Author: Nicola Sharp
6 July 2020
4 min read
Nicola Sharp assesses a case that establishes that it is the duty of an auditor to gauge whether a document is protected by legal professional privilege.
The significance of the judgment in A v B and the FRC  EWHC 1491 (Ch) is that it establishes that is it ultimately up to an auditor – not the auditor’s client - to assess whether a particular document has the protection of legal professional privilege.
In the case, the High Court in London found that a set of corporate documents were not covered by legal advice privilege and must be disclosed to the Financial Reporting Council (FRC) for its investigation into the auditors of a retail company.
The proceedings arose out of an investigation by the FRC into an audit by B (the auditor) of the financial statements of A (the audit client). The FRC issued a notice to the auditor requiring the provision of certain documents under its statutory powers, including executive committee minutes, board meeting minutes, a risk register, and a draft script by the company’s chairman. Non-compliance with such a notice constitutes an offence. But there is no offence of failure to comply if the document sought is protected from disclosure on the grounds of legal professional privilege.
The auditor, having received the statutory notice, proposed to disclose certain documents over which the audit client claimed privilege. The auditor did not agree with the audit client in relation to the claims of privilege sought over six of the documents.
The issue for the court, therefore, was who should determine whether a document is protected by the principles of legal professional privilege. Or to put it differently, who should determine whether a document should be disclosed or can be withheld. The audit client brought proceedings against the auditor and the FRC for a declaration on this matter. The case was heard by Mr. Justice Trower.
The audit client made the argument that privilege is a fundamental right belonging exclusively to the client: only the client possesses the information necessary to justify the assertion of any such privilege and only the client should decide whether to assert or waive it. According to A, the auditor or any third party does not have the right to disclose such privileged material without the audit client’s consent.
A argued that if the investigating body disputes the claim to privilege then that dispute is between the client and the investigating body (in this case, the FRC) – not between the investigating body and the auditor. A took the view that the auditor should take a “purely ministerial role”, reporting the client’s claim to privilege to the investigating body and thereafter adopting a neutral stance.
In making its case, the auditor accepted that it has a statutory right to withhold documents subject to a valid claim to privilege. It also accepted that it had duties to a client to withhold from an investigating body any documents that are protected by the principles of privilege. But B argued it was its duty to determine what documents should be withheld on the grounds of privilege, as the auditor is the entity that is obliged by legislation to give disclosure – and it is the auditor that suffers the consequences of a failure to comply with those regulations.
B stated that the audit client could apply for relief against it if the client considered that the wrong decision had been made regarding disclosure. B argued that it was impractical for the assessment of privilege to remain with the client because the auditor’s ability to comply with a statutory notice was then out of its hands and because it would require the audit client to review documents that the audit client was not entitled to see.
Mr Justice Trower ruled that legal advice privilege could extend to documents, such as internal company communications, which reproduce advice given in a legal context. However, he found that five out of the six documents in question in this case were not covered by legal advice privilege. The judgment in respect of the sixth document is redacted.
With regard to the executive committee meeting minutes, the judge said the fact that the audit client’s general counsel was the last person to edit the document did not mean the minutes were covered by legal advice privilege. Even if a lawyer is involved in the preparation of minutes of a meeting this does not mean that, in carrying out that task, the function he is performing is connected with the giving of legal advice.
The audit client said its risk register had been prepared by its general counsel for the dominant purpose of providing legal advice, while the auditor said it was an “entirely conventional risk register” prepared to mitigate business interruption events.
The judge said a document was not privileged merely because it takes into account legal advice. Instead, it is only privileged if the way in which it does so makes clear or communicates in an obvious manner the substance of that advice.
This judgment provides valuable reminders to businesses and their in-house legal teams of when internal communications will and will not be privileged. Just because a lawyer is involved in the production of a document that does not mean the document has been prepared in connection with giving legal advice so as to attract legal advice privilege. Businesses must remember that simply copying in lawyers, having them present at a meeting or asking them to draft a document will not make the document privileged.
This decision appears to be limited in its application to FRC audit investigations, given its references to the auditor’s obligations under the Statutory Auditors and Third Country Auditors Regulations 2016. However, it remains to be seen whether it is held to apply by analogy in the context of similar regulatory regimes.
Nicola is known for her fraud, civil recovery and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.