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A number of multinational companies have voiced concern that new US rules, which place greater responsibility on auditors for detecting corporate fraud, may undermine lawyers’ ability to provide confidential advice.
The battle over new audit standards proposed by the Public Company Accounting Oversight Board (PCAOB) has centered around attorney-client privilege, with the accounting profession seeking to oppose these rules.
Currently, auditors only have access to a limited amount of legal correspondence that directly pertains to a company’s financial statements. However, the PCAOB’s proposed rules would require auditors to assess whether a company is complying with all applicable laws and regulations, leading to a wider range of evidence being considered.
In comment letters released by the PCAOB, companies argued that the new rules could result in more attorney-client communication being shared with auditors, thereby losing its legal privilege and potentially becoming evidence in litigation.
Ronald Edmonds, controller at Dow, wrote, “Company personnel could be more hesitant to disclose legal violations to their counsel if they fear that the communication will not be privileged.”
Marathon Oil, Cigna, Freeport-McMoRan, and Directors of Beyond Meat, Verizon, and Whirlpool’s audit committees were among those echoing this concern.
Amy Johnson, controller at defense group RTX (formerly known as Raytheon), argued that the rules could entail sharing sensitive attorney advice with auditors.
Audit firms believe that these rules expand their responsibilities into areas that should be managed by corporate compliance departments and legal advisers, making them either too costly or unfeasible.
PCAOB Chair Erica Williams defended the proposal, stating, “Companies’ non-compliance with laws and regulations, including fraud, can have devastating consequences for investors. This proposal ensures that the protection investors believe they’re receiving aligns with the required standard.”
Support for the rules came from investor groups and the AFL-CIO, representing union members. Brandon Rees, the organization’s deputy director, wrote, “Auditing standards should require auditors to have uncomfortable conversations with management.”
The PCAOB will analyze feedback from the consultation period before deciding whether to proceed with, amend, or discard the proposal. While two board members oppose the rules, a simple majority is all that is necessary.
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