July 8, 2021

Tension in Company Audit Process Could Get More Pronounced

Last month, John blogged about the removal of the PCAOB Chair and the pending overhaul of the members of the PCAOB board. Some view these moves as political, but aside from that, a Troutman Pepper memo advises companies to prepare for potentially more rigorous auditing processes. The memo notes that a revamped PCAOB will likely place more emphasis on enforcement, which could lead auditors to engage in more intense audits. More than that, the memo also discusses a district court decision out of the D.C. Circuit relating to attorney-client privilege that could raise tension between auditors and companies.

The court’s decision required the company to provide information from an internal investigation to the SEC after the company’s outside counsel shared information with the company’s outside auditor. Between the PCAOB developments and this court decision, companies could feel the heat a little more than years past as they work through the annual audit process with outside auditors. Here’s more about the court decision:

The issue here started shortly after the company announced a False Claims Act settlement with the DOJ and from there, things began to unravel. The SEC then initiated a formal investigation into RPM’s public disclosures. Due to the SEC’s investigation, RPM’s outside auditor, E&Y, informed RPM that they could not sign off on RPM’s 10-K without RPM conducting an internal investigation. RPM hired outside counsel to conduct an internal investigation, who interviewed 19 current and former RPM employees.

To give E&Y comfort, RPM’s outside counsel made an oral presentation to E&Y, which included specific quotes from their interviews. RPM’s outside counsel then drafted 19 interview memoranda based on their interviews.

The SEC then sued RPM alleging that the company didn’t timely record accruals relating to the DOJ settlement. As part of discovery, the SEC requested documents including the interview memoranda. The court ordered the company to produce all of the interview memoranda to the SEC, holding that the interview memoranda wasn’t work product because it wasn’t prepared in anticipation of litigation, by sharing the substance of the information with E&Y (and subsequently allowing E&Y to share information with the SEC), the company waived its work product protection and while most of the interview memoranda reflected privileged communications between the company’s outside counsel and company employees, the company waived attorney-client privilege when it disclosed facts from the investigation to E&Y.

The court’s holding in this case really highlights the limitations companies could encounter when seeking to rely on attorney-client privilege and work product protection. For more on the court’s decision in this case, this Skadden memo provides a discussion of the court’s reasoning. Also, our “Attorney-Client Privilege” Practice Area has memos with tips and guidance about how to manage risks in protecting privileged information.

– Lynn Jokela