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D.C. Circuit Protects Attorney Work Product in Auditor Documents

By Katerina Milenkovski, Litigation News Associate Editor – August 27, 2010

The U.S. Court of Appeals for the District of Columbia Circuit has upheld a federal district court’s decision denying the IRS access to documents relating to the tax treatment of two partnerships owned by Dow Chemical that were in the possession of Dow’s auditor, Deloitte. United States v. Deloitte LLP [PDF].

Work-Product Protection and Auditors
One of the disputed documents was prepared by Deloitte and summarized a meeting involving Dow’s counsel about the necessity of accounting for possible litigation in an ongoing audit.

In seeking the documents, the government relied on United States v. Arthur Young & Co., where the Supreme Court refused to recognize an accountant work-product privilege, explaining that while an attorney is “a loyal representative whose duty it is to present the client’s case in the most favorable possible light,” an independent certified public accountant has a “public responsibility” and “owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public.”

The government argued that because the memorandum was prepared by Deloitte, not Dow, and because it was generated as part of the routine audit process, not in anticipation of litigation, it was not work product. The appellate court disagreed, holding that Deloitte's preparation of the document did not exclude the possibility that it contained Dow’s work product.

With respect to the Deloitte memorandum and other documents that the government conceded were work product, the government also argued that Dow had waived any work-product protection by providing the documents to Deloitte.

The appellate court disagreed. It determined that Dow’s voluntary disclosure to Deloitte was not made to a “potential adversary.” Further, the court ruled that Dow had a reasonable expectation of confidentiality when it made the disclosure because Deloitte was an independent auditor with an “obligation to refrain from disclosing confidential client information.”

Litigators React
“I think the opinion is correct, and I think it is welcome in an area that has been inconsistent in the past,” says Jeffrey J. Greenbaum, Newark, NJ, former cochair of the ABA Section of Litigation’s Federal Practice Task Force. “I don’t think this opinion is inconsistent with the Arthur Young case at all,” he says.

“In Arthur Young, the documents at issue were generated solely for the purpose of an independent audit and without the contemplation of pending litigation,” says Christina L. Dixon, Denver, cochair of the Section’s Trial Evidence Committee.

“In Deloitte, the independent auditing firm specifically requested information that dealt with pending tax litigation,” Dixon notes. “The determinative factor in Deloitte is appropriately the fact that the mental impressions and thoughts of Dow’s attorneys were provided to Deloitte during the independent audit process with an eye toward the effects tax litigation would have on Dow’s financial performance.”

The D.C. Circuit was careful to distinguish between work-product protection and the attorney-client communication privilege. As Ian H. Fisher, Chicago, cochair of the Section’s Pretrial Practice and Discovery Committee points out, “the protection exists for the sake of the adversary system and is not necessarily waived if the information is shared with a non-adverse third party; the privilege exists to protect the sacrosanct attorney-client relationship and will be waived if shared outside of that relationship. These are important distinctions that lawyers and courts often overlook.”

Tension Between Auditing and Litigating
“Courts face a difficult tension in these situations,” notes Fisher. “On the one hand, auditors must remain independent and ultimately owe their allegiance to the investing public,” he says. “On the other hand, auditors must have access to a company’s internal information to conduct meaningful audits. This includes having at least some level of access to a company’s attorneys. This may be why so many of the independent auditor decisions concerning discovery seem so fact specific. I think the Deloitte decision does a good job of resolving the tension given its particular facts,” Fisher says.

Greenbaum warns, however, that accountants can be aggressive in demanding information, such as attorney opinions on the likelihood of success in litigation, saying they cannot provide an opinion without such information.

“Attorneys should be cautious when providing very sensitive information to auditors,” he says. “They have to make judgments on whether or not to provide the information and whether such disclosure might constitute a waiver. While this opinion is a good first step, it isn’t clear how other jurisdictions might rule, and you still need to be protective of privilege,” says Greenbaum.

Keywords: Litigation, D.C. Circuit, auditors, work-product protection, attorney-client privilege

  • September 3, 2010 – Thanks for the case law. It will help as this issue comes up all the time.


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