Has 'privilege' lost its reward? Company officials can and sometimes should turn down auditors' requests to turn over privileged documents or waive attorney-client privilege. Recent calls for regulatory guidance may help, experts say.

• Author: Orenstein, Edith
• Position: Legal issues

Attorney-client privilege has long been recognized and respected by the legal system, since the confidentiality it provides instills confidence among attorneys and clients to discuss sensitive matters, including compliance with laws and regulations, remediation of noncompliance and defense of those accused of breaking the law.

However, the early 2000s saw a shift in government policy and standards of the auditing profession, encouraging companies to waive attorney-client privilege to be deemed "cooperative" with government investigations or substantiate tax positions--and by extension, other positions--to auditors.

Beginning with the "Holder Memorandum" issued by the Department of Justice (DOJ) in 1999, and continuing with DOJ's more widely known "Thompson Memorandum" in 2003, waiver of privilege was included among factors of cooperation to determine whether to indict a company and the level of charges filed.

In 2001, when the Securities and Exchange Commission (SEC) issued its "Seaboard" decision--touting Seaboard Corp. as a model of cooperation--it was released concurrently with a generic "framework for evaluating cooperation," which includes the role of waiver. Related amendments to the U.S. Sentencing Guidelines in 2004 were the final step in establishing waiver as a central tenet for companies to demonstrate cooperation with regulators.

Enter the auditors, who were swept into the waiver wave--pulling financial executives with them--by new rules issued by the American Institute of Certified Public Accountants (AICPA) in 2003. Now, auditors are required to obtain access to opinions of outside advisers on which client's rely, if the client's support for the tax accrual or matters affecting it, including tax contingencies, is based on that outside opinion--"notwithstanding potential concerns regarding attorney-client or other forms of privilege."

Although "other sufficient documentation"--such as client-prepared summaries--may suffice, some auditors insist that clients turn over privileged documents. That's because the rule also says that if an auditor can't obtain "sufficient competent evidence" about whether there is a "supported and reasonable basis" for the client's position, the auditor should consider the effect of this "scope limitation" and may issue a qualified opinion, or withhold its report.

The collective result of this "attack on privilege" triggered a response by the legal and business community. This has included formation of an American Bar Association (ABA) Presidential Task Force on Attorney-Client Privilege, which, along with the American Corporate Counsel Association (ACCA) and others, have entered into a dialogue with regulators to stem the erosion of privilege.

Recently, there has been a public backlash against waiver and other forms of coerced cooperation. In March, the U.S. Sentencing Commission amended the sentencing guidelines to remove waiver as a condition of cooperation. (The amendments become effective November 1, barring any objection from Congress.) In June...