Audits: preserving legal privilege when auditors request information

• Published date: 22 June 2022
• Law Firm: Corrs Chambers Westgarth
• Author: Richard Flitcroft, Andre Newell and Daniel Gordon

Disclosing information to an auditor risks waiving privilege over legal advice and related material, thereby potentially exposing the material to the world at large - including class action plaintiffs.

Courts have found that disclosure of pre-existing privileged material to an auditor will not result in a waiver at large if conditions of confidentiality and privilege are maintained and it is made for the limited purpose of the audit (limited waiver).¹ When access to privileged information is requested, we recommend deploying an incremental approach where privileged material is only disclosed to the extent necessary and care is taken throughout the process to preserve privilege.

Australian companies (other than small proprietary companies and certain companies limited by guarantee) must have their accounts (or financial report) audited at the end of every financial year. In conducting this process, an auditor will often request access to a company's legal information or documents to allow the auditor to have the comfort and assurance necessary to issue an unqualified report.

This creates competing pressures on the audit client - on the one hand, achieving an unqualified audit report and on the other, maximising the preservation of privilege. Disclosure of privileged information to an auditor might make that act of disclosure vulnerable to attack from litigants, regulators and class action plaintiffs, all of whom are increasingly seeking access to material disclosed to auditors or third parties. Although the risk of exposing the material cannot be eliminated, it can be greatly mitigated.

Legal privilege

Broadly, documents² will be protected by legal professional privilege in two forms:

• advice privilege, where the confidential communication (or document recording the communication) was prepared for the dominant purpose of providing legal advice to the client; or
• litigation privilege, where the confidential communication (or document recording the communication) was prepared for the dominant purpose of use in litigation or anticipated litigation.

Is the material privileged in the first place?

It can be easy to assume that advice prepared by lawyers in relation to a client is automatically privileged but that is not the case.

When determining whether privilege exists, courts will look to the 'dominant purpose' of the advice. In the context of audits, if the dominant purpose of the communication of the advice is not to provide the client with legal advice, but...