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The Joint Policy Statement: Managing Risk and Maintaining Confidentiality

2 minute read

As part of the preparation of audited financial statements, auditors are obliged to make inquiries to legal counsel about claims or possible claims by or against the client.

The accounting and legal professions developed a Joint Policy Statement on how this would occur. This Joint Policy Statement remained unchanged from 1978 until December 1, 2016, when a new Joint Policy Statement was introduced.

Protecting the confidentiality associated with solicitor-client privilege is a major theme of the Joint Policy Statement. The law firm receives the inquiry letter directly from the client. If the law firm does not agree with management’s evaluation of the claim or the possible claims, the law firm is to discuss the situation with management and agree upon a revised evaluation. If the law firm identifies possible claims that have not been included in the inquiry letter, the law firm is obliged to discuss the situation with management to ensure it is aware of its responsibilities to disclose all possible claims.

Once the internal protocol has been satisfied, the lawyer maintains the confidentiality of the process by providing their written response to the client on the reasonableness of management’s evaluation of the claims and possible claims and by specifying any outstanding claims omitted from the inquiry letter. As a result, the client is effectively addressing the lawyer and the lawyer addressing the client, not the auditor, in communications regarding audit inquiries and the lawyer’s response is limited to an assessment of the client’s description of claims and possible claims.

Major changes in the new Joint Policy Statement are that inquires will include in-house counsel, there is more detail on the communication protocols between lawyers and auditors, and the inclusion in the letter of a specific response date that is usually five business days after the effective date of the inquiry.

While all of this seems relatively straightforward, issues may arise in circumstances where the law firm disagrees with its client’s evaluation of the claim, discussions occur and the lawyer and client cannot agree on a revised evaluation of the claim. If this is not resolved, the auditor may not be able to obtain appropriate audit evidence. That is a situation the parties will want to avoid because the auditor may not be able to provide an unqualified audit opinion.

Although there have been changes to the Joint Policy Statement that will take some getting used to, the amendments to the Joint Policy Statement do not change the overriding objective from a legal perspective – to protect privileged information.

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Ian D. Shewan

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