Legal privilege has become an increasingly prominent issue in the audit profession in recent years. While it serves to protect confidential communications between solicitors and their clients, it can pose significant challenges for auditors who need access to such information to perform their duties effectively. 

In its updated Technical Release, Legal privilege and its interaction with audit (TECH 01/25), ICAEW’s Audit and Assurance Faculty has drawn on experiences of auditors and lawyers to help address these challenges, reflecting on recent legal developments, including new case law in the last few years.

Auditors would usually expect to be privy to most company information so that they can obtain evidence around accounts, balances, transactions and disclosures, but also assess risks related to non-compliance, litigation or regulatory investigations, and the effects thereof. However, there can be more friction with the sharing of communications, documents and other information when it is identified as legally privileged by an entity’s management.

Understandably, management may be cautious about disclosing such material. Striking the right balance is important. Auditors must obtain sufficient appropriate audit evidence to support their audit opinion, while entities must protect their claim to legal privilege.

High Court rulings – such as A v B and the Financial Reporting Council [2020] EWHC 1491 – held that auditors should independently assess an entity’s claim to legal privilege when facing regulatory requests for documents. This decision, along with those in other cases such as the Financial Reporting Council v Sports Direct International plc, prompted ICAEW to review and update its previous guidance, ensuring that auditors are equipped to handle privileged information appropriately.

Replacing TECH 02/95 AAF

The previous Technical Release, TECH 02/95 AAF, described solicitor responses to non-specific requests from auditors around pending legal matters, with a view to the auditor becoming aware of possible provisions and contingent liabilities. 

This major overhaul, developed by a working group of technical experts in audit and legal counsel from firms, adds considerably more practical guidance for auditors in communicating with solicitors and, importantly, helps auditors deal with situations where they come across legally privileged information. 

TECH 01/25 AAF includes and supersedes the information within TECH 02/95 AAF. 

What’s in the new release?

TECH 01/25 covers key points such as:

• What is legal privilege? Why is it important for auditors to understand how to deal with privileged information in the context of an audit? And how might legal privilege be lost?
• Directors’ responsibilities in relation to the recognition and disclosure of liabilities.
• Auditors’ duties (through various auditing standards) that could be impacted by legal privilege and guidance on the types of evidence that could be obtained.
• The extent to which auditors are entitled to call for legally privileged information and whether the audited entity can withhold such information.
• How auditors should report on audits where legally privileged information is withheld.
• How and what to record in the audit file regarding legally privileged information.
• How to deal with requests from third parties (including regulator requests) and using limited waiver agreements. 
• Case law relevant to this subject matter.
• Types of legal privilege.

ICAEW’s updated Technical Release supports auditors in navigating these complexities while maintaining audit quality and compliance with auditing standards. We hope it is also helpful for solicitors in understanding the auditor’s approach. We are grateful to our colleagues at the Law Society for their input into the update.