Corporate Counsel Group Assails First Circuit Tax Audit Work Papers Ruling as Deletorious to Attorney-Auditor Relationship

The Association of Corporate Counsel has decried the First Circuit’s en banc ruling that audit work papers were discoverable by the IRS since they were done with SEC-required financial statements not litigation in mind. The group said that the decision hamstrings public companies’ in-house lawyers from advising auditors in a manner that promotes accuracy and transparency in financial reporting and the certification of financial statements filed with the SEC. It eviscerates the notion that the in-house lawyer can share legal assessments with company auditors without risking waiving the client’s privilege.

In US v. Textron, the full First Circuit Court of Appeals ruled that the attorney work product doctrine does not shield from an IRS summons tax accrual work papers prepared by a company’s lawyers to support the calculation of tax reserves for audited financial statements filed with the SEC. In a 3-2 opinion, the court held that the purpose of the tax audit work papers was not to prepare for litigation, but rather to make book entries, prepare financial statements and obtain a clean audit. This was the testimony of IRS expert and former PCAOB Chief Auditor Douglas Carmichael, who said that tax accrual work papers include all the support for the tax assets and liabilities shown in the financial statements.

In adopting this standard, said the corporate counsel association, the appeals court seeks to promote greater convenience for government investigators at the expense of the public interest in promoting the accurate and complete preparation of corporate financial documents and audits by independent outside auditors. Further, the decision serves as an impediment to accurately gauging corporate liability, averred the association, which is a requirement of disclosure and necessary to transparency in the marketplace. Similarly; it diminishes the value of the important preventive and strategic roles that in house counsel play in complex, publicly companies.

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