High Court decides auditors – not audit clients – are to assess whether documents are privileged and can be withheld from the FRC

An auditor producing documents to the Financial Reporting Council (the FRC) must make its own assessment of whether those documents are protected by privilege, even if the privilege belongs to its client. The auditor cannot rely solely on its client’s assertion of privilege. So said the English High Court last week in A v B and another [2020] EWHC 1491 (Ch)

Background and Issues 

The case concerned an FRC investigation into B, A’s former auditor. The FRC issued a notice to B under the Statutory Auditors and Third Country Auditors Regulations 2016 (SATCAR), requiring provision of certain documents which A had provided to B. SATCAR did not oblige B to provide privileged documents to the FRC (including documents where the privilege belonged to a third party).

It was accepted that any privilege A had in the documents had not been lost when A provided the documents to B under a limited waiver. The recent Court of Appeal decision in Sports Direct International plc v. The Financial Reporting Council [2020] EWCA Civ 177 confirmed there was no “infringement exception” which could override A’s claim to privilege in the documents (see our blog post on that decision).

A asserted privilege over the documents, but B took the view that certain of the documents were not privileged and had to be disclosed. A therefore launched proceedings, asking whether:

1. B was obliged to withhold production on the grounds of A’s assertion of privilege; or

2. B was entitled to make its own assessment of privilege, and only withhold those documents which B considered subject to a valid privilege claim.

   Judgment

   The court held that B was not obliged to withhold documents from the FRC on the basis of A’s assertion of privilege alone. B’s obligation was to comply with the terms of the FRC’s statutory notice and, therefore, it was for B to form its own view of whether the documents were privileged.

   Implications

   The case makes clear that an audit client’s assertion of privilege is insufficient to prevent the disclosure of documents by the auditor to the FRC, putting assessment of privilege solely in the hands of the auditor. While the decision allows auditors to fulfil their statutory obligations to their regulator where they disagree with their clients’ views as to whether documents are privileged, it highlights the risk of breaching their obligations to their clients, should they provide documents that are in fact privileged.

   Audit clients, however, are not left powerless. Should an audit client disagree with the auditor’s decision to disclose documents, it can seek an injunction against any such disclosure on the basis that its privilege will be infringed (although, given the expense and time involved in seeking an injunction, this may not always be an attractive option). The FRC will not automatically be party to these proceedings but can be joined by the court in appropriate circumstances.

 If the auditor instead asserts the client’s privilege and is challenged on this by the FRC, the FRC can bring proceedings against the auditor under SATCAR. The audit client will not automatically be party to the claim but can be joined should the court think it appropriate.