Saturday, November 17, 2007

Corporate Privilege

"As part of its defense, AES obtained a court order that gave it access to Shaw's auditing records, which had been prepared by Ernst & Young. The records are a trove of information on corporate 'soft spots'--the unseen details behind the public filings. ... Companies are increasingly concerned that the auditors could be required to turn over confidential records to outsiders, exposing corporations and excutives to lawsuits from shareholders or whistleblowers and unwanted scrutiny by regulators. ... The trend of auditors looking further behind the corporate curtain is a major shift from the 'don't ask, don't tell' mentality of the years before Enron. ... Lawyers typically say that such legal opinions are confidential. ... 'In order for auditors to properly do their job, they must not share common interests with the company they audit', Judge [Alvin] Hellerstein wrote. ... The Association of Corporate Counsel, in a supporting brief filed on behalf of Shaw, wrote that without guarantees of confidentiality, 'talking to the corporation's accountant is no different than talking to a prosecutor or to the other side in civil litigation'. Critics say the system could have the opposite effect from what it intends, by chilling internal investigations", NYT, 16 November.

Why should an artificial state-created entity, like a corporation have any lawyer-client privilege? I say repeal it by statute, at least for SEC registrants. I said this 30 years ago! As to chilling internal investigations, so? What are they if not top management hiring an outside law firm to find middle-management scapegoats for top management nonfeasance, malfeasance or misfeasance? I say, "end it. You can't mend it". I have long deplored the Justice Department and SEC using corporate counsels as "private attorneys general" to police their employers.

CPAs are "looking further behind the corporate veil". Wonderful. Where were they before Enron? What is it the CPAs think they were being paid to do?

Judge Hellerstein's opinion is on firm legal ground. The Supremes chimed in on this in US v. Arthur Young, 465 US 805 (1984). 23 years ago?! What led anyone to believe a privilege existed to hide material information from an SEC registrant's auditors?

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