• Privilege is a fundamental substantive right on which the administration of justice rests and belongs exclusively to the client (i.e. the Audit Client).Only the Audit Client possesses the information necessary to justify the assertion of such privilege and only the Audit Client should decide whether to assert or waive it.(For that reason, the Audit Client also strongly objected to a suggestion by the Auditor that it might not be obliged even to consult with the Audit Client as to the status of the relevant documents.)
• In contrast, the Auditor has no right to disclose such privileged material to any third party (including the FRC) without the Audit Client's consent. The Auditor has no interest in the Audit Client's right to the privilege and therefore no incentive to protect such right (conversely it may have an incentive to disclose such documents to avoid alienating the FRC as its regulator).
• If the FRC disputes the claim to privilege, such dispute is between the Audit Client and the FRC. The Auditor should take a “purely ministerial role” role, reporting to the FRC the fact of the Audit Client's claim to privilege and thereafter adopting a neutral stance. Whilst a failure to comply with a document request under SATCAR could give rise to criminal liability, this should not be the case in this situation as the Auditor’s behaviour could not be described as intentional obstruction or failure to comply.

The Auditor’s position (with which the FRC broadly agreed) was that:

• The Auditor accepted that it has a right under SATCAR to withhold documents subject to a valid claim to privilege.It also accepted that it had duties to the audit client to withhold from the FRC any documents that are in fact privileged (unless the privilege is waived, or the Auditor is ordered to provide the documents).
• However, it was for the Auditor to determine what documents should be withheld on the grounds of privilege, not least because it is the Auditor who is obliged by SATCAR to give disclosure (and the Auditor who must suffer the consequences of a failure to comply with those regulations).
• The Audit Client could apply for injunctive or other relief against the Auditor if it considered that the wrong decision had been made.
• It was impractical for the assessment of privilege to remain with the client because:
  • It could mean that the Auditor’s ability to comply with a statutory notice was out of its hands, and subject to the whims of a client who may refuse, or be unable, to engage with the process.
  • It would require the Audit Client to review the documents the Auditor intended to produce, which may well include documents (such as working papers) that the Audit Client was not entitled to see.

Judgment

Mr Justice Trower declined to make any of the declarations sought as they did not accurately reflect the obligations and entitlements of the Audit Client and the Auditor, which were held in summary to be as follows:

• The Auditor’s function in this situation is not purely “ministerial”; it has interests of its own to protect and direct obligations to the FRC.
• It is for the Auditor to determine whether the document is privileged because “it is the person by whom the duty to disclose on service of a statutory notice is imposed”. The Auditor’s “obligation [under SATCAR] is to comply [with the document request from the FRC] unless the document is in fact privileged, not unless [the Auditor] believes that it is privileged or [the Audit Client] asserts that it is.”
• Given the contractual relationship between the Audit Client and the Auditor, Trower J thought it was “likely that [the Auditor] will have been under a duty to tell [the Audit Client] about the statutory notice and will have done so.”.He therefore concluded that the Audit Client's rights were capable of being protected by proceedings (and, if appropriate, injunctive relief) against the Auditor: “If [the Auditor] makes the wrong decision, it will be liable to [the Audit Client] if and in so far as it has failed to maintain a privilege in respect of which it was under a duty to [the Audit Client] to maintain.”
• Conversely, if the Auditor decided to withhold the document on the grounds of the Audit Client's privilege, it would be always open to the FRC to challenge the Auditor’s decision (by an application to court under paragraph 2 of Schedule 2 to SATCAR) and the Audit Client could be joined to that if necessary.
• In the judge's view, there are “real advantages” in leaving the issue of any disagreement on disclosure to be determined in proceedings between the Audit Client and the Auditor, the most practical of which being the question of whether a document was in fact privileged can be resolved in proceedings where both parties have the advantage (unlike the FRC) of having seen the disputed document.

Discussion

At first glance, auditors may express surprise at the effect of this judgment, having regard to:

This appears to be the first reported case on this issue and it remains to be seen whether: the judgment makes a material difference in practice in FRC cases; and whether there will be an appeal.

The judgment makes clear the need for the auditor (together with its legal advisers) to actively consider whether a claim of privilege by the audit client is sufficiently meritorious.  However, one would expect the number of documents in issue in most cases to be limited (indeed, there were only six in issue in A v B and The FRC) and it seems likely to be rare for the auditor and audit client to disagree as to a claim of privilege. 

Perhaps a more common scenario may be that the auditor, having seen the client’s position on privilege, does not have sufficient information or knowledge properly to form a view.  Whilst it would be advisable to liaise with the client with a view to obtaining further information to assist in its decision making, ultimately it appears that the auditor will nevertheless have to make a decision and face the potential consequences. 

The prudent course is for the auditor, if possible, to ventilate the issues/uncertainties early, in correspondence with both the client and the FRC.  That may enable the auditor to explore with the parties whether a resolution can be reached that avoids proceedings.  If that is not successful, it at least enables the auditor to show that it has endeavoured to handle the matter in the correct way, having regard to its conflicting duties to the client and the regulator.

Given the emphasis in the judgment on the auditor’s obligations under SATCAR and the AEP, this decision appears to be limited in its application to FRC audit investigations.  However, it remains to be seen whether it is held to apply by analogy in the context, for example, of similar regulatory regimes.