Question

What is the best way for a CPA "cover" from potential litigation costs when doing audits of small firms and publicly held corporations?

Answer 1

UNDER FASB ACCOUNTING STANDARD CODIFICATION STANDARS 450 NAMED AS CONTINGENCIES,the preparation of financial statements under principles of accrual accounting requires companies to make many judgments about contingent liabilities that are due to any litigations files against that company, including ones arising from pending or anticipated litigation, regulatory or law enforcement proceedings or investigations and in some circumstances, internal investigations. Under ASC 450-20, a contingent loss must be categorized as remote, reasonably possible or probable. Depending on the categorization, the company may have to disclose the nature of the contingency and estimated loss, or record the estimated loss or the best estimate from within a range of losses as a charge to income.

In the normal course of an external audit, independent auditors routinely request information to support a company’s decision about how to account for these litigation and regulatory-related contingencies to cover themselves from the future problems.The basic facts, claims and allegations related to a particular contingency generally are not privileged. However, auditors regularly request additional information to evaluate the reasonableness of a company’s judgment on how to apply the contingency standards to a particular or potential claim or exposure. For example, it is common for auditors to ask the company’s in-house and outside counsel for information and perspective on the likelihood (or lack thereof) of any ultimate loss — a request that triggers considerations about whether the information being sought is protected, in whole or in part, by the attorney-client or work-product privileges and, in turn, about the risks of waiving such privileges,The attorney-client privilege protects the substance of legal advice, including an outside counsel’s assessment of likely exposure. The general rule is that providing a third party with information otherwise protected by the attorney-client privilege waives the privilege and allows third parties, including adverse litigants, to discover that information (assuming the absence of another applicable privilege). Courts generally have held that there is no exception to this principle for companies that choose to share otherwise privileged information with their independent auditors.