Accounting
Balancing the interests between attorney-client privilege and the auditor’s need to know
Companies often face the tricky task of producing privileged and confidential information to their independent auditors for audit purposes.
This article first examines a company’s dilemma regarding whether to disclose any privileged information to its independent auditors. Next, it provides an overview of the existing law, which addresses when the attorney-client privilege and work product protection could be waived when documents are voluntarily disclosed to an independent auditor for the audit. Finally, we’ll examine how to successfully manage the conflict between an auditor’s need to know and a company’s need to protect privileged and confidential information.
A company’s dilemma: To disclose or not to disclose?
Corporations hire independent auditors to perform financial audits and comply with the applicable SEC requirements, shareholder demands, banking regulations and other obligations. In the course of such audits, independent auditors review and test the corporation’s financial statements, detailed books and records, and internal controls. Auditors may also request to review certain privileged information that the corporation prepared for any ongoing or anticipated litigation, including internal investigation reports, attorney memoranda evaluating possible liabilities, tax position papers, and other materials.
Auditors may request privileged materials for several reasons – for example, to verify financial disclosures; to investigate potential “illegal acts” by a company under Section 10A of the Securities Exchange Act of 1934; or to avoid liability under the recent
Companies may comply with the auditor’s request for privileged information. The potential downside to such compliance is that a third party may argue that the documents are no longer privileged because they were disclosed to a third party — the company’s independent auditor. The privilege protecting such documents could be waived and such materials may become discoverable by third parties, including government agencies and a corporation’s litigation adversaries. Conversely, companies may choose to decline to disclose the privileged information to their auditors. With access to less information, a company runs the risk that the auditor could be unable or unwilling to opine on the company’s financial statements.
In June 2023, PCAOB proposed a new audit standard — Noncompliance with Laws and Regulations — that would require auditors to identify and respond to NOCLAR instances, including whether a company is complying with all the laws and regulations or committing any fraud (see
In a surge of comments on the PCAOB’s proposal, companies said the new rule could mean more correspondence with lawyers would have to be shared with auditors, with the result that it loses its legal privilege and could become evidence in litigation (see
Applicable law: Privileges and work product doctrines
The attorney-client privilege is designed to protect communications between clients and their attorneys. Depending on the circumstances, the protection can be waived when documents or communications are voluntarily disclosed to an independent auditor for audit purposes. In a 2019 case
Unlike the attorney-client privilege, a voluntary disclosure of work product to an independent auditor does not automatically waive work product protection (see
There are two categories of work product, each of which is afforded a different level of protection. First, there is “ordinary” work product, which includes facts and evidentiary documents prepared for an ongoing or anticipated litigation. Ordinary work product is generally subject to protections from discovery, but those protections can be overcome by the opposing party upon a showing of “substantial need” and “undue hardship.” Second, “opinion” work product consists of work product that is narrowly confined to the attorney’s legal analysis, mental impressions, conclusions, opinions or legal theories. Because opinion work product reflects the attorney’s analysis of the client’s legal position, courts typically afford it near-absolute protection from disclosure to third parties. Determining whether the work product is ordinary or opinion involves a fact-intensive inquiry.
There is a split among the courts regarding waiver of work product doctrine for materials shared with auditors. Under the majority view, auditors are not considered “adversaries” and any disclosure of work product to them does not waive protection. In other words, a corporation’s disclosure of privileged information to its independent auditor does not waive work product protection, because an auditor’s role — including scrutiny and investigation of a corporation’s records and bookkeeping practices – does not constitute an adversarial relationship. In a 2010 case,
In the event that an opinion work product is disclosed to an auditor, courts are not likely to deem it a waiver and will protect the opinion work product from disclosure to third parties. The same level of protection may not apply to ordinary work product shared with auditors, although the majority rule still would likely provide some protection from disclosure to third parties.
Managing the conflict: Planning, balancing and taking charge
As in any conflict situation, the means to a successful resolution is understanding the needs of all interested parties and narrowing the areas of dispute to the core issues. The key to achieving this includes planning ahead, balancing the needs of the interested parties, and taking charge of the situation.
First, consider negotiating a strong confidentiality and non-waiver agreement in an audit engagement letter from the outset. Before a company receives a request for production of any privileged materials by its auditor, the objectives of the auditor’s engagements and responsibilities should be clearly defined. Any engagement letters, work plans and other documents should memorialize the scope of the auditor’s confidentiality requirements. The corporation and auditor should have a mutual understanding that any information sent to the auditor would remain confidential and any disclosure to the auditor is not intended to waive any applicable privileges.
Second, balancing the auditor’s need to know with the attorney’s need to protect is crucial. Blanket demands by auditors for all information possessed by counsel are intrusive and unnecessary. Equally unhelpful is the counsel who refuses to understand that the client’s interests are best served by working with the auditors to help them discharge their audit responsibilities. It is essential that the auditor and the counsel communicate in detail and plan an approach that allows the auditor to gather the maximum amount of information independent of counsel, thereby lessening the burden and reliance on privileged communications and protected materials. This may involve the auditor’s review of historical information and third-party documents that are not privileged. The auditor should also confer with the audit team and company counsel, and find ways of mitigating the audit’s need for privileged materials.
At the same time, company counsel should carefully examine the materials to be disclosed to the independent auditor to reduce the risk of any waiver. Although the corporation should provide all the necessary materials required by the auditor, it should do so only after conducting a thorough review of documents to ascertain whether they are truly responsive to the auditor’s requests and whether there are nonprivileged materials that would suffice. Even though the majority rule protects work product, a company should limit disclosure to materials that are necessary for the auditors to complete their audit.
To the extent possible, attorneys should limit the amount of written work product that is shared. Where feasible, the corporation should consider oral briefings that focus on nonprivileged facts. A telephonic or in-person conversation responding to the auditor’s specific questions might limit the amount of written work product that needs to be disclosed. It is important to note that counsel should exercise caution even when presenting work product orally, as an auditor’s notes from an oral presentation might be subject to discovery.
If litigation arises and the auditor is subpoenaed, company counsel should closely work with the auditors and review any materials that may contain privilege or work product before they are produced. Being proactive and working cooperatively with the auditors will mitigate and avoid unnecessary disclosures.
Effective accounts receivable (AR) management is vital for maintaining a company’s cash flow, profitability, overall financial stability and is considered to be best practice for accounting management . By implementing strategic AR practices, businesses can reduce payment delays, minimize financial risks, and improve relationships with customers. Below are in-depth strategies for enhancing AR performance, ensuring financial health, and maintaining strong client relationships.
Establishing Formal Policies and Procedures
A well-defined set of policies and procedures is the foundation of effective accounts receivable management. Clear guidelines ensure consistency across the entire order-to-cash cycle, from invoicing to collection. These guidelines should outline the specific steps involved in generating invoices, tracking payments, and handling overdue accounts. Clearly defined roles and responsibilities for team members contribute to accountability, while setting payment terms and due dates helps streamline the process.
Creating a documented standard operating procedure (SOP) that employees can refer to ensures that everyone follows the same approach, minimizing errors and reducing confusion. Policies should also specify the consequences for late payments, including any penalties or fees. Establishing escalation protocols—such as follow-up reminders, late payment notices, and legal actions if necessary—keeps the collection process organized and efficient.
Leveraging Advanced Technology for Efficiency
Incorporating technology into accounts receivable management can significantly enhance efficiency. Advanced AR software platforms offer a range of features designed to automate and optimize the process, reducing the manual workload and minimizing errors. These platforms often include automated invoicing, payment tracking, customer communication, and collections management.
Automated systems can send reminders for upcoming payments and follow up on overdue accounts without human intervention. This automation saves time and ensures consistency in communication with clients. Many platforms also offer integrated billing systems that sync with existing account receivable software, providing a seamless flow of information across financial operations. Customer portals allow clients to access statements, make payments online, and review their payment history, fostering a more convenient and user-friendly experience. Some of the best account receivable software are: QuickBooks Online, Xero, Sage Intacct and NetSuite ERP.
Implementing Regular Accounts Receivable Reviews and Aging Analyses
Regular reviews of accounts receivable are essential to maintain a healthy cash flow. Implementing a schedule for periodic AR reviews allows businesses to monitor the status of outstanding balances and identify potential problems early. Aging analyses categorize receivables based on how long they have been outstanding—30, 60, or 90+ days—highlighting overdue accounts that require immediate action. These reports are valuable tools for assessing the health of cash flow and making informed decisions about which accounts to prioritize for follow-up.
Analyzing AR data helps identify patterns and trends that may indicate broader issues, such as recurring late payments from specific clients or seasonal fluctuations in cash flow. Businesses can use this data to refine their credit policies and improve collection strategies. A disciplined review process also enables organizations to proactively address cash flow challenges before they escalate, ensuring financial stability.
Strengthening Customer Relationships for Improved Collections
Maintaining positive relationships with customers is a crucial aspect of effective AR management. Accurate and up-to-date customer information, including contact details and payment histories, enables personalized service and facilitates smoother transactions. Keeping comprehensive customer profiles with relevant data helps businesses address issues quickly and negotiate payment plans when necessary.
Clear and transparent communication builds trust with clients, making them more likely to prioritize timely payments. Sending invoices promptly, following up with friendly reminders, and providing clear payment instructions are all practices that enhance client relationships. By understanding customers’ payment behaviors and preferences, businesses can tailor their approach to improve cash flow without jeopardizing long-term partnerships.
Implementing Credit Risk Management Strategies
For companies that extend credit to customers, managing credit risk is a critical part of AR management. Implementing structured credit assessment processes allows businesses to evaluate the risk associated with each customer before offering credit terms. Conducting thorough credit checks and setting credit limits based on each client’s financial history and creditworthiness can significantly reduce the likelihood of non-payment.
Businesses should regularly review credit terms and limits to ensure they remain aligned with evolving market conditions and customer circumstances. Implementing dynamic credit policies that adapt to changes in a customer’s payment behavior or overall economic environment helps minimize risks and protect cash flow. A well-executed credit management strategy reduces the impact of late payments and uncollected debts on the company’s finances.
Utilizing Aging Reports for Strategic Analysis
Aging reports are essential tools for understanding the status of outstanding invoices. These reports categorize receivables based on the duration since the invoice was issued, making it easier to identify overdue accounts. Regularly analyzing aging reports helps businesses prioritize follow-up efforts, allocate resources effectively, and take targeted actions to minimize delinquencies.
A data-driven approach to AR management not only enhances the efficiency of collections but also provides valuable insights into the company’s financial health. Recognizing patterns in payment behavior can inform adjustments to invoicing procedures, credit policies, and follow-up strategies. Accurate and timely aging reports are crucial for maintaining cash flow and ensuring that overdue accounts are addressed promptly.
Balancing Automation with Human Oversight
While automation offers numerous benefits for accounts receivable management, human oversight remains indispensable. Automated systems excel at handling routine tasks like invoicing, sending reminders, and updating payment statuses, but they cannot replace the expertise and judgment of experienced professionals. Human involvement is necessary for analyzing data, handling complex payment disputes, and maintaining customer relationships.
Businesses should strike a balance between automation and manual oversight. Leveraging automation for repetitive tasks allows AR teams to focus on higher-value activities, such as negotiating payment plans and resolving disputes. A well-rounded approach that combines technology with human expertise ensures that AR management remains adaptable and responsive to changing circumstances.
Proactive Collections and Follow-Up Procedures
A proactive approach to collections is crucial for maintaining healthy cash flow. Sending invoices as soon as work is completed and issuing payment reminders well before the due date can significantly reduce payment delays. Establishing a structured follow-up schedule for overdue accounts—such as sending gentle reminders at 15 days and more assertive notices at 30 days—helps businesses maintain consistent cash flow.
Maintaining detailed records of all payment communications provides a clear audit trail and ensures that the collection process remains professional and well-documented. Professional yet firm follow-up procedures demonstrate the company’s commitment to timely payments while preserving the relationship with clients.
Monitoring Key Performance Indicators (KPIs) for Continuous Improvement
Tracking key performance indicators (KPIs) is essential for assessing the effectiveness of AR management strategies. Metrics such as Days Sales Outstanding (DSO), average collection period, and the percentage of overdue accounts provide valuable insights into cash flow health. Setting specific goals for these KPIs encourages continuous improvement and helps identify areas where adjustments are needed.
By regularly monitoring and analyzing these metrics, businesses can refine their AR processes, implement targeted strategies, and optimize collections. Effective AR management not only improves cash flow but also strengthens the organization’s financial foundation, supporting sustainable growth and long-term success.
Accounts receivable management services
Several reputable accounts receivable management services are available to help businesses enhance cash flow and streamline collections. TSI (Transworld Systems Inc.) specializes in customized debt collection and payment reminders, reducing delinquency rates through targeted analytics. Atradius Collections offers global AR management, focusing on credit insurance and tailored solutions for international clients. Dun & Bradstreet Receivable Management Services provides comprehensive AR solutions, including credit risk assessments and data-driven strategies. Gulf Coast Collection Bureau supports industries like healthcare and utilities with services ranging from AR outsourcing to debt recovery. ABC-Amega delivers global commercial debt collection and AR outsourcing, assisting clients in managing complex cases and reducing payment delays. These services are designed to enhance financial stability and improve payment practices across various industries.
Conclusion
Optimizing accounts receivable management is a critical step toward ensuring consistent cash flow and financial stability. By establishing clear policies, leveraging technology, conducting regular reviews, and maintaining strong customer relationships, businesses can minimize risks and improve payment efficiency. A combination of automated tools and human oversight, alongside a proactive collections strategy, allows organizations to manage their receivables effectively. Prioritizing AR management is not just about getting paid—it’s about securing the financial health and longevity of the business.
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Captive audience; some disagreement; game of 21; and other highlights of recent tax cases.
Barrington, Illinois: Tax preparer Gary Sandiego has been sentenced to 16 months in prison for preparing and filing false returns for clients.
He owned and operated the tax prep business G. Sandiego and Associates and for 2014 through 2017 prepared and filed false income tax returns for clients. Instead of relying on information provided by the clients, Sandiego either inflated or entirely fabricated expenses to falsely claim residential energy credits and employment-related expense deductions.
Sandiego, who
He was also ordered to serve a year of supervised release and pay $2,910,442 in restitution to the IRS.
Ft. Worth, Texas: A federal district court has entered permanent injunctions against CPA Charles Dombek and The Optimal Financial Group LLC, barring them from promoting any tax plan that involves creating or using sham management companies, deducting personal non-deductible expenses as business expenses or assisting in the creation of “captive” insurance companies.
The injunctions also prohibit Dombek from preparing any federal returns for anyone other than himself and Optimal from preparing certain federal returns reflecting such tax plans. Dombek and Optimal consented to entry of the injunctions.
According to the complaint, Dombek is a licensed CPA and served as Optimal’s manager and president. Allegedly, Dombek and Optimal promoted a scheme throughout the U.S. to illegally reduce clients’ income tax liabilities by using sham management companies to improperly shift income to be taxed at lower tax rates, improperly defer taxable income or improperly claim personal expenses as business deductions. As alleged by the government, Dombek also promoted himself as the “premier dental CPA” in America.
The complaint further alleges that in promoting the schemes, Dombek and Optimal made false statements about the tax benefits of the scheme that they knew or had reason to know were false, then prepared and signed clients’ returns reflecting the sham transactions, expenses and deductions.
The government contended that the total harm to the Treasury could be $10 million or more.
Kansas City, Missouri: Former IRS employee Sandra D. Mondaine, of Grandview, Missouri, has pleaded guilty to preparing returns that illegally claimed more than $200,000 in refunds for clients.
Mondaine previously worked for the IRS as a contact representative before retiring. She admitted that she prepared federal income tax returns for clients that contained false and fraudulent claims; the indictment charged her with helping at least 11 individuals file at least 39 false and fraudulent income tax returns for 2019 through 2021. Mondaine was able to manufacture substantial refunds for her clients that they would not have been entitled to if the returns had been accurately prepared. She charged clients either a fixed dollar amount or a percentage of the refund or both.
The tax loss associated with those false returns is some $237,329, though the parties disagree on the total.
Mondaine must pay restitution to the IRS and consents to a permanent injunction in a separate civil action, under which she will be permanently enjoined from preparing, assisting in, directing or supervising the preparation or filing of federal returns for any person or entity other than herself. She is also subject to up to three years in prison.
Los Angeles: Long-time lawyer Milton C. Grimes has pleaded guilty to evading more than $4 million in federal taxes over 21 years.
Grimes pleaded guilty to one count of tax evasion relating to his 2014 taxes, admitting that he failed to pay $1,690,922 to the IRS. He did not pay federal income taxes for 23 years — 2002 through 2005, 2007, 2009 through 2011, and 2014 through 2023 — a total of $4,071,215 owed to the IRS. Grimes also admitted he did not file a 2013 federal return.
From at least September 2011, the IRS issued more than 30 levies on his personal bank accounts. From at least May 2014 to April 2020, Grimes evaded payment of the outstanding income tax by not depositing income he earned from his clients into those accounts. Instead, he bought some 238 cashier’s checks totaling $16 million to keep the money out of the reach of the IRS, withdrawing cash from his client trust account, his interest on lawyers’ trust accounts and his law firm’s bank account.
Sentencing is Feb. 11. Grimes faces up to five years in federal prison, though prosecutors have agreed to seek no more than 22 months.
Sacramento, California: Residents Dominic Davis and Sharitia Wright have pleaded guilty to conspiracy to file false claims with the IRS.
Between March 2019 and April 2022, they caused at least nine fraudulent income tax returns to be filed with the IRS claiming more than $2 million in refunds. The returns were filed in the names of Davis, Wright and family members and listed wages that the taxpayers had not earned and often listed the taxpayers’ employer as one of the various LLCs created by Davis, Wright and their family members. Many of the returns also falsely claimed charitable contributions.
Davis prepared and filed the false returns; Wright provided him information and contacted the IRS to check on the status of the refunds claimed.
Davis and Wright agreed to pay restitution. Sentencing is Feb. 3, when each faces up to 10 years in prison and a $250,000 fine.
St. Louis: Tax attorneys Michael Elliott Kohn and Catherine Elizabeth Chollet and insurance agent David Shane Simmons have been sentenced to prison for conspiring to defraud the U.S. and helping clients file false returns based on their promotion and operation of a fraudulent tax shelter.
Kohn was sentenced to seven years in prison and Chollet to four years. Simmons was sentenced to five years in prison.
From 2011 to November 2022, Kohn and Chollet, both of St. Louis, and Simmons, who is based out of Jefferson, North Carolina, promoted, marketed and sold to clients the Gain Elimination Plan, a fraudulent tax scheme. They designed the plan to conceal clients’ income from the IRS by inflating business expenses through fictitious royalties and management fees. These fictitious fees were paid, on paper, to a limited partnership largely owned by a charity. Kohn and Chollet fabricated the fees.
Kohn and Chollet advised clients that the plan’s limited partnership was required to obtain insurance on the life of the clients to cover the income allocated to the charitable organization. The death benefit was directly tied to the anticipated profitability of the clients’ businesses and how much of the clients’ taxable income was intended to be sheltered.
Simmons earned more than $2.3 million in commissions for selling the insurance policies, splitting the commissions with Kohn and Chollet. Kohn and Chollet received more than $1 million from Simmons.
Simmons also filed false personal returns that underreported his business income and inflated his business expenses, resulting in a tax loss of more than $480,000.
In total, the defendants caused a tax loss to the IRS of more than $22 million.
Each was also ordered to serve three years’ supervised release and to pay $22,515,615 in restitution to the United States.
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