Law Times

Law Times • February 10, 2014 Page 7 www.lawtimesnews.com COMMENT New audit enquiry guidelines welcome and necessary hen accountants prepare clients' au- dited fi nancial statements, they need to enquire about claims or possible claims against them to confi rm that fi nancial reserves are suffi cient. ey also need to include any notes to the fi nancial statements refl ecting potential future payouts. In the normal course, accountants ask for the client's assessment of potential future obligations and the likeli- hood of a positive or negative outcome. e client then asks the lawyers to confi rm the outstanding claims and the assessment of the situation and to report that informa- tion directly to the accountants. But the guidelines for the audit enquiry and response process are changing under relatively new accounting standards and are something lawyers should be aware of. Lawyers must exercise caution when liaising with their clients' accountants to avoid risks to confi dentiality and solicitor-client privilege. Over the years, lawyers and accountants have sought to establish a standard process to govern these sorts of communications. In 1978, the Canadian Bar Association and the Canadian Institute of Chartered Accountants established the joint policy state- ment on audit enquiries. e joint policy statement established guidelines and confi rmed responsibilities between lawyers and accoun- tants. e overriding goal is to ensure auditors are able to provide informative and reliable fi nancial reporting on potential liabilities without compromising the outcome of any litigation involving the client or lawyers' profes- sional duties to maintain confi dentiality and privilege. On Jan. 1, 2011, Canada adopted International Fi- nancial Reporting Standards for public companies and government businesses. e standards changed, among other things, the rules for evaluating contingent liabilities pursuant to Accounting Standard IAS 37. e CBA and the Canadian Institute of Chartered Accountants set out to update the joint policy statement and issued interim guidance in the meantime. A fi nal version of a new joint policy statement is expected this year. e main reason for the delay is the presently unsettled status of IAS 37. e diff erences between s. 6560 of the institute's hand- book and IAS 37 and the apparent misapprehension of the interim guidance have caused some confusion for ac- countants and lawyers alike. In November 2013, the joint policy statement r eview committee provided an update summarizing the feed- back received from lawyers and accountants, points of agreement, and ongoing negotiations between the CBA and the aud iting and assurance standards board. e update touched on a number of areas: 1. In-house counsel: e application of the joint policy statement to in-house counsel acting in a legal capacity was a point of agreement. ey also agreed that in-house coun- sel are not management employees and any audit review of their fi les would exclude privileged documents, includ- ing legal opinions to management. It is, of course, a well- established principle that opinions by in-house counsel in their capacity as solicitors are privileged whereas the work of those who act in a managerial capacity is not. 2. Communications: e need to adhere to timelines for lawyers' responses and updates to the status of claims and possible claims was a point of agreement. ey also agreed that auditors should review clients' enquiry letters before they are sent to the law fi rm and request changes if necessary, especially with respect to listing and assess- ing claims in accordance with the applicable accounting framework. Negotiations continue towards both keeping the joint policy statement and enquiry and response letters free of complex references to accounting and audit standards and limiting the lawyer's role to assessing only the pos- sible legal outcomes and the reasonableness of the client's evaluations. is would be a welcome development given the frequency with which audit enquiry letters include extensive references to accounting standards beyond the scope of most lawyers' expertise. 3. Privilege: e privileged status of all disclosures of information to auditors and the lawyer's response let- ter was a point of agreement. Of course, it is important to note that a declaration by the review committee can- not create or limit legal privilege. Biomedical Information Corp. v. Pearce established that there is no general privi- lege for solicitor-accountant communications, so an audit response letter should not be presumed to be privileged regardless of what the joint policy statement says. Fur- thermore, Philip Services Corp. v. Ontario Securities Com- mission confi rmed that disclosure of information to auditors is not a general waiver of privilege over the lawyer's fi le to the entire world. Negotiations will continue regarding whether the new joint policy statement will include guidance that a client's description of claims in an enquiry letter should be brief in order to reduce the risk of disclosing privileged information. In practice, there is a widespread under- standing that enquiries and responses should be brief and pithy for precisely this reason. 4. No response required or possible: ere was agree- ment that there should be a materiality threshold to dis- courage auditors from asking to have letters sent to law- yers as a matter of course. Negotiations will continue regarding the circum- stances when estimates of potential loss are not necessary. Negotiations will also continue regarding when a lawyer may state that a meaningful evaluation of the likelihood of a loss is not possible. is is important and contentious since IAS 37 is more stringent than generally accepted ac- counting principles and states that it should be "extremely rare" that a reliable estimate of liability is not possible. Any litigator well knows that the opposite is true as it would be rare to be able to ascertain the outcome of a dispute with certainty. 5. Timing: e new joint policy statement will include a provision requiring auditors and in-house counsel to make appropriate plans to ensure there is suffi cient time for consultation with external counsel. is would be wel- come since audit enquiries are frequently provided late and require fast turnaround times. 6. Other matters: Negotiations will continue regard- ing whether the new joint policy statement will include guidance about avoiding requests for information about a client's subsidiaries that are not clients of a lawyer. Nego- tiations will also continue regarding electronic signatures and the delivery of enquiries and responses by e-mail. By the time the new joint policy statement is available, the former version will be approximately 36 years old. A lot of things have changed since the 1978 version of the joint policy statement. Consequently, the ultimate release of the new joint policy statement is both welcome and necessary. LT John Sorensen is an associate in the Toronto tax group at Gowling Lafl eur Henderson LLP. u SPEAKER'S CORNER Stephen gets even with Elections Canada ack in 2000, when Prime Minister Stephen Harper was with the Na- tional Citizens Coalition, he took Elections Canada to court arguing against rules forbidding big companies from spending as much as they wished on elec- tion advertising. Harper lost his case and later that year sent out a fundraising newsletter to coalition members attacking "the jackasses at Elec- tions Canada" for prosecuting a man who had posted election results online. at wasn't nice, but Harper didn't get where he is now by being nice. Last week, 14 years later, Harper's govern- ment introduced bill C-23, the fair elections act, legislation that actually has little to do with its name. e legislation splits Elections Canada in two by putting the chief investigator, com- missioner of elections Yves Côté, under the director of public prosecutions, who reports to the federal justice minister who in turn re- ports to the Harper cabinet. You can follow the pecking order yourself and fi gure out what it means. e minister for democratic reform, Pierre Poilievre, told reporters the govern- ment made the split because "the referee should not be wearing a team jersey." Now what did that mean? Was that a cheap shot? Why did he smear the investi- gative arm of Elections Canada? Was it be- cause the Harper government has had so many problems with Elections Canada over election scams during the past few years? Liberal Leader Justin Trudeau said bill C-23 is a bid by the Harper government "to strip Elections Canada of its in- vestigative powers and attack its independence." Actually, there's more to it. In the 2006 election, the Con- servatives pulled off the big- gest electoral scam in Canadian history. Conservative headquarters transferred $1.3 million to 67 riding associations across the country and then immediately took the money back again in order to use it for national advertising and thereby ex- ceed its spending limit. Elections Canada refused to pay refunds to the individual riding associations and won the case in court. Bad blood ensued. In 2008, the Conservative headquarters in Ottawa refused to hand over documents requested by Elections Canada. e Mount- ies raided the Conservative headquarters. at infuriated the party bosses. Four senior Conservative offi cials faced charges, including Sen. Irving Gerstein, a key party fundraiser, and the late senator Doug Finley, the party's chief organizer at the time. A deal worked out with Elections Canada saw the Conservatives plead guilty and pay $52,000 with nobody going to jail. In the 2011 election cam- paign, hundreds or perhaps thousands of Liberal supporters across the country received calls from recorded voice machines on voting day with directions to fake polling stations. is was the famous robocall scam. One Conservative party worker in Guelph, Ont., Michael Sona, is facing a charge over the matter. Peterborough, Ont., Conservative MP Dean Del Mastro ran into some trouble over his own 2008 election campaign fi nancing. He says he's innocent. He appears in court on June 23. ere were other cases across the coun- try. A Federal Court judge ruled last May that the "most likely source" of the lists used for the robocalls was the Conservative party database in Ottawa. NDP Leader Tom Mulcair says he doubts anything the Conservatives have to say about improving elections "because they have a proven track record of consistently cheating in elections." Now was that nice, Tom? You know Harper hates when people call him a cheater. A few small changes in the bill will mean improvements. For instance, people will have to provide proper identifi cation at vot- ing stations. at card you get in the mail identifying your polling station isn't enough. It's too bad since a lot of people relied on it in the last election to be sure they weren't victims of the mysterious Pierre Poutine and his phony polling station scam. And there will be no more vouching for a friend who shows up without identifi cation at the polling station. at practice came from times when everybody knew everyone else in town. ose times are long gone. An- other clause in the legislation raises the cap on yearly donations to a political party to $1,500 from the current $1,200. Of course, there are people who wouldn't give 15 cents to a politician even if they had it. e bill would also increase penalties for impersonating an Elections Canada offi cial. Somebody should tell Pierre Poutine. NDP democratic reform critic Craig Scott called the legislation "Orwellian." Instead of tackling electoral fraud, he said, the Conservatives are going a er the guy who has been fi ghting that very problem. e Harper government didn't do much to consult chief electoral offi cer Marc Mayrand. He had all sorts of advice they never heard. Mayrand said he would comment on the legislation a er the Conservatives had given him a chance to read it. LT Richard Cleroux is a freelance reporter and columnist on Parliament Hill. His e-mail ad- dress is richardcleroux@rogers.com. The Hill Richard Cleroux W B

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