As with many other businesses, accountancy firms are coming across investigations on an ever more regular basis. Regulators and enforcement authorities are increasingly willing to police firms’ regulatory compliance by way of external investigations, while firms themselves are more likely to use internal investigations as a method of managing risk and dealing with regulatory enquiries. Additionally, firms are being asked more often to assist clients with their own investigations by, say, carrying out a forensic accounting exercise or a books and records review.
In terms of internal investigations, while tackling potentially damaging issues head-on can be a daunting prospect for any business, addressing these issues promptly and effectively when they arise can save time and resources in the long-run. A properly conducted internal investigation will diminish potential disruption to the business and prevent the risk of a one-off issue becoming a protracted problem.
At the outset of an internal investigation, a crucial question is whether sensitive documents produced during that process are at risk of later having to be disclosed externally to interested third parties. It is therefore important to have an understanding of the law of privilege, which protects the confidentiality of legal communications, and to know how it operates in the context of investigations.
What is legal professional privilege?
Legal professional privilege entitles a party to withhold certain documents from being disclosed to third parties. It has two parts: legal advice privilege and litigation privilege.
Legal advice privilege applies to confidential communications between lawyers and their clients for the purpose of the giving or receiving of legal advice. The important thing to note here is that legal advice privilege does not extend beyond lawyers to other professionals advising on legal matters. In particular, documents generated by or sent to accountants giving legal advice are not covered by privilege (R. (on the application of Prudential Plc and anor.) v Special Commissioner of Income Tax and anor. [2013] UKSC 1).
It is also worth bearing in mind that when it comes to legal advice privilege, the definition of “client” in a corporate context is limited to only those within the client entity who are specifically authorised to seek and receive the legal advice on that entity’s behalf (Three Rivers District Council and others v The Governor & Company of the Bank of England (Three Rivers No. 5) [2003] EWCA Civ 474). So, for example, in general notes of investigatory interviews between lawyers and non-client employees/partners will not attract privilege, unless otherwise covered by litigation privilege.
Litigation privilege allows parties involved in live or potential adversarial litigation to prepare their case without the risk of their opponent being able to view material generated in those preparations. It applies to confidential communications between a client and their lawyer, or between either of them and a third party, for the dominant purpose of conducting litigation that is either in progress or reasonably in contemplation at the time of the communication.
How might accountancy firms encounter an investigation?
We live in an age of increasing regulation, and accountancy firms could find themselves the subject of or involved in an external investigation by regulators or other enforcement authorities. The most likely source of such an external investigation is the Financial Reporting Council (FRC), which regularly investigates accountancy firms’ audit procedures. But firms could find themselves involved in an HMRC investigation into a client business’s tax issues. And recent cases involving the Serious Fraud Office (SFO) investigating allegations of corruption, fraud and bribery in businesses have touched on work carried by accountants for those businesses.
In respect of FRC investigations, firms need to be aware that they may be obliged to disclose a client’s privileged documents to the FRC under the Statutory Auditors and Third Country Auditors Regulations 2016 and the FRC’s own Audit Enforcement Procedure. In the recent decision in FRC -v- Sports Direct International Plc [2018] EWHC 2284 (Ch), it was held that requiring a firm to provide a client’s privileged documents to the FRC in the context of a confidential investigation into the conduct of a regulated person was not an infringement of the client’s legal professional privilege.
Regulatory concerns can in turn give rise to, or overlap with, internal investigations. An internal investigation might become necessary in the context of potential criminal conduct or regulatory concerns, or prospective civil claims. Alternatively, a firm might instigate an investigation of its own accord on discovery of alleged employee or partner misconduct, or in light of grievances or whistle-blowing allegations.
The question of whether privilege applies is of particular importance where the same or similar issues are being investigated both internally and externally. Enforcement authorities and regulators carrying out an external investigation or commencing proceedings may know or suspect that documents generated in an internal investigation may be of benefit to them. Recent high profile cases have seen regulators like the SFO going as far as the Court of Appeal to seek orders for the disclosure of documents generated during internal corporate investigations.
What about internal investigations in the context of criminal proceedings?
It seems logical that a firm should not be deterred from prudently investigating an allegation of criminal wrongdoing for fear of being punished by having to reveal what they have uncovered. But in 2017, the High Court decision in SFO -v- Eurasian Natural Resources Corporation Ltd (“ENRC”) ([2017] EWHC 1017 QB) gave rise to precisely those concerns, after it was found that documents arising from an internal investigation into allegations of criminal corruption had to be divulged to the SFO. The documents included lawyers’ notes of interviews with employees and forensic accounting material.
To sighs of relief from lawyers across the country, the Court of Appeal recently overturned the High Court’s decision (SFO -v- ENRC [2018] EWCA Civ 2006). It rejected the first instance conclusion that litigation privilege could not apply until a prospective defendant is aware that prosecution – as opposed to merely investigation – is reasonably in prospect. The Court held that an organisation needing to investigate allegations further before knowing that criminal proceedings are likely will not preclude the existence of litigation privilege.
The Court of Appeal judgement brings the law on what litigation being “reasonably in contemplation” means in a criminal context back into line with the position for civil claims. While each case will turn on its facts, the decision should give greater confidence to businesses conducting internal investigations in the context of potential criminal wrongdoing that associated documents will be protected from disclosure.
Practical tips
So how can a firm carrying out its own internal investigation increase the likelihood that legal professional privilege will apply? There are a number of things a firm can do in practice, including:
- Before starting any investigation, it is best to discuss the matter with a lawyer to receive advice on the preservation of privilege.
- If the business reasonably considers that the issues at hand may give rise to litigation (be it civil or criminal), and it is therefore considered that litigation privilege is likely to apply, this conclusion should be recorded early on, with reasons and in writing, so that there is an audit trail.
- The business should, in any event, set up a dedicated team which is authorised to request and receive advice on the investigation from lawyers, recording which individuals are in that team. Communications requesting or containing legal advice should be marked “privileged and confidential” and circulation restricted to maintain confidentiality.