In December 2000 an article was written for this column which addressed the professional liability risks for auditors and the lawyers who are asked to report to auditors on litigation that had a material impact on the financial statements subject to audit.[1]� In such contexts lawyers, restrained by applicable evidentiary privileges and the client confidentiality obligation, cannot always effectively inform the auditor. Even where the lawyers’ reports are both consistent with professional standards and not affected by privilege or confidentiality obligations, the auditor does not generally review with counsel prior to the publication of the financial statements the accounting determinations that have significant legal implications and the footnote disclosures. Audit failure in this context, therefore, can be more effectively prevented when such a pre-release review by the lawyer handling or managing the litigation does take place. Enron’s professional intersection, while not identical, is quite similar in that the audit failure resulted from the ineffective coordination and focus of legal and auditing expertise. The accounting treatment of certain transactions and relationships that had significant legal implications and the attendant disclosures were, in the last analysis, ultimately left to the auditor without the benefit of an independent legal determination and review. By understanding the material risks of this professional intersection in the audit process, we can here, too, take the right path to reform.
‘U.S. v. Simon’
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