Lawyers and auditors should not work under same roof, inquiry hears
A parliamentary hearing has heard testimony that abuse of legal professional privilege will continue so long as the big four accounting firms are allowed to own law firms.
Asked how to avoid abuses of legal professional privilege (LPP) among the big four consulting giants, University of Wollongong associate professor Andrew Schmulow said the answer was an outright ban on allowing them to own law firms.
“They should never have been allowed to own law firms in the first place. In fact, lawyers and auditors will at times be on opposite sides of a conflict. I think of trading in insolvency. I think of faulty or defective financial statements,” he told a recent hearing of the Parliamentary Joint Committee on Corporations and Financial Services.
“To have lawyers in the same firm as an audit firm is absolute lunacy; it should never have been allowed to happen, and it is very quick and easy to unwind.”
Schmulow’s solution may be more extreme than most, but his concerns echo those raised throughout the parliamentary inquiries triggered in response to the PwC tax leaks scandals.
Several witnesses have raised concerns that legal practices within advisory divisions of multidisciplinary firms may offer the cloak of privilege as a selling point for their non-legal services.
Legal Consolidated partner, Brett Davies, opposed Schmulow’s calls for a forced split of multidisciplinary firms.
“What are you going to do? You’ll allow a doctor’s surgery to own a law firm, but you won’t allow an accounting house to own a law firm?”
“I think it’s ridiculous … I think it’s discriminatory to suggest accountants have a lower standard than a financial planning group,” he said.
Asked whether the law should go further in protecting against abuses of LPP, Davies said the laws were already in place.
“Your right as a client to prepare information which may go to court is protected by [LPP] and whether it is or it isn’t is a question for a judge in a court of law to decide,” he said.
“So, what the judge will do is say, ‘OK, you’re claiming [LPP], show me the information in confidence and I’ll tell you whether it’s subject to LPP or not’ … Everyone does it.”
ATO second commissioner Jeremy Hirschhorn recently told the Senate the Tax Office had been “disappointed” by the test of legal professional privilege applied by in-house and independent law firms.
“We [the ATO] have been disappointed with the law firms, whether that is the law division of multidisciplinary firm or a law firm itself, in how they have gone about doing the test as to whether something truly is privileged,” he said.
“Instead, in some cases almost viewing it like a negotiating tactic by making a blanket claim and forcing us to go document-by-document.”
Hirschhorn said he had observed a strategic blurring of the lines between consulting and legal functions, with consultants claiming their services had been offered under the “aegis of a law firm.”
“When I read that, I worry that the exact same problem that we had with the big four accounting firms will be replicated in the big law firms,” he said.
Misuse of LPP among large consulting firms is not a new observation. Both reports of the Senate Finance and Public Administration Reference Committee on the integrity of consulting services featured detailed accounts of the issue.
Both referred to the findings of Justice Mark Moshinsky in the 2022 Federal Court decision of the Commissioner of Taxation v PricewaterhouseCoopers that PwC had incorrectly applied LPP to more than half of the 15,500 documents requested by the ATO.
The first report wrote that PwC’s approach to LPP was “striking,” adding that the Senate committee believed that approval for the privilege claims “must have” been approved from the “most senior levels” of the firm.
After reviewing its approach to LPP claims, PwC Australia said it had identified “certain engagements that were not being directed by legal practitioners as described in the engagement letters.”
It added that these incidents were contrary to the firm’s values and policies.
