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Disclosure of audit files: a balancing exercise between confidentiality and the public interest to uncover the truth

Disclosure of audit files: a balancing exercise between confidentiali

Disclosure of audit files: a balancing exercise between confidentiality and the public interest to uncover the truth

03.06.2016

On 5 January 2016, the Amsterdam Court of Appeal ruled that under circumstances, the public interest to uncover the truth outweighs the confidentiality duty of an auditor towards his client in case of a claim for disclosure of records. In the case at issue, the Court of Appeal ordered that the complete audit files had to be disclosed.

Amsterdam Court of Appeal, 5 January 2016, ECLI:NL:GHAMS:2016:30 (Colima c.s./PwC)

Claiming disclosure of records

A claim for disclosure of records can be based on article 843a of the Dutch Code of Civil Proceedings (“DCCP”). Pursuant to this article, a party may obtain records if (i) he has a legitimate interest (rechtmatig belang) in doing so, (ii) the records are sufficiently specified, (iii) there is a legal relationship to which the claimant is a party, (iv) the claim for disclosure is directed towards the party with the records in its possession and (v) none of the exceptions set forth in article 843a (3) and (4) DCCP apply.

Background of the case

This case concerns the potential liability of PricewaterhouseCoopers et al. (“PwC”) as the auditing firm of several funds that invested in Madoff’s Ponzi-scheme. PwC audited and approved the annual accounts of these funds over a number of years. When the fraud was exposed in 2008, it turned out that the funds’ underlying assets did not exist.

Against that background Colima et al. (“Colima”), a group of duped investors, raised a professional negligence claim against PwC. In support of its claim in the main proceedings, Colima raised a procedural motion (incident) in which it claimed disclosure of PwC’s audit files of the funds over the years 2000 to 2005.

On 3 September 2014, the District Court of Amsterdam (ECLI:NL:RBAMS:2014:6121) dismissed the claim for lack of a sufficient legitimate interest. A Disciplinary Court had earlier declared a complaint of Colima against the auditor with regard to the approval of the annual accounts unfounded and ruled that there was no reason for additional auditing measures. The District Court ruled that Colima insufficiently stated that disclosure of the complete audit file was likely to create new facts or circumstances. In the District Court’s view it was unlikely that it would have caused to deviate from the irrevocable ruling of the Disciplinary Court.

The Amsterdam Court of Appeal: a far-reaching disclosure obligation

The Amsterdam Court of Appeal disagreed with the District Court. According to the Court of Appeal, Colima does have a sufficient legitimate interest in obtaining the audit files of PwC. The Court of Appeal emphasized that one of the functions of an audit file is to be able to account for the work of an auditor ex post.

The Court of Appeal also attached importance to the fact that the approval of annual accounts served to protect the interests of third parties (i.e. investors) who should be able to rely on the annual accounts. According to the Court of Appeal, a failure in the review of PwC could constitute an unlawful act against the investors, among whom Colima. Consequently, Colima has a legal relationship with PwC as well as a legitimate interest in obtaining the audit files in support of its claim in the main proceedings. It seems probable that the potential liability of the auditor played (and will play) an important role in entitling disclosure of the audit files.

PwC argued that the audit files contain confidential information about its clients and that PwC is bound by a duty of confidentiality towards its clients. The Court of Appeal acknowledged the confidential nature of the audit files by imposing a duty of confidentiality on Colima. However, the Court of Appeal reiterated that PwC does not have a professional privilege as recognized in paragraph 3 of article 843a DCCP. The Court of Appeal concluded that in this case, the public interest of uncovering the truth outweighs the importance of confidentiality. In order to form a correct and complete picture of PwC’s review – and therewith PwC’s potential liability – disclosure of the entire audit files is necessary.

Going forward, clients of an auditor should be aware that documents they provide to their auditor may at some point in time have to be disclosed to a third party.

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