Canada: The Joint Policy Statement: Managing Risk and Maintaining Confidentiality

Last Updated: February 15 2017
Article by Ian D. Shewan

As part of the preparation of audited financial statements, auditors are obliged to make inquiries to legal counsel about claims or possible claims by or against the client.

The accounting and legal professions developed a Joint Policy Statement on how this would occur. This Joint Policy Statement remained unchanged from 1978 until December 1, 2016, when a new Joint Policy Statement was introduced.

Protecting the confidentiality associated with solicitor-client privilege is a major theme of the Joint Policy Statement. The law firm receives the inquiry letter directly from the client. If the law firm does not agree with management's evaluation of the claim or the possible claims, the law firm is to discuss the situation with management and agree upon a revised evaluation. If the law firm identifies possible claims that have not been included in the inquiry letter, the law firm is obliged to discuss the situation with management to ensure it is aware of its responsibilities to disclose all possible claims.

Once the internal protocol has been satisfied, the lawyer maintains the confidentiality of the process by providing their written response to the client on the reasonableness of management's evaluation of the claims and possible claims and by specifying any outstanding claims omitted from the inquiry letter. As a result, the client is effectively addressing the lawyer and the lawyer addressing the client, not the auditor, in communications regarding audit inquiries and the lawyer's response is limited to an assessment of the client's description of claims and possible claims.

Major changes in the new Joint Policy Statement are that inquires will include in-house counsel, there is more detail on the communication protocols between lawyers and auditors, and the inclusion in the letter of a specific response date that is usually five business days after the effective date of the inquiry.

While all of this seems relatively straightforward, issues may arise in circumstances where the law firm disagrees with its client's evaluation of the claim, discussions occur and the lawyer and client cannot agree on a revised evaluation of the claim. If this is not resolved, the auditor may not be able to obtain appropriate audit evidence. That is a situation the parties will want to avoid because the auditor may not be able to provide an unqualified audit opinion.

Although there have been changes to the Joint Policy Statement that will take some getting used to, the amendments to the Joint Policy Statement do not change the overriding objective from a legal perspective – to protect privileged information.

The following highlights some of the transactions our Business Law Group was involved with in 2016, providing you with an idea of the depth and breadth of experience our Group has.

Transactions Completed in 2016  

  • acted for the seller and co-founder of a large digital media company in a $16 million sale of shares;
  • counsel to the landlord in the negotiation of a complex lease buy-out and new lease for over 50,000 square feet of office space;
  • acted for the buyer of a Southwestern Ontario based concrete forming company;
  • acted on setting up various family trusts and estate planning initiatives;
  • counsel to the buyer of a Southwestern Ontario based trucking company with significant cross-border implications;
  • acted on the sale of a Canadian digital media company to a American public company;
  • advised various family members on a corporate reorganization of a family group of companies;
  • acted for a data analysis company on the purchase of a Canadian business and on the purchase of a new American business from a large American data management company;
  • counsel to a Canadian company on the purchase of a specialized Canadian manufacturing business from an American vendor;
  • acted on a financing of an Ontario biotechnology business by non-Canadian investors and Canadian government entities;
  • advised a trade association on various significant contractual matters;
  • counsel to chartered bank on financing of various solar power projects;
  • acted for seller of optical stores with multiple locations throughout Ontario;
  • advised 20+ buyers and sellers of dental practices;
  • acted on the sale of a plant and relocation of a large manufacturer;
  • succession planning and restructuring of multiple family farm corporations;
  • acted for the vendors in a $42 million sale of shares of a technology company;
  • acted for a Co-operative in a $4 million acquisition of a trucking company;
  • assisted municipal officers in responding to access to information requests;
  • counsel to purchaser in $6.5 million purchase of office facility;
  • counsel to purchaser in purchase of shares of Southwestern Ontario pharmacy;
  • acted for purchaser of assets of a local restaurant franchise;
  • acted on sale of majority control of construction firm with multiple offices in Ontario to a venture capital firm;
  • completed Offering Statements for a new agricultural co-operative and for a renewable energy co-operative;
  • counsel to chartered bank in financing multiple service stations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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