How Confidential are Auditor Workpapers

Court OrderOngoing shareholder litigation highlights concerns that many holders have regarding the confidentiality of audit workpapers when dealing with third party audit firms acting on behalf of multiple states. City of Sterling Heights General Employees Retirement System v. Prudential is an ongoing class action case in Federal Court in New Jersey wherein shareholders have sued the company and several officers for violating federal securities laws by making false and misleading statements, overstating income and understating expenses. The claims stem from an unclaimed property audit and eventual settlement. Prudential was amongst the first life insurers to settle with California and other states after Verus conducted an audit using the Social Security Death Master File to match policies to deceased individuals. Previously, life insurers typically did not search the SSDMF to determine if an insured had died and instead waited until notified of death by the family or other beneficiary.

In this ongoing litigation, the shareholders have subpoenaed Verus records and to give a deposition. Verus objected to the subpoena stating that records were confidential and subject to an insurance examination privilege. On April 30, 2015, the Court rejected Verus' claim that the records are privileged and did not extend privilege as a matter of federal common law. However, it did permit the State of California to intervene for the limited purpose of asserting its own privilege rights. This is an ongoing battle that is sure to be of interest to holders of unclaimed property that are audited by any third party auditor.

This case continues to highlight the issues surrounding unclaimed property audits. Holders and advocates like Barganier have had serious concerns about the confidentiality of records arising out of the audit. Any time information is disclosed is another potential data breach waiting to happen where valuable company data, including information relating to employees, customers and vendors could be disclosed. In addition, the holder community has had concerns about how the information is used post-audit by the audit firms. Finally, holders now must be concerned that the audit workpapers could be disclosed during subsequent litigation, by shareholders or customers, as fallout from the audit or for other purposes.

While this is an ongoing case and the law has not yet been settled on this issue, the case does highlight the need for a holder to limit the information that it does turnover to auditors during the course of the audit. Responses should be limited to only that information that is necessary for the completion of the audit and no more. Companies should continue to assert their rights during an unclaimed property audit to prevent unnecessary disclosures that could then be used against them outside the immediate audit if disclosed.

Barganier will continue to follow this case and provide updates as warranted.

See Also:
CA Appeals Court Overturns Preliminary Injunction
Temple Inland Survives Motion to Dismiss, Challenge to Delaware Continues
New York Requesting Bids for Auditors