A recent ruling by a U.S. Court emphasized that sharing information learned in an internal investigation with the independent auditor does not result in a waiver of the attorney-client privilege. This important decision reinforces the ability of the independent auditor to fulfill its gatekeeping role in the protection of capital markets.

Sixth Circuit Ruling on Attorney-Client Privilege

In a recent ruling, the United States Court of Appeals for the Sixth Circuit overturned a district court decision and reaffirmed that when a company engages attorneys to conduct an internal investigation, the internal investigation materials are subject to the attorney-client privilege and the work-product doctrine.¹ Had the district court’s opinion been upheld, a company’s decision of whether, and how, to conduct an internal investigation would have had to be weighed against the proposition that communications, analyses, and other sensitive material would likely need to be disclosed to adverse parties.

Among the plaintiffs’ arguments in the case was that the disclosure of investigation materials to third parties, including the independent auditor and the U.S. Department of Justice (DOJ), resulted in a waiver of privilege. The Sixth Circuit disagreed and emphasized that the disclosure of investigation information to a company’s independent auditor does not waive privilege, as the independent auditor is not an adversary and is professionally bound by ethical rules prohibiting the disclosure of confidential client information without the specific consent of the client.

The ability of the internal investigation team to share information with the independent auditors is critical to bringing an investigation to a satisfactory conclusion. This is particularly true when the investigation identifies misconduct by management or results in findings that implicate the company’s historical accounting and financial reporting.

In contrast, the inability to share information or work product from an investigation with the independent auditor could result in significant delays (and incremental costs), as the auditor would need to perform additional procedures to effectively mirror aspects of the investigation. In certain instances, it could even theoretically prevent the auditor from issuing an opinion at all.

The Independent Auditor

The relationship between a company’s finance and accounting team and its independent auditor is one of cooperation, with open and ongoing communication and a shared goal of ensuring that the financial statements are free from material misstatement.

The existence of an internal accounting investigation necessarily changes the dynamic between management and the auditor. For one, the investigation team, typically led by outside counsel with the assistance of forensic accountants, will generally be the first to learn of new facts. And because one typical aspect of an investigation is to evaluate the competency and conduct of management, there is often a limited sharing of new information with management as the investigation is ongoing.

Further, given the existence of an investigation, the independent auditor will invariably take steps to react to the now higher-risk nature of its audit engagement. These steps could include, among others, the involvement of internal and external counsel, the addition of a second “risk management” partner to the engagement team, increased oversight by risk and technical accounting experts in the national office, and the existence of a second “shadow” audit team experienced in evaluating the sufficiency of the forensic accounting investigation.

These changing dynamics make it critical for the investigation team to help the company effectively manage its relationship with its auditor, assisting in the meaningful flow of information needed by the auditor to complete its work. After all, regardless of how much time and effort is expended regarding an investigation, a company will only be able to issue its financial statements upon such time as its auditor is fully satisfied with the investigative scope, process, and conclusions reached.

Best Practices

While every investigation is unique, there are several steps an investigative team should strongly consider to gain the confidence of the auditors and to avoid any undue escalation that could hinder the company’s ability to issue its financial statements as soon as practicable.

Scope of Investigation

The scope of an investigation is generally established by the investigative team and approved by those at the company overseeing the investigation (e.g., audit committee, special committee of the Board of Directors, etc.). Sharing the scope with the auditors, both while it is being developed as well as when it is formalized, is an important step in gaining the auditor’s confidence that the investigation will be transparent.

Further, to the extent that the investigative plan is missing one or more steps that the auditor strongly believes are necessary, learning this at the outset (and adjusting the scope early on) can help avoid time delays and inefficiencies toward the end of the process.

Significant Issues and Findings

If there is one thing that can cause an auditor to quickly lose confidence in an investigative team, it is the untimely communication of the identification of a new and significant issue.

Chief among these are facts that indicate that fraud or intentional misconduct have occurred, particularly if the alleged individual or individuals are members of senior management or a part of the accounting and finance team. Such potential misconduct not only affects materiality judgments (as discussed further below) but will require the independent auditor to revisit the sufficiency of its previous audits, as the integrity of management is something the auditor relies upon when planning and executing its audit work and ultimately issuing its opinion.

While a short delay in communication as the investigative team works to quickly find corroborative evidence and informs the audit committee of the new issue is understandable, a delay that stretches into weeks will generally be viewed unfavorably by the auditor.

Ongoing Updates

It is important to establish a cadence for progress updates to the independent auditor over the course of the investigation. While the auditor understands that the investigative team needs to do its work independently and thoroughly, ongoing communication can serve to lower anxiety and ultimately lead to a more efficient process at the end of the investigation. Among other things, the investigative team should consider communicating (or be prepared to answer questions regarding) the following:

• Progress to completion as to the original scope, and estimated timing to overall completion
• Any changes or suggested changes to the scope of the investigation
• Any hurdles or obstacles encountered
• Updates on any accounting errors identified, including analysis of their cumulative materiality to previously issued financial statements
• Any communications with government regulators such as the United States Securities and Exchange Commission (SEC), DOJ, or other regulators
• Nature and extent of cooperation from company management
• Any update on previously identified significant issues

Accounting Errors and Materiality

Many internal investigations result in the identification of accounting errors that impact the accuracy of a company’s historical financial reporting. For a public company, once it has determined that one or more of its previously issued financial statements are materially misstated, SEC rules require public disclosure of this fact within four business days.²

The determination of materiality is the responsibility of management, with the concurrence of the independent auditor. However, in an internal investigation, it is most often the investigation team that is the first to identify new facts and related accounting errors. For public companies in particular, tracking and quantifying accounting errors as they are identified is a critical part of the investigative process. Only by sharing such information with management and the auditor on an ongoing basis can a company be assured of meeting its SEC reporting requirements in the event that the accumulation of accounting errors leads it to conclude that one or more of its previously issued financial statements contain material errors.

In addition to the quantification of accounting errors, the investigative team should also communicate any facts that could affect the qualitative assessment of materiality as required under U.S. GAAP. For example, a determination that one or more accounting errors were made intentionally would be a significant qualitative factor in any materiality analysis.

Conclusion

Independent auditors play a crucial role in ensuring the high-quality financial reporting required for maintaining the confidence of investors and other financial statement users. As former SEC Acting Chief Accountant Paul Munter noted in an August 2022 Statement:

High-quality audits are critical to the process of providing decision-useful financial information for the benefit of investors, and auditors serve an important gatekeeping and investor protection function by helping to ensure that issues are promptly identified and addressed.³

The decision by this Sixth Circuit allowing information from an internal investigation to be shared with the independent auditor, unencumbered by an associated waiver of attorney-client privilege, is critical to ensuring that auditors can continue to receive meaningful information sufficient to allow the fulfillment of their gatekeeping role at a time most critical to shareholders and other interested parties.

1. See On Petition for a Writ of Mandamus, United States District Court for the Southern District of Ohio, Nos. 2:20-cv-03785; 2:20-cv04287, October 3, 2025, for a copy of the Court’s opinion.
2. SEC Form 8-K, Item 4.02, Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
3. Auditor Independence and Ethical Responsibilities: Critical Points to Consider When Contemplating an Audit Firm Restructuring, Paul Munter, SEC Acting Chief Accountant, August 29, 2022