Accountant-Client Privilege Can't Protect Exxon's Audit Files

Accountant-Client Privilege Can't Protect Exxon's Audit Files

ExxonMobil can’t rely on accountant-client privilege to protect documents from an investigation into whether the Exxon, the largest private oil company in the world, had mislead investors about the expected impacts of climate change. The company had argued that accountant-client privilege prevented its auditor, PricewaterhouseCoopers, from disclosing files related to its private calculations of the business risks posed by climate change. New York State Attorney General Eric Schneiderman subpoenaed documents from the accounting firm last year, as part of his two-year long fraud investigation into Exxon.

PWC, however, declined to part with its files while Exxon sought to quash Schneiderman's subpoena on the basis of Texas’s accountant-client privilege law, an argument that a New York court rejected last year. On Tuesday, New York’s highest court declined to take up Exxon’s appeal, leaving Exxon and PWC with view options but to turn over the documents.

Schneiderman’s Exxon Investigation

Schneiderman opened his investigation into Exxon in 2015, focusing on whether the oil company had engaged in financial fraud in its communications to investors about climate risks. Exxon, long a leading opponent to climate change action, is suspected of downplaying the risks of climate change in its communication with investors, contrary to the conclusion of its own internal scientific research. For example, in 1977 one of Exxon's senior scientists bluntly warned about the risks of human-caused climate change, according to an investigation by InsideClimate News, 11 years before scientists at NASA began raising concerns over global warming. Exxon has rejected allegations that it misrepresented climate risks, as well as the accusation that it has suppressed climate change research.

Schneiderman’s investigation, described by the New York Times as “a new legal front in the battle against climate change,” has been long running and wide ranging. The attorney general has sought extensive financial records, emails, and other documentation around the oil giant’s climate change research and communications. In total, more than three million documents have been turned over, including ones that show former Exxon CEO and current Secretary of State Rex Tillerson’s preferred email pseudonym: Wayne Tracker.

The documents revealed so far, the AG says, show that the company used “secret, internal figures” that were lower than the numbers disclosed to investors. That conclusion wildly misrepresents the information found in the documents, Exxon says.

Last year, Schneiderman's office subpoenaed PWC for information relating to its audit of the company. Nineteen pages long, the subpoena sought everything from Exxon’s internal auditing of its oil and gas reserve estimates to its projections of potential changes in the cost of carbon. PWC has so far refused to comply with the subpoena, given Exxon’s insistence that the files are protected by accountant-client privilege.

Accountant-Client Privilege

Accountant-client privilege is one of the rarer species of privilege, falling low on the list of evidentiary protections—many rungs behind attorney-client privilege and even priest-penitent privilege, though maybe somewhere above the “critical self evaluation privilege.”

Not found in common law, the accountant-client privilege is a creation of state and federal law. Recognizing the need for full disclosure between accountant and client, and the need for accountants to protect the sensitive information shared by their clients, these laws provide limited protections to communications and documents relating to financial advice.  (Of course, accountant communications may also fall under the protections of attorney-client privilege, as well, if the accountant was retained for the purpose of obtaining legal advice from a lawyer or to aid the lawyer in rendering advice.)

On the federal side, Internal Revenue Code § 7525 grants the “same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney” to taxpayers and federally authorized tax practitioners. That protection is limited, however, to federal tax advice only and excludes other forms of financial communication. It is also not available once a return has been submitted to the IRS or if the information has been shared with another third party. Section 7216 of the tax code, however, also prohibits tax preparers from disclosing tax returns and related information without the client’s consent.

When it comes to state law, Texas has one of the better known accountant-client privilege statutes and the one at issue in the Exxon case. Under Texas Occupations Code Section 901.457, accountants may not disclose information communicated to them by a client “in connection with services provided to client.” That is, unless such a disclosure falls under one of seven enumerated exceptions to that rule. Those exceptions may be broader than some wish, making Texas’s protections not quite the shield one might expect, as the Exxon dispute demonstrates.

No Protection for Accountant Communications, New York Court Rules

When the argument over Exxon’s claimed privilege came before Judge Barry R. Ostrager, of the Supreme Court of New York (the state’s trial-level court), the dispute seemed to be a question of choice of law: Does New York’s approach to accountant-client privilege (there is none) apply here, or does Texas’s? If New York law applied to, as the court characterized it, a New York investigation involving subpoenas by the New York Attorney General to companies that do business in New York, then there would be no protection for PWC. If Texas law applied, as Exxon argued, then Texas’s privilege statute could prevent the accounting firm from producing the requested documents. (PWC abstained from taking any position in the dispute.)

But the court did not have to reach that question, it found, as the Texas statute, whether it applied here or not, “does not preclude production of the requested documents.” That’s because the law’s privilege protections appeared not to be much of a safeguard against disclosure after all. Under the statute, information can be disclosed in several circumstances, including under a court order signed by a judge, if the order is “addressed to the license holder, mentions the client by name, and requests specific information concerning the client.”

The court rejected Exxon’s argument that the court order exception should be read in the context of the proceeding sections, which dealt with investigations under the Internal Revenue Code and the Securities Exchange Act. The plain language of the statute allows disclosure pursuant to a court order, the court ruled, whatever the reason. The implication, choice of law questions aside, is that Texas’s accountant-client privilege statute offers no privilege at all when it comes to a court’s ability to order disclosure.

This May, a five-judge appellate panel refused to quash the subpoena, though on slightly different grounds. As New York caselaw requires that courts decide privilege issues applying “the law of the place where the evidence will be introduced at trial,” Texas’s account-client privilege statute was of no import. “In light of our conclusion that New York law applies,” the panel explained in a brief, unsigned opinion, “we need not decide how this issue would be decided under Texas law.”

On Tuesday, the state's highest court declined to hear Exxon's appeal from that ruling, ending Texas's attempt to keep the files secret.

The battle over Exxon’s climate change reporting is far from over, however. Exxon has sought to derail investigations into its climate change numbers, suing both Schneiderman and Massachusetts Attorney General Maura Healey, accusing them of “improper political bias” that should disqualify them “from serving as the disinterested prosecutors required by the Constitution.” After being transferred from federal court in Texas to New York, that case “has largely gone back to square one,” according to Bloomberg.

Meanwhile, Exxon’s dispute serves as an important reminder that, when it comes to accountant-client privilege, there’s not always much there to count on.

This post was authored by Casey C. Sullivan, who leads education and awareness efforts at Logikcull. You can reach him at or on Twitter at @caseycsull.

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