164 [81 O p. Att’y
P UBLIC I NFORMATION A CT

) S TATUS OF A UDITOR ’ S “M ANAGEME NT L ETTER ”

May 23, 1996

The Ho norable Richard Colburn Maryla nd S enate You have req uested ou r opinion w hether an a udit firm’s “management letter” is p rivilege d and therefo re exe mp t fr om the Pub lic Information Act from disclosure to mem bers of the public. You also asked whe ther, if an au dit firm ’s m anag em ent letter is privi leged, itis nev erthele ss ava ilable to a governmenta l agency t hat is the sour ce of fundi ng for the r e cipient of the m anagem ent letter. Our opinion is as follows: 1. A ma nage me nt letter is p riv ilege d and exempt from disclosure from the Public I nformati on Act only to t he exten t that it contai ns eithe r (i ) a communicationmade by a cli ent to t he lic ensed certi fiedpub lic acco untan t or firm perfo rmin g the a udit or ( ii) infor mation derived from the client’s materi als. T he portions o f a management letter that

contai n comments of the aud itor s evera ble from client co mm unica tions o r clie n t-derived inf ormation ar e not priv ilege d. 2. Because the Pub lic Informati on Ac t appli es to i nterage nc y requ ests foraccess t o records , the agency recipient of a management letterthat is pa rtly privile ged m ay de cline to disclos e thos e parts of the le tter to anothe r governmentagency, even one that pro vides its fun din g, un less o ther law req uire s dis clos ure .

I Background Earli erthis year, the Co mm issioners of C aroline Co unty receiv ed a request from two ne wspa pers for a cop y of a “management letter” tha t had b een s ent by an au dit firm to t he County. The audit fir m r ecom men ded that the C om missione rs dec line t o m ake the le tter p ubl ic.Gen. 164] 165 The audit f

irm distinguis hed between the nature and purpose of a management lett er and an audit report. The former “is a letter that points out minor probl ems, identifi es pot ent ial problems and prais es a job welldone when appropriate. ” Let te r f ro m Jo hn D

. Irel and, CPA, to County Comm issi on e rs of C aroline Co unty (February 9, 1996). According to Mr. Ireland, the management letter(which we oursel ves have not s een) cont ains “l ittle or no backgroundinfor

mation” and onl y very bri ef comments. This is so, Mr. Irel and points out, be cause the letter is both prece ded and foll owed by oral disc us sions. The audit f irm is conc erned that the letterits elf, without t

he context

of thes e discus sions, might be misleadi ng. Mr. Irel and observes that t he audit report , which i s made public, “w ould in clude any material prob lems in the C ounty’s operations. O ur firm ’s job i s to make judgments a bout how important

or materi al an i ssue is and our toolof communicat ion to the publi c is t

he audit report , not amanagement lett er.”

II Statutory Privilege

No pr ivil ege for communicati ons between an account ant and a clie nt was recogni zed under the common law

. In re Special Investigati on No. 202 , 53 Md. App. 96, 100, 452 A.2d 4 58 (198 2). See gene rally Franci s M . Do ugh erty , An not ation , Privil eged Comm unication Between Account and Cli ent , 33 A.L.R. 4t h 539 (19 84)

. In 1924, the G enera l Ass em bly modified t he common law by enacti ng a stat

utory pr ivil ege. Chapter 585 of the Laws of Maryland 1924. The current

versi on of the privi lege i s set out in §9-110 of

the Courts and Judi cialProceedings (“CJ”) Art icle , Maryland Code:

Except [with regard to disc losu res i n a pee r revi ew process or in connecti on with a bankruptcy, crim inal, or B oard of Pu blic Accountancy regulatory proceeding], or unl es s expr essly permitt ed by a cli ent or the pers onal repres entat ive or succes sor in interes t of t he166 [81 O p. Att’y client, a lic ensed certifi ed p ubl ic account ant or fir m m ay not dis close: (1) The content s of any com munica tion made to the lice nsed certified pub lic ac countant

or fi rm by a client

who em ploy s the lice nsed certifi ed public accou ntant o r firm to audit, exam ine, or r epo rt on an y acc oun t, boo k, reco rd, or sta tem ent of th e clien t; (2) Any information that t he license d certi fiedpub lic acco untan t or firm , in re nd er i ng pr of

es si on alse rv i ce , de rive s f ro m: (i) A cl ie nt who employs the lice nsed certi fied publ ic account ant or f irm; or (ii) The ma terial of th e clien t. CJ §9-110(b). The purpose of t he stat utory pr ivil ege was “to cre ate an atmosphere i n which the cl ient c an feelfree to discu ss high ly confidential and p erson al fin ancial deta ils w ith h is ac cou ntan t.” Dixon v. Ben nett , 72 Md. App. 620, 642, 531 A.2d 13 18 (19 87), cert. denied , 311 M d. 55 7 (1 988 ). Because “the account ant/c lient privi lege di d not exis t at common law,” t

he stat utory pr ivil ege “in derogation of the common law [is] to be str ictly cons trued. ” In re Special Inves tigation No. 202 , 53 M d. App . at 103. Con stru ed st rictly

)or, inde ed, m erely stra ightf orwardly, in acc orda nce w ith its text

)CJ §9-110 by no means provides blanket protection t o comm unications from an accountant

to his or her cli ent. Rather, su ch a c om mu nicatio n is privi legedif, but only if, it conta ins info rma tion tha t is itself a cli ent com m uni catio n or is de rive d fro m the c lient ’s m ateri al. In an unpublis hed opinion i ssued in 1979, AttorneyGe neral Sachs concludedthat C J §9-1 10 d id no t apply to a “m anag erial au dit letter” that indicat ed weaknesses i n a school board’s internal accounti ng control s and recommended ways to improve the cont rol sy st em. Opinion No. 79-024 ( 1979) (unpubli shed). Attorney General Sachs observe d that t he stat utory pr ivil ege “w as en acted to prohibi t account ants f

rom disclos ing inf

ormation gi ven to the m byGen. 164] 167 their clients. It is not int ended to pre vent cl ients (such as the Board) from discl osing advi ce (such as the ma nagerial aud it letter) given to them by their

accountant s.” Opini on No. 79-024, at 6-7 n.7. W e are aware of no chan ge in th e law since 1 979 that w ould call into questi on this analysi s and conclus ion. The M arylan d Pu blic Info rma tion A ct calls fo r a cus todian to de ny inspection of a publ ic rec ord if “by law, t

he public record i s privi legedor confiden tial.” §10-6 15( 1) of the State Government Articl e. To th e exte nt t ha t po rti on s o f aman ag eme nt l ett er from a CPA fit within the relatively narrow confines o f the statutory privi lege in CJ §9-110, the cust odian must deny i nspecti on. How ever, to the e xtent th at a letter c ontain s com me nts from aCPA that are sever able from any client commu nications or material , those por tion s m ust b e dis clos ed. We note, in thi s regar d, that the management l ette r to t he Com missione rs of Caroline County is said t o contai n “lit tle or no backgroundi nf

orma tion

.... ” Not having see n the le tter , we can reach no con clusion w hether such a letter could be p rivileged. In any event, the respo nsibility fo r app lying th ese leg al stand ards to the par ticul ar d ocu m ent is the C om m issio ner s’.

III Funding Agency Access to Privil eged Portions of a Letter As discussed in P art II above, po rtions of a management lett er might fallwithin t

he stat utory pr ivil ege )that is, those porti ons that repeat clie nt communications or a re d eriv ed f rom clien t m ateri al. If so, oth er pu blic ag encie s wo uld general ly not be entitled to inspect those porti ons of the management lett er, bec ause the Act “regulates the acce ss of o ne g ove rnm enta l age ncy to th e rec ord s of a not her .” Office of th e A ttorn ey G ene ral, Public I nformati on Act Manual5 (6th ed. 199 3). Although the agencythat receives the management let ter may with hold it from anoth er go vern me ntal ag ency on th is basis, it nee d no t d o so. “[ T]he accountant-cl ient privil ege belongs to the cl ient ...” and there fore can be waived by the c lient

. First In terstate C redit168 [81 O p. Att’y Alli ance, Inc . v. Arthur Anderse n & Co. , 5 41 N .Y

. S. 2d 433, 435 (N. Y. App . Div. 1989 ) (applying M aryland law ). Itis also p ossible that other l aw might requir e the di sclosure of a document that is not subject to discl osure under

the Public I nformati on Act. In t he 1979 opin io n, Att orney General Sachs conclude d that t he “managerial audit letter” in quest ion there, whichhad be en prepa red for a bo ard of educati on, was “a matter of publi c record” under §5-108( c)(1) of the Educati on Articl e. Opini on No. 79-024, at 3.

IV Conclusion In summ ary, it

is our opinion t

hat management let

ters from audit firms are ge nerally not p riv ile ged against discl osure. To the extent that porti ons of a part icular lette r are pr ivilege d, acc ess to those portions may be denied to other governm ental agencies unless another l aw requires discl osure. J. Joseph C urran, Jr. AttorneyGeneral Jack Sch wa rtz Chief Counsel Opinions and Advic e