Deloitte, PwC and EY use partnership shield to stymie legal cases

But when asked in a public hearing of the parliamentary inquiry into audit quality on Monday, Deloitte, the first firm to try the legal tactic, stood by its use of the privilege.

Limiting court obligations

Deloitte audit partner Reuben Saayman successfully claimed the privilege when the Federal Court ordered that he hand over documents associated with his audit of collapsed construction company Hastie, for which the firm is facing a class action.

When other partners were ordered to produce the documents instead, Mr Saayman took the “extraordinary and troubling” step, as labelled by the judge, of locking up the documents and refusing to give them to his fellow partners.

When asked by Labor senator Deborah O'Neill to explain the use of the privilege to the inquiry, the Deloitte witnesses were unable to do so.

Deloitte's chief risk officer, Jody Burton, said it was "an intricacy of law" so she could not answer, but said that "Reuben was the audit engagement partner, and it's entirely appropriate for the audit engagement partner to have custody of any of the reports from the audit”.

Deloitte chairman Tom Imbesi had the same response.

"That's a technical matter that's before the courts … [but] the ownership of the audit file is the responsibility of the audit partner," he said.

"The ownership of the truth is the Australian people's right. That's what you're supposed to be doing for them, for us," Senator O'Neill responded.

Senator O'Neill questioned whether access to the privilege was part of the reason Deloitte remained in a partnership structure.

"No it isn't, Senator. There's varying reasons we've remained a partnership," Mr Imbesi said.

Committee chairman, Liberal senator James Paterson, cut off the questioning, but not before Mr Imbesi reinforced his ongoing support for Mr Saayman, who remains an audit partner at Deloitte.

The firm also argued that privilege extends to its entire partnership, claiming each partner is liable for any penalty incurred by another partner in the course of doing the firm’s business.

The court is yet to rule on extending the privilege to the partnership.

Reducing accountability

Australian National University law professor Peta Spender warned that an extension would have "an extraordinarily undesirable effect" on the accountability of modern partnerships.

"It will be good for the firms, make that a lot more difficult to hold to account," University of Adelaide accounting associate professor Bryan Howieson added.

PwC is also relying on the privilege to deny a court order to produce documents in a class action it is facing into its audits of failed education provider Vocation.

Federal Court Justice John Middleton put off ruling on that aspect of the PwC case, however, until a judgment comes down on Deloitte’s appeal, meaning multiple cases now hang in the balance of that decision.

EY (formerly Ernst & Young) has also used the argument around privilege in its ongoing legal battle with collapsed financial services firm LM Investment Management.

EY argued there was a real risk that any adverse civil ruling in the LMIM case could flow on to a penalty or criminal action both against any auditor at the firm.

"These privilege claims are well established at law and a fundamental part of the administration of justice," an EY spokeswoman said.

Deloitte and PwC declined to comment.

The use of the privilege comes as auditors face increased litigation over their work on failed companies.

EY chief executive Tony Johnson told the parliamentary inquiry on Monday that the increase in actions was having a detrimental effect on the auditing profession.

"The pressure on audit partners and audit teams is real, and the ramping up of regulatory focus has been significant and applied on us both externally and internally is a very real issue, and it does drive morale and engagement within the firm," he said.