One of the most important cases facing general counsel, their accountants and outside lawyers has been percolating through Texas. The suit raises questions about the scope of the so-called auditor privilege — whether records turned over to auditors, including sensitive legal documents, are for the auditor’s eyes only, or whether they can be subpoenaed by third parties.
It didn’t look like a particularly consequential case at the outset. It began as a dispute between two companies over a construction contract. In 2002 AES Wolf Hollow commissioned The Shaw Group Inc. to build an electric power plant in Texas for $99 million. But things got ugly, and Shaw eventually sued AES for nonpayment. In turn, AES said that since Shaw was suing for lost profits and damages, it had a right to see the company’s financials. So AES subpoenaed the accounting firm Ernst & Young for Shaw’s auditing records. Granbury, Texas-based AES made the request even though Shaw and its auditor are located in Louisiana, where state law provides for an iron-clad auditor-client privilege.
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