Law Tips: Ethics—What Lawyers Need To Know About Financial Statements – Part I

Ethics: What Lawyers Need To Know About Financial Statements – Part I

“Financial statements are pervasive in legal matters outside of criminal law. And even in

that field, they can sometimes be material (e.g. certain fraud cases, or criminal tax matters).

Transaction lawyers, real estate attorneys, corporate counsel, bankruptcy law firms, securities

lawyers, and even family law attorneys regularly review, request, evaluate, consider and

comment on financial statements.”

The foregoing legal commentary sets the stage for valuable ethics advice from Jeff Nickloy, Campbell, Kyle Proffitt LLP, Noblesville.  In his recent CLE presentation for ICLEF’s National Speakers Series “How to Understand and Analyze Financial Statements: What Lawyers Need To Know” Jeff covered the key ethical issues involving financial statements. I’m pleased to share a portion of that information here:

We advise our clients based on what we see in financial statements. We offer them in court as documentary evidence. We sometimes base our arguments to judges or juries on their contents. Some of us also use them in connection with our roles as managers, leaders, directors, or members of organizations we serve other than as legal counsel, including our own firms.

Perhaps the importance of financial statements is obvious. But what is less obvious is that the Rules of Professional Conduct will often apply to our activities involving financial statements – often in ways and circumstances we do not expect. Because those rules are so important to our ability to practice law we need to understand how and when they might apply to our interaction with financial statements.

To put the matter in some perspective please consider one brief example:  Your client is being sued in federal court based on an alleged breach of contract for the sale of your client’s South Carolina factory. You need to draft responses to discovery requests seeking information about the pre-sale performance of the factory. You have a copy of your client’s financial statement, which includes the factory’s performance. The CFO, who is a personal friend, was responsible for preparation of the statement. You think the financial statement is inaccurate.  What are your responsibilities?

At this point, Jeff reminds attorneys of the advisability of reviewing the Indiana  Rules of  Professional Conduct that apply to these situations: 1.1, 1.6, 1.13, 4.1, 5.1, 5.3, 5.7 and 8.4.  The Preamble to these Rules [2] notes the lawyer’s responsibilities as an adviser, an advocate, a negotiator, an intermediary and an evaluator when acting as a representative of clients.

One  illustration of his reference is in the Comment for Rule 5.7, Responsibilities Regarding Law-Related Services:

“A broad range of economic and other interests of clients may be served by lawyers’ engaging in the delivery of law-related services. Examples of law-related services include providing title insurance, financial planning, accounting, real estate counseling, legislative lobbying, economic analysis, social work, psychological counseling, tax preparation, and medical or environmental consulting.”

Perhaps you want to review the Rules of Professional Conduct and develop your own conclusions about the scenario presented above.  If so, you will find them by Clicking Here.

What do you think?  Are there competency issues? What about other lawyers assisting?  One of the cautions that Jeff points out is:  “If the lawyer confirms the inaccuracies he will face a dilemma caused by the interplay of Rule 1.6 (dealing with confidentiality) and Rule 4.1 (prohibiting untruthful statements).”

How would you handle the personal friend’s situation?   This ethics discussion continues next week with several more of Mr. Nickloy’s points concerning the application of the Rules of Professional Conduct in the hypothetical scenario above.

For an in-depth study of the legal issues involving Financial Statements, Click Here to attend ICLEF’s Video Replay or view the Online / On Demand Seminar of the National Speakers Series seminar entitled How to Understand and Analyze Financial Statements.”  This comprehensive CLE features Douglas R. Smith, CPA, Doug R. Smith Consulting, Myrtle Beach, South Carolina, teamed with Jeff Nickloy’s ethical review.


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Thank you for reading ICLEF’s Law Tips.  Click here to read  Part II of Ethics: Financial Statements.

ICLEF • Indiana Continuing Legal Education Forum, Indianapolis, IN

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