Law Tips: Ethics – Financial Statements Part II

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

Have you had an inaccurate financial statement presented to you by a client? What did you do to solve the ethical issues? We began a discussion last week of such a scenario posed by Jeff Nickloy, Campbell, Kyle & Proffitt, Noblesville, in his recent ICLEF seminar presentation.

Remember this situation?

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?

To begin the analysis, Jeff presented a list of the Rules of Professional Conduct which apply to attorneys’ representation of clients in these situations.
Those rules are: 1.1, 1.6, 1.13, 4.1, 5.1, 5.3, 5.7 and 8.4.

After his review of these Rules of Professional Conduct, here is how Mr. Nickloy applies them to the client/personal friend scenario above:

A. Since the lawyer is acting as the client’s representative, the lawyer must be competent in dealing with the financial statement. If it is important to the case he must understand it. Rule 1.1 requires at least this much.

B. Since the lawyer will be making representations based on financial statements, Rule 4.1 requires that the lawyer’s statements be truthful. If the lawyer has reason to believe the financial statement is inaccurate he may not simply draft his discovery responses by referral to the document. Since a false financial statement, intentionally submitted to push a deal forward is probably fraud, the lawyer doing so would at least be violating Rule 4.1 (b) and Rule 8.4 (c) prohibiting behavior that assists a client in a fraudulent act and engaging in deceitful conduct.

C. 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).

D. If the lawyer is being assisted in the case by others in the firm, he must be sure that their work honors the rules too. It may not be easy for a supervising attorney to escape disciplinary action by claiming that he made reasonable efforts to be sure his associates complied with the rules if he lets them rely on a false financial statement in their dealings with opposing parties and counsel.

Jeff finalizes his analysis with the following comments:
Like nearly any other problem, the difficulties lawyers face that can arise out of erroneous financial statements are more easily corrected if recognized early, rather than after those financial statements have been produced, or relied on in the representation. So in order to help avoid or minimize ethical issues, if for no other reason, lawyers need to understand what financial statements mean and how to read them.


We hope you found helpful advice in these ethical reminders.  Thank you to Jeff Nickloy for sharing his expertise once again here in Law Tips.

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

We appreciate you reading Law Tips. Come back next week for more tips sifted from the treasure trove of ICLEF faculty presentations.
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To read more of ICLEF’s Law Tips from Nancy Hurley – Click Here.

ICLEF • Indiana Continuing Legal Education Forum, Indianapolis, IN

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