CASE 5.5
PHILLIPS PETROLEUM COMPANY
Synopsis
How many auditors would serve time in jail to protect the confidentiality of a client’s financial
records? This case profiles one principled audit partner who did just that. Bill Grant, managing
partner of Arthur Young‘s Tulsa office, was jailed in October 1975 by a federal judge for failing to
turn over certain audit workpapers that had been subpoenaed by a federal grand jury. The
workpapers pertained to prior audits performed by Arthur Young for Phillips Petroleum Company, a
large oil and gas firm headquartered in Bartlesville, Oklahoma, near Tulsa. At the time, the grand
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Phillips Petroleum Company—Key Facts
1. Bill Grant, an Arthur Young audit partner, was jailed by a federal judge because he refused to
turn over to a federal grand jury certain Phillips’ audit workpapers that the grand jury had
subpoenaed.
3. The workpapers requested by the grand jury included tax accrual workpapers and attorneys’
4. Grant refused to provide the requested workpapers because he was concerned that the
5. Grant was released from jail after one day but was ordered to produce the requested workpapers
within the following week or face a potential jail term of seventeen months.
6. The federal judge and Arthur Young attorneys eventually reached a compromise that resulted in
7. In 1984, the Supreme Court ruled in another case involving Arthur Young that the IRS has the
right to review copies of auditors’ tax accrual workpapers.
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Instructional Objectives
1. To illustrate difficult decisions that an auditor faces when responding to a situation in which his
or her actions may threaten the confidentiality of a client’s financial records.
Suggestions for Use
This case focuses on the client confidentiality rule and thus could be discussed in conjunction
with classroom coverage of that topic. The role of attorneys’ letters is also featured in this case.
Consequently, instructors may want to integrate this case with coverage of the “wrap-up” phase of an
independent audit when attorneys’ letters are obtained.
This is another case that highlights a dramatic set of circumstances involving independent
Suggested Solutions to Case Questions
1. Given the potential repercussions of the decision he had to make, Grant almost certainly
deliberated long and hard over this matter and consulted extensively with colleagues and legal
counsel within his firm before making his decision. There are several exceptions to the client
confidentiality rule, one of which involves the subpoena of confidential client information. In such a
case, an auditor will not violate the client confidentiality rule if he or she turns over the information
“answer” they choose.]
2. When a partner or employee of a public accounting firm is subpoenaed to testify regarding a
client, that firm has an obligation to apprise the individual of his or her legal and professional
responsibilities. Why? Because the individual will be acting as a representative of the firm when he
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3. AU Section 337, “Inquiry of a Client’s Lawyer Concerning Litigation, Claims and
Assessments,” is the authoritative source regarding the nature and purpose of attorneys’ letters within
the PCAOB’s Interim Standards. The corresponding authoritative source in the AICPA Professional
4. It stands to reason that if auditors realize that their tax accrual workpapers are subject to being
obtained by the IRS, they will be very careful to avoid including information in those workpapers