Birk Dorren, is a partner with the firm Shelby, Dorren & Ruppe, CPAs. Birk serves as the audit partner on the integrated audit engagement for Pundley Fasteners, Inc., a public company.
One week after issuing unqualified opinions on the fairness of Pundley’s financial statements and effectiveness of its ICFR, Birk learned that the company was in violation of its loan covenants. Such violation is grounds for the financier to demand immediate payment of the loan, which would likely force the company into bankruptcy. This situation was not disclosed in the financial statements or accompanying footnotes.
Birk approached the client about the situation and suggested that the company’s stockholders be notified that the financial statements and audit report could no longer be relied upon due to the misstatements resulting from the omitted information pertaining to the loan covenant violation. Birk indicated that revised financial statements could be available within two weeks, given the company’s cooperation.
Pundley’s management refused to comply with Birk’s request, claiming that the financial statements were, in fact, materially correct. Furthermore, Pundley threatened to file a grievance against Shelby, Dorren & Ruppe if the stockholders are notified of the situation, claiming that the firm would be violating an auditor-client principle of privileged communication if it were to divulge such confidential information.

Required:
a. What are the requirements of the AICPA Code of Professional Conduct with regard to confidential client information? Is Birk in violation of the Code?
b. What should Dorren do in this case?