The notion of an accountant-client privilege like that that exists between lawyers and their clients is dismissed by both COMMON and FEDERAL LAW. However, when an accountant serves as an agent for an attorney offering legal services, accountant-related correspondence can still be exempted from disclosure.
The second circuit expanded the attorney-client privilege in UNITED STATES V. KOVEL to correspondence between a client and another who is retained by an attorney to provide accounting-related services. The court ruled that, just as secretaries and clerks were recognized as required to provide legal services, accountants should also be recognized.
Attorney-Client Privilege can apply to a wide variety of parties in a U.S.-based client relationship with a lawyer. Standard 503 of the Supreme Court and the judgment of Diversified Industries Inc..
A lawyer and an accountant are privileged in NOT ALL Correspondence BETWEEN. Two general grounds for refusing privilege include the finding that it has been waived and that the services of accountants are not adequately connected to the provision of legal services.
The In-Bieter decision is important for accountants. By contrast, Bieter extends the right of attorney-client to such accountants’ correspondence and work products.
To strengthen a successful privilege argument, at the time a service is sought, rendered and billed, the legal intent of the accounting services should be recorded.
In almost all cases, accounting principles are a foreign language to some lawyers and, in some cases, to almost all lawyers. When financial litigation becomes more complicated, this often-quoted assertion helps illustrate why accountants’ services often continue to be used by lawyers. Support for litigation has become so much a part of the accounting profession that the Code of Professional Ethics of the American Institute of CPAs describes public accounting practice as including litigation support services. The need to consult a CPA is particularly acute for many lawyers as they deal with financial statements, assess a net worth of customers, try to understand a company books and records or handle tax matters.
An problem raised by the attorney-accountant relationship is whether the use of accounting services would jeopardize correspondence and work otherwise shielded by the right of attorney-client. This problem is based on the denial by both common and federal law of the accountant-client privilege and the likelihood that such communications may result in the waiver of the privilege of the attorney-client (see Berkowitz, 355 F.Supp. 897, affd 488 F.2d 1235, and Sidney Samuels, 155 F.R.D. 195 [N.D. Cal. (1994)]). From the viewpoint of accountants, the failure to shield correspondence and work products from exposure undermines consumer candor and the ability of CPAs to offer quality services.
Despite the denial of the right of a federal accountant-client, accountant-related communications will still be covered from disclosure when an accountant works as a legal services agent for an attorney (Judson, 322 F.2d 460 [9th Cir. (1963)]). In this way, expanding the attorney-client privilege to accountants is intended to strengthen transparent and candid communications and enable consumers to receive sound legal advice. In both the Internal Revenue Manual and Treasury Circular 230, understanding that the attorney-client privilege may extend to accountant communications and job product is evident. Both simply claim that an accountant does not need to disclose details that he or she fairly considers to be privileged in good faith.
This article discusses the proposed extension to accountants of attorney-client privilege, and some relevant planning issues. It is important for CPAs not only to represent the best interests of a client, but also to prevent undue legal liability to know when to increase privilege.
Supreme Court Standard 503, Lawyer- Client Privilege, states that a client has the privilege to refuse to reveal confidential correspondence made for the purpose of promoting the provision of legal services to the client and to prohibit others from revealing them. The relationships can be:
– Between the client or representative of the clients and his or her lawyer or representative of the lawyers of the clients.
– Between the lawyer’s clients and the agent of that lawyer.
– Produced in a matter of shared interest by the client and his or her counsel representing another.
– Between a client’s members.
– Between attorneys who represent the client.
The Second Circuit Court of Appeals applied the attorney-client privilege in United States v. Kovel (296 F. 2d 918 [2d Cir. (1961)]) to correspondence between a client and another who is retained by an attorney to provide accounting-related services. The case included Kovel, a former agent of the Internal Revenue Service who had accounting abilities.
Kovel was recruited by a law firm to help advise its clients. He met with a client who was under investigation by the grand jury and obtained from the client a personal financial statement, along with a letter suggesting his intent. Kovel was subpoenaed by the grand jury, who declined to answer questions about his customer meetings and the effects of such purchases. He was then held in contempt of court and sentenced to one year in jail.
The question was appealed to the Second Circuit, where the ruling of contempt was overturned. Judge Friendly wrote that accountants should be accounted for just as other parties have been identified as required to include legal service secretaries, clerks and messengers. Consequently, the attorney-client privilege applies to the accountant when an attorney retains an accountant to provide services that boost the legal advice being given.
A argument for extending attorney-client privilege to accountants can be made as a consequence of Kovel, when:
– There is an attorney-client partnership.
– The counsel is retained by an accountant.
– The accountant offers services that support the delivery of legal services.
– There is no waiver of right by the parties.
For CPAs, Mullen and Company (766 F. Supp. 620 [D. Ct. Mass. (1991)]) is instructive since it addresses the issue of whether the right of attorney-client extends to correspondence between a client and someone who is both an attorney and an accountant. The problem was posed by a Mullen client, which is an accounting company. The client believed that the licensed lawyers were two of the three accountants who worked for Mullen and the services they requested were legal in nature.
According to the tribunal, an attorney-client relationship had to exist for the right to apply. Important factors found by the court in making this decision include the following:
– Did the client seek Mullen and Company’s legal advice?
– Did other outside counsel have the client?
– Were Mullen’s attorneys licensed in that state?
– Has their legal practice been ethical and lawful?
– Have only the lawyers in Mullen given services?
– Was the non-professional accountant subordinate to the lawyers?
When communications promote the provision of legal services, the law acknowledges attorney-client privilege for communications between a client employee and a client attorney (or attorney agent) ( Upjohn , 49 U.S. 383 ). As a consequence, for in-house accountant-attorney correspondence, privilege may be used. As is obvious in the U.S., the possible application of attorney-client privilege will apply to a much wider variety of individuals with relationships with an attorney client. Standard 503 of the Supreme Court (which, while not incorporated in the federal rules of evidence, was largely relied on) and the test ruled by Diversified Industries Inc. of the Eighth Circuit Court of Appeals. (577 [8th Cir. (1977)]) F.2d 596).
According to the Diversified Norm, if the attorney-customer privilege extends to interactions with an employee, if:
The contact was made in order to get legal advice.
At the behest of his or her corporate superior, the employee making the contact did so.
The superior made the request so that the company could obtain legal advice.
The topic of the interaction is within the framework of the corporate duties of the workers.
The conversation was not discussed with anybody other than those who wanted to know its substance because of the organizational structure.
In McCaugherty (132 F.R.D. 234 [N.D. Cal. (1990)]), while not extending the right on other grounds, the District Court for the Northern District of California claimed that it did not see the reason to discriminate between employees and others who served as the functional equivalent of employees. The meaning of the requirement in this way would theoretically allow the right open to accountants who work as non-employees.
Recently More, in In re Bieter Co . The Eighth Circuit Court of Appeals (16 F.3d 929 [8th Cir. (1994)]) upheld the extension of the right of attorney-client to correspondence between an attorney and an independent contractor who was a real estate agent employed by the client to provide advice on the acquisition of land that became the subject of a legal dispute. The court acknowledged that the contractor was directly involved with the customers seeking to achieve their goal from the start of the projects. In meetings with prospective tenants and city authorities, the consultant often acted as the consumer representative and was relied on for his expertise as one might rely on an external accountant to develop correct accounting and tax practices. In the eyes of the judiciary, maintaining privilege under the conditions would promote a free flow of relevant knowledge to the legal counsel of the clients.