Accountants vs. Attorneys in Privileged Client Communications
Is it unfair to accountants that the attorney-client privilege is stronger than the accountant-client privilege? I think so, but it is important for accountants to know the situations where the privilege exists, and the situations where it does not. The latter can be a trap for the unwary accountant, and lead to conversations with his or her liability insurer.
Essentially, a privilege attaches to information in the files of the professional in service to a client, and prevents an adversary—either the government or a private party to a lawsuit—fr om gaining access to the information.
While the attorney-client privilege was recognized in common law, the accountant-client privilege is a creation of statute, and varies by state. With the exception of the somewhat limited federally authorized tax practitioner privilege in Internal Revenue Code Section 7525, there is no accountant-client privilege in federal law. Nevertheless, federal courts may apply state law in certain situations, in which case the state privilege would be recognized.
And work that accountants do when working with lawyers may be privileged. When accountants do work with lawyers, they generally assume that their work is privileged, but that’s not always the case, indicated Aaron Krauss, a litigator in Cozen O’Connor’s Philadelphia office.
“A lawyer is supposed to be an advocate, and an accountant is not supposed to be an advocate,” said Krauss, whose practice includes the defense of accounting firms. “If the IRS is auditing a client’s tax return, they have to look at what the accountant did, and if another firm is doing a peer review of an engagement, then they really have to look at what the accountant did. If there were a privilege, you couldn’t have peer review, and audits at a minimum would be difficult. The bottom line is that an accountant isn’t supposed to be an advocate.”
Nevertheless, nearly all accountants believe that if they did something because a lawyer told them to, or they gave something to a lawyer, it’s privileged, according to Krauss. “For example, a client gets into a business dispute, litigation ensues, and there’s a question of lost profits,” he said. “The lawyer goes to the accountant and says, ‘What are the lost profits?’ If the accountant says, ‘I do a quarterly P and L, and here’s the last one,’ that’s not going to be privileged. But if the accountant says, ‘I want a separate engagement letter, and I’m doing a separate report that I’ve never done before, and I’m charging a separate fee,’ what he gives to the lawyer will be privileged.”
The difference is that if what an accountant is doing is routine accounting work, it’s not privileged even if the accountant is dealing with a lawyer, observed Krauss.
The requirements for a separate engagement letter—a Kovel letter—were spelled out in a Second Circuit decision, in which the accountant actually was jailed for contempt by the trial court. The appellate court reversed, and spelled out conditions in which the work an accountant does for an attorney will be privileged.
“Most state courts follow the reasoning in the Kovel case,” said Krauss. “The point of Kovel is that if you have a separate engagement letter, and the work is not something that the accountant would have done without the lawyer’s involvement, you have a good argument that the work you’re doing is protected by the privilege.”
But Krauss cautions that privileges can be waived. “If you turn over information to the government, say the SEC or the IRS, the privilege doesn’t just go away vis a vis the government; it goes away, period,” he said. “And you can’t make selective disclosure, where you release the good stuff and not the bad stuff. That’s wh ere the balloon theory of the privilege comes in—one prick and it’s gone.”