Accountants and the Attorney-Client Privilege
Accounting concepts are a foreign language to some lawyers in almost all cases and to almost all lawyers in some cases." As financial litigation becomes more complex, this often-quoted statement helps explain why attorneys sometimes need to use the services of accountants. Litigation support has become so much a part of the accounting profession that the American Institute of CPAs Code of Professional Conduct defines the practice of public accounting as including "litigation support services." For many lawyers, the need to consult a CPA is particularly acute when they work with financial statements, determine a client's net worth, try to understand a business' books and records or handle tax matters. An issue raised about the attorney-accountant relationship is whether use of an accountant's services will jeopardize communications and work otherwise protected by the attorney--client privilege. This issue is grounded in the rejection of an accountant-client privilege by both common and federal law as well as the possibility that such communications may result in the waiver of an attorney-client privilege (see Berkowitz, 355 ESupp. 897, affd 488 E2d 1235, and Sidney Samuels, 155 F.R.D. 195 [N.D. Cal. (1994)]). From an accountant's perspective, the inability to protect communications and work product from disclosure threatens client candor and the CPA's ability to deliver quality services. Despite the rejection of a federal accountant-client privilege, accountant-related communications still may be shielded from disclosure when an accountant acts as an agent for an attorney providing legal services (Judson, 322 E2d 460 [9th Cir. (1963)]). Extending the attorney-client privilege to accountants in this way is intended to enhance open and candid communications and to enable clients to obtain sound legal advice. Recognition that the attorney-client privilege may apply to accountant communications and work product is evident in both the Internal Revenue Manual and Treasury Circular 230. Both say essentially that an accountant need not reveal information he or she in good faith reasonably believes to be privileged. This article examines the possible extension of attorney-client privilege to accountants, and some related planning considerations. Knowing when to raise privilege is vital to CPAs not only to serve a client's best interests, but also to avoid unnecessary legal liability. THE LANDMARK KOVEL DECISION In United States v. Kovel (296 F. 2d 918 [2d Cir. (1961)]), the Second Circuit Court of Appeals extended the attorney-client privilege to communications between a client and someone an attorney retains to provide accounting-related services. The case concerned Kovel, a former Internal Revenue Service agent who had accounting skills. A law firm had hired Kovel to help advise its clients. He met with a client who was under grand jury investigation and received a personal financial statement from the client, along with a letter indicating its's purpose. The grand jury subpoenaed Kovel, who refused to answer questions about his meetings with the client and the effect of certain transactions. As a result, he was held in contempt of court and sentenced to one year in prison. The matter was appealed to the Second Circuit, where the contempt decision was reversed. Judge Friendly wrote that just as other parties have been recognized as necessary to providing legal services-secretaries, clerks and messengers--so should accountants. Consequently, when an attorney retains an accountant to provide services that enhance the legal advice being provided, the attorney-client privilege extends to the accountant. As a result of Kovel, a case for applying attorney-client privilege to accountants can be made when * An attorney-client relationship exists. * An accountant is retained by the attorney. * The accountant renders services that abet the provision of legal services. …