by Adam B. Brink, Associate

Accountants are privy to a substantial amount of documents, records, and communications that reflect confidential, business-sensitive,  proprietary, or litigationrelated information. Such information is not always revealed in public filings, such as an accountant’s opinion on a  corporate financial statement; however, all of that information is potentially subject to discovery if it is relevant to a lawsuit or a government  investigation.

There are a number of instances in which companies and their attorneys may wish to limit the discoverability of documents prepared by, or  provided to, their accountants – particularly when those documents are related to an ongoing or anticipated lawsuit. As described below, and in   certain limited situations, accountant documents are and communications may remain confidential and shielded from discovery under state statutory privileges or extensions of the attorney-client privilege or attorney workproduct doctrine.

No Accountant Privilege At Common Law

Unlike the attorney-client relationship, in which confidentiality is deemed sufficiently necessary and justified to create a privilege for both attorney-client communications and attorney work-product, there is no accountant-client privilege at common law. The United States Supreme Court explained the reason for this distinction in United States v. Arthur Young & Company, 465 U.S. 805 (1984), that while the attorney is a loyal
representative, whose duty is to present the client’s case in the most favorable possible light, the independent certified public accountant has a public responsibility and owes ultimate allegiance to a corporation’s creditors and stockholders, as well as to the investing public (a “public watchdog” function). As a result, courts do not afford a common law privilege for either communications between a client and its accountant, or for the work-product of an accountant.

Statutory Accountant-Client Privileges

Although no accountant-client privilege exists at common law, a number of states have enacted statutes that create a privilege for accountant- client communications and/or accountant work-product. Eleven states have enacted some form of statutory accountant-client privilege, including Arizona, Florida, Illinois, Maryland, and Pennsylvania. Importantly, however, there are a number of statutory and judiciallycreated limitations and  restrictions on these accountant-client privileges. For example, and depending on the state in question, the privilege may not apply if: the case is  one involving crime or fraud; the accountant was jointly retained by two or more persons or entities; the case does not involve “public” or “certified  public accountants”; or even if the information in question came from an accountant’s examination of books, reports, or accounts (as is the case in Pennsylvania). Finally, choice of law considerations may result in an out-of-state or federal court refusing to recognize the state’s statutory accountant-client privilege.

Extending The Attorney Privileges To Accountants

Despite the absence of a common law accountant-client privilege, and the limitations on state statutory privileges, certain client-accountant  interactions may be shielded from discovery under the traditional attorney-client privilege. Communications with accountants, for example, will  generally be considered privileged and nondiscoverable if the communication was made to an accountant hired to assist an attorney in providing  legal advice (if the communication was made in confidence and for the express purpose of obtaining legal advice from the lawyer).

As was demonstrated in United States v. Deloitte LLP, 610 F.3d 129 (D.C. Cir. 2010), a recent case from the United States Court of Appeals for the District of Columbia, documents prepared by or provided to accountants may also remain protected by extension of the attorney work-product
protection.

As a general rule, the attorney work-product protection shields from discovery: (1) documents prepared in anticipation of litigation, or (2)  documents that disclose the mental impressions, conclusions, opinions, or legal theories of a party’s attorney or other representative concerning  the litigation. In Deloitte, the government subpoenaed documents from Dow Chemical Company’s independent auditor, Deloitte & Touche. Deloitte produced a number of documents to the government, but refused to produce three documents identified by Dow as work-product relating to the possibility of litigation over the tax treatment of partnerships owned by Dow. The documents in question consisted of a memorandum  prepared by Deloitte and two documents prepared by Dow’s attorneys that were provided to Deloitte.

In recognizing that the documents could be potentially privileged, the Court held that even the memorandum prepared by Deloitte (the accountant) “...was shielded from discovery by the attorney work-product privilege to the extent that it contained the thoughts and opinions of counsel...” developed in anticipation of litigation. The Court noted that the Deloitte memorandum was not discoverable despite the fact that it was prepared during the course of a routine audit: as long as the memorandum was prepared because of the anticipated tax litigation, and contains the thoughts or analysis of counsel, it was privileged. The Court did note, however, that the memorandum might include other information that “may not be so intertwined with the legal analysis to warrant protection under the work-product doctrine,” and remanded the issue to the district court with the instruction that the court review the document to determine whether it was entirely work-product.

The Court also recognized that the government was not entitled to discovery of two privileged attorney memorandums that had been disclosed to Dow. Under the federal law applicable in Deloitte, disclosing work-product to a third party waives the production only if, under the circumstances, such disclosure is inconsistent with the maintenance of secrecy from the disclosing party’s adversary. In rejecting the government’s waiver arguments, the Court held that Deloitte was not a potential adversary with respect to the documents (despite Deloitte’s power to issue an adverse public opinion and the potential for a dispute to arise between an independent auditor and its client) and further noted that Dow had a reasonable expectationthat Deloitte would maintain the confidentiality of the documents.

Accounting Documents That Are Potentially Privileged As Work-Product

As seen in Deloitte, there are occasions in which documents prepared by or provided to accountants remain confidential and privileged under the attorney-client privilege, regardless of whether a state statutory privilege is in play. Provided that the accountant’s work-product contains an attorney’s analysis of pending or potential litigation, or is even “intertwined” with that analysis, that work-product (or a portion of it) could remain privileged.

In Deloitte, the privileged work-product took the form of an accountant memorandum detailing the possibility of tax litigation and the need to account for the same in an audit. Other instances in which an accountant’s working papers reflect attorney work-product are readily imaginable. For example, clients frequently ask attorneys to provide an opinion regarding the likely outcome, or range of outcomes, of ongoing or anticipated litigation for annual audit purposes. It would be potentially devastating if such classic attorney work-product (mental impression and conclusions) could be obtained in discovery. As was also the case in Deloitte, clients can also be expected to provide their accountants with confidential attorney work-product during the course of a routine audit. Accountants may potentially require access to attorney opinions and advice to the client on matters relating to taxation, regulatory-compliance, and/or bankruptcy when auditing a client. Under Deloitte and similar cases  discussing the bounds of the attorney work-product protection, there are good arguments that these types of documents prepared by
accountants, or provided to accountants, are not discoverable.

Conclusion

Although there is no accountant-client privilege at common law, certain state statutory privileges and extensions of the attorney-client privilege and attorney workproduct doctrine may serve to shield accountant communications and documents from the prying eyes of discovery or a government civil investigation. These privileges and protections are particularly limited when accountants are involved, and corporations or  individuals should consult counsel to determine whether such a privilege or protection applies in their jurisdiction, and in their particular  circumstances.