Capitol Report | Fall 2015
A Privileged Profession
As always, the Illinois “accountant’s privilege” is a hot topic of conversation.
Marty Green, Esq.
Senior VP and Legislative Counsel, Illinois CPA Society
The Latest on Advocacy and Legislation
Section 27 of the Illinois Public Accounting Ac
t explains that, “A licensed or registered certified public accountant shall not be required by any court to divulge information or evidence which has been obtained by him in his confidential capacity as a licensed or registered certified public accountant.”
If you, as a CPA, have been contacted by an attorney requesting information or have received a subpoena requesting the production of documents, there are a number of nuances you need to be aware of before invoking the Accountant’s Privilege. First and foremost, consult with legal counsel as soon as possible, and involve that counsel in your privilege analysis and in the response the subpoena requires. Most importantly, ensure your actions do not waive the privilege by unintentionally disclosing the privileged information to a non-agency third party. Illinois Supreme Court Rule 201(b)(2) recognizes when the third party is an agent of the client, and no waiver occurs.
A progeny of state and federal court cases provide guidance in assessing the privilege’s scope. First, the privilege only protects information that the client has communicated to his/her accountant in confidence. Generally, the privilege doesn’t apply to information the client has submitted for the purpose of disclosure to third parties, unless those third parties share a common interest with the disclosing party. Specifically, the Illinois Supreme Court in In Re October 1985 Grand Jury held that the privilege can’t be invoked for information obtained in preparing state income tax returns, since there’s little expectation of privacy when it comes to these records. Similarly, in United States v. Arthur Young & Co.
104 S. Ct. 1495, 1503 (1984), we see the rule applied to auditors’ work papers used to prepare a client’s tax returns that previously were subject to disclosure through an IRS summons.
Separate and apart from the state privilege, in 1998 Congress amended the Internal Revenue Code § 7525 to create a limited accountant-client privilege that extends the common law attorney-client privilege to federally authorized tax practitioners providing “tax advice.” This privilege can only be applied to noncriminal tax matters before the IRS or noncriminal tax proceedings in Federal Court.
The Illinois Accountant’s Privilege generally applies to state court actions; there is no confidential accountant-client privilege under federal law, and no state-created privilege has been recognized in federal cases. However, in limited instances the federal courts may recognize the privilege when exercising diversity jurisdiction and applying Illinois state law. This limited federal recognition generally doesn’t apply to federal regulatory agencies unless there’s a separate, specific provision such as Section 2575 of the Internal Revenue Code.
Earlier this spring, the Illinois Supreme Court in Brunton v. Kruger,
2015 IL 117663 (Ill. 2015) issued a ruling where two significant issues were considered: First, whether the Accountant’s Privilege belongs to the client who communicated the information or to the accountant who received the information; and second, whether the testamentary exception is applicable to the Accountant’s Privilege.
The Court held that the accountant owns the privilege, and failed to extend the common law testamentary exception as it does in the attorney-client privilege. The basis of the Court’s ruling was that the Accountant’s Privilege is not intended to function purely as an evidentiary rule as other privileges do, but rather is an attribute of the accounting profession.
Furthermore, previous court cases have narrowly construed the Illinois Accountant’s Privilege as protecting accounting services involving opinions on financial statements.
This narrow construction distinguished traditional attest services from rendering non-financial consulting services. The Brunton
Court rejected the appellee’s narrow interpretation and looked to the broader definition of “Accountancy Activities” in Section 8.05 of the 2013 updated Public Accounting Act
(Public Act 98-254). The Court held that the legislative intent of the accounting functions list in Section 8.05 was not exhaustive.
Lastly, Section 27 prohibits a CPA from invoking the Illinois Accountant’s Privilege in hearings and investigative matters initiated by the Illinois Department of Financial and Professional Regulation for alleged violations of the Illinois Public Accounting Act.
The information here only skims the surface, but I hope makes you a little more familiar with the application and operative use of this important CPA tool.