Most accountants are well aware of the accountant-client privilege in Maryland.
By preventing disclosure of confidential communications, the privilege preserves an honest and open relationship between accountants and their clients. The privilege in Maryland is strong. A recent Maryland Court of Appeals decision even closed the long-established exception that permitted disclosure of privileged communications in the case of fraudulent conveyances (BAA v. Acacia Mutual Life, 400 A.2d 136, 151(Md. 2007)).
The privilege, however, is not absolute. With the exception of some tax-related communications, the accountant-client privilege (ACP) may not exist in federal court or federal agency proceedings. Federal tax ACP does not exist at all in cases of fraud or criminal activity.
The limited tax privilege also may not exist if the accountant is advising clients in a state where the accountant is not licensed. New York, for example, does not recognize the privilege. Accountants practicing in Maryland or other states with ACP (such as Washington, D.C., Virginia, Florida, Colorado and Puerto Rico) should be aware of the privilege disparity between state and federal laws before rendering advice in those jurisdictions. Once a subpoena has been issued, it may be too late to “fix” the problem.
Finally, be aware that federal law may apply in non-accounting cases in which ACP is at issue. For example, in federal jurisdiction cases such as those involving patents or trademarks, an accountant may receive a subpoena requesting information to be used in calculating damages.
If you are uncertain whether a communication is privileged, prior consultation with a trusted attorney can eliminate potential exposure for both the client and the accountant.
The history of privilege dates back to British common law, where attorneys, clergy and physicians had privilege, but accountants did not. Upon independence, America also did not recognize accountant privilege, so many states enacted their own privilege laws. In order to foster full disclosure to accountants, Maryland’s own laws regarding accountant-client privilege were enacted in 1924 and are now contained in Maryland Code Section 9-110 of the Courts and Judicial Proceedings Article.
In most ACP jurisdictions, the privilege protects communication made by a client to a CPA or to the CPA firm, and any account, book, record, or statement of the client. The privilege does not, however, affect federal bankruptcy laws, state criminal laws, or regulatory proceedings by the State Board of Public Accountancy. The court in the Acacia Mutual case above, held that accountant privilege did exist in a civil fraud case. If, however, the fraud had been alleged in a criminal case, the records of the accountant could have been forced into evidence. Additionally, the Maryland Court of Special Appeals has allowed the subpoena of accountant records by a grand jury, even if the grand jury had not decided upon criminal charges. In re Special Investigation #202, 53 Md.App., 96, 102-105, (1982). So even in Maryland, the privilege is not absolute and can have differing outcomes in court, depending on the facts in the particular case.
The income tax exception in federal court can also be limited. The Supreme Court has held that “no confidential accountant-client privilege exists under federal law, and no state created privilege has been recognized in federal cases.” Couch v. United States, 409 U.S. 322, 335, (1973). The Court went on to say that “there can be little expectation of privacy where records are handed to an accountant, knowing that mandatory disclosure of much of the information therein is required in an income tax return.” The court further held that tax accrual work papers were relevant and that, in contrast to attorney-client privilege, there is no accountant work-product privilege, stating, “[t]o insulate from disclosure a certified public accountant’s interpretations of the client’s financial statements would be to ignore the significance of the accountant’s role as a disinterested analyst charged with public obligations.” United States v. Arthur Young & Company, 465 U.S. 805, 818, (1984). The Court very clearly stated the position of the federal courts of having very limited privilege in communications between accountants and their clients.
However, not only does the privilege not exist in federal court, the privilege may also not exist in other states. A federal district court in Maryland held that Maryland law broadly covers interactions between a Maryland and a New York company, even though New York does not recognize the privilege (Hare v. Family Publication Service, Inc. 334 F.Supp. 953, 961 (D.C. Md, 1971)). Had the Hare case been heard in a New York court, the results may have been different. It is clear that even though privilege is enjoyed by Maryland accountants, the privilege is not absolute. Accountants should be very careful when dealing with out-of-state clients, as the laws of another state may apply either in the state courts of that jurisdiction or in a federal court that might be sitting in diversity for citizens of two or more different states.
Even in situations where privilege exists, care must be taken to avoid inadvertently waiving the privilege. A waiver occurs when client information is disclosed to a third party. In that event, otherwise privileged information may not be protected, on the grounds that the information had already been disclosed outside the accountant-client relationship. Such disclosure can be accidental, such as an errant email with an incorrect address (a server-imposed “send delay” can sometimes help this problem), indiscrete discussions in public places, a forgotten brief case or electronic storage device; or it can be intentional, with a reliance on privilege that a court later holds did not exist. The Maryland Court of Appeals held in Acacia that a corporation did not waive accountant privilege when it turned over an accountant’s working papers to a prospective purchaser of the company’s subsidiary as part of the purchaser’s due diligence. An important note, however, is that the accountant communications in the purchase disclosures were very clearly treated as confidential and between the parties only. Privilege may be waived by the client, the accountant, or imposed by court order. Sears, Roebuck & Co. v. Gussin, 350 MD 552, (1998). It is therefore, critical that clients be warned about the necessity to safeguard any information that they would not want disclosed in a judicial proceeding.
What happens if a subpoena for confidential and privileged client information is served on you or your client? As an accountant, you may know to immediately consult counsel. A client, however, may be less savvy. The client may be intimidated by an aggressive attorney, especially if the opposing party is government agency, such as the IRS or the SEC. Clients need to be reminded to consult immediately with their accountants and/or their attorneys if inquiries are made about their financial records. No amount of protection by an accountant can protect against disclosures by their own clients. Hopefully, this tax season is uneventful for you and your clients. With some careful planning and advising, some of the risk of problems with unwanted disclosures can be avoided.