Attorney-Client Privilege: CPAs and the E-Frontier

CPAs performing litigation support must be careful not to inadvertently waive privilege.

ATTORNEY-CLIENT PRIVILEGE EXTENDS to accountants under the Kovel rule when a CPA acts at the direction of the lawyer to provide information for the client. Inadvertent disclosure of confidential information may lead to loss of the privilege.

A PRACTITIONER WHO DOES LITIGATION CONSULTING should document the circumstances of his or her hiring, log relevant phone calls and appointments, obtain an engagement letter from the lawyer, label the project’s work product confidential, properly conduct client meetings, directly invoice the attorney (not the client), send reports directly to the lawyer and make sure engagement report materials are segregated from other work files.

COLLABORATING CPAs AND ATTORNEYS SHOULD obtain client consent to communicate their business using cordless or cell phones and take precautions to ensure use of electronic communications tools such as cell phones and faxes doesn’t cause confidentiality to be waived.

SCRAMBLERS AND ENCRYPTION TOOLS can substantially reduce the likelihood of waiver of privilege due to inadvertent disclosure but can be expensive ways to foil interception.

A CPA SHOULD BE AWARE that for work involving a corporation it is preferable that outside counsel rather than in-house counsel hire the CPA. If outside counsel cannot engage the accountant, in-house counsel is preferable to corporate management. The probability of a successful claim of privilege is diminished when management hires the CPA.

IF A CLIENT’S LOSS OF A CASE turns on the inadvertent disclosure of an electronic communication, the attorney and/or accountant could be sued for malpractice or subject to disciplinary proceedings.

CARL. PACINI, CPA, JD, PhD, is associate professor, accounting and business law, at Florida Gulf Coast University, Fort Myers, Florida, and adjunct professor of forensic accounting at Florida Atlantic University, Boca Raton; he is a member of the Florida Bar. WILLIAM HILLISON, CPA, PhD, CMA, is Andersen Professor of Accounting and Information Systems at Florida State University, Tallahassee; he has been published in many professional and academic journals. M. G. FENNEMA, CPA, PhD, is associate professor of accounting and the department chairperson at Florida State University, Tallahassee. RAYMOND PLACID, CPA, JD, is visiting professor of accounting and business law at Florida Gulf Coast University, Fort Myers. The authors’ e-mail addresses are, respectively, , , and .

n a landmark case Louis Kovel, a former IRS agent and accountant, had been hired by a law firm to help advise its clients. Kovel met with and received information from a client under IRS investigation for tax fraud. When subpoenaed by a grand jury, Kovel refused to answer questions about the client and was sentenced to a year in prison for contempt of court. The Second Circuit Court of Appeals reversed the contempt citation. It ruled there was no reason in the case to exclude accountants from the list of those who assist lawyers in providing legal services ( United States v. Kovel ).

As Kovel established, CPA-client communications may be privileged under a specific set of conditions. Not meeting them can result in loss of privilege—and can cause a legal strategy to fail. Today’s technology such as e-mail, voice mail, cell phones and faxes makes those conditions difficult to maintain. This article will discuss the framework in which attorney-client privilege extends to accountants and will suggest practical ways CPAs operating in a technological environment can avoid inadvertent disclosure of confidential information to preserve attorney-client privilege.

Although some states have statutes to protect the communication between accountants and clients in limited circumstances, such privilege isn’t recognized under federal common law and is of little value in federal cases ( Couch v. United States ). Moreover, the CPA-client privilege established by IRC section 7525 applies only to tax advice in noncriminal matters before the IRS and noncriminal tax proceedings in federal court. For federal proceedings communications between a client and a third party such as a CPA may be privileged when an attorney retains that agent (see “Third-Party Privilege”).
Subpoenaed by a grand jury, a former IRS agent and accountant refused to answer questions about his client and was sentenced to a year in prison for contempt of court. The Second Circuit Court of Appeals reversed the contempt citation.

Proposed rule of evidence 503 (also known as Supreme Court standard 503) established the general scope of the attorney-client privilege under federal common law: “A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional services to the client.” The communications can be

Between the client or client’s representative and his attorney or the attorney’s representative.

Between the client’s attorney and that attorney’s representative.

From the client or his or her lawyer to a lawyer representing another person or organization in a matter of common interest. (For example, in a joint defense where multiple parties share a common legal interest, confidentiality extends to communications between them and their attorneys or agents.)
The Ninth Circuit Court

A total of 11,421 appeals
were filed in 2002.


Between representatives of the client.

Between lawyers representing the client.

Business-organization clients may assert attorney-client privilege as individuals do, but applying privilege to corporate situations, even those involving in-house counsel, can be problematic because corporations act only through their agents. The Supreme Court ruled that a communication is privileged when management authorizes an employee or former employee to speak with an attorney (or agent thereof) regarding conduct or proposed conduct related to employment ( Upjohn v. United States ). Formal criteria for all situations involving a corporate setting and the attorney-client privilege that applies don’t exist, however. Prior to meeting with or communicating with clients, CPAs who perform litigation support should obtain a letter that clarifies their role as agents of the lawyer.

An attorney’s client holds the attorney-client privilege and has the power to waive it. In practice the client’s lawyer also has limited authority to waive it; by extension a CPA agent can cause its forfeiture. Some courts have held that any disclosure—even an accidental one—waives confidentiality. Disclosure can occur through the use of electronic communications devices such as cordless and cell phones, faxes and e-mail. It can result from unintentionally faxing a document to an opposing attorney or sophisticated espionage methods by adversaries. Cases involving inadvertent disclosure are subject to three different court approaches.

The strict responsibility approach. Courts that follow this approach treat all inadvertent disclosure as a waiver of privilege and do not require the element of intent. They reason that once a third party obtains a privileged communication, confidentiality is lost and cannot be restored. (Some courts insist disclosure is evidence of the client’s intention to forfeit privilege.) This thesis is simple for courts to administer and yields predictable results. If an attorney and his or her agents do not want an adversary to use confidential information, they must safeguard it sufficiently. The seminal case for this approach is Underwater Storage, Inc. v. United States Rubber Co.

Critics of this rule say it undermines the confidence parties can place in attorney-client privilege, provoking client reticence and reducing a lawyer’s ability to provide effective representation. It also punishes a client for someone else’s error. For example, if a consulting CPA’s secretary accidentally presses the wrong speed-dial button, a client’s case can be damaged.

Third-Party Privilege
W hen ruling on whether attorney-client privilege extends to a lawyer’s third-party agent such as a CPA, courts make subtle distinctions aimed at preventing the abuse of privilege. For example, one court ruled communications between client and accountant prior to the attorney’s hiring the CPA are not privileged ( United States v. Cote ). However, privilege applied when the client retained a lawyer who then hired a CPA, or the client consulted with the attorney and accountant simultaneously.

In another example an attorney directed a client to consult with an accountant regarding that client’s conviction for willful failure to file a federal income tax return. On appeal the Ninth Circuit refused to extend privilege to the accountant because there was insufficient evidence to show the lawyer had commissioned CPA services to support the rendering of legal advice ( United States v. Gurtner ). Thus, if a practitioner provides business advice rather than litigation-related information for the attorney, no privilege attaches. Even litigation-specific information is unprivileged if it is incidental to business advice.

This limitation was reinforced in the Sequa Corp. case, in which in-house counsel hired Arthur Andersen, the corporation’s auditor, to prepare a memorandum of the tax consequences of a proposed corporate reorganization. After discussions between Sequa and Andersen, the firm delivered the final memorandum to in-house counsel. Sequa consummated the transaction as Andersen recommended.

Later, the IRS subpoenaed Andersen to produce the memo. In response Sequa claimed attorney-client privilege, saying the Andersen memorandum had been prepared to aid in-house counsel in rendering legal services. The Second Circuit held the Kovel rule did not apply because Sequa consulted the accounting firm for tax advice rather than for assistance with and support of legal services. The court noted Sequa had not produced documentation such as a separate retainer agreement or itemized billings for the Andersen report to support a claim of privilege ( United States v. Adlman ).

The Eighth Circuit Court of Appeals ruled that in applying Kovel it is inappropriate to distinguish between those on the client’s payroll and independent contractors such as CPAs. In the example of In re Bieter Co. the court set out principles applicable to determining whether privilege protected third-party communications. It said

The communication must be made for the purpose of seeking legal advice.
The third-party expert that’s involved must act at the direction of the client.
The subject matter of the communication must be within the scope of the consultant’s duties.
The communication must not be disseminated beyond those parties who need to know.

The modern or “no waiver” approach. Under this approach the privilege is waived only when a disclosing party chooses to do so. An accidental fax transmission, for example, would not waive privilege. The court need determine only whether the disclosed material is protected by attorney-client privilege; if it is, the recipient may not introduce it at trial. Supporters say a waiver is, by definition, intentional relinquishment of a known right, making the concept of an “inadvertent waiver” inherently contradictory. The seminal case for this approach is Mendenhall v. Barber-Greene Co.

Critics of this approach claim it is too difficult to discern a client’s intent and that clients can change their minds and lie. Critics also say the “no waiver” approach erodes incentives for attorneys and their agents to protect clients’ confidential documents.

The balancing test approach. Most state and federal courts use this approach, which evaluates whether privilege has been waived based on the circumstances of a disclosure. Courts using this approach often apply the following five-factor checklist, which originated with Lois Sportswear, USA, Inc. v. Levi Strauss & Co .:

The reasonableness of the precautions taken to prevent inadvertent disclosure.

The number of inadvertent disclosures.

The extent of the disclosure.

Any delay in measures taken to rectify the disclosures.

Whether the overriding interests of justice would or would not be served by relieving a party of its error.

The balancing test is more work to apply, but what it lacks in ease of application it makes up for in fairness. However, critics say it leads to inconsistent results because each court will define “reasonable precautions” differently, encouraging parties to litigate unnecessarily.

Privileged information is susceptible to waiver by interception or inadvertent disclosure in electronic communications. A basic component of the law covering attorney-client privilege is that a protected communication must have a reasonable expectation of privacy. Collaborating attorneys and CPAs should take care that their use of electronic communications tools such as cell phones and faxes doesn’t cause confidentiality to be waived. In particular, electronic communications carry unique risks.

Telephones. Generally, a conversation on a landline phone between an attorney and client or an attorney and a CPA expert is privileged. In United States v. Hall, the court held that when a person talks by landline telephone, he or she can reasonably assume privacy. That is, traditional phone conversations take place under circumstances considered inherently confidential. The law is less clear about cordless and cell phones.

A federal appeals court said a client’s cordless phone conversation with his attorney was not protected in United States v. Mathias. Other courts have ruled that no reasonable expectation of privacy exists for cordless phone conversations because users broadcast their messages in the same way that radio stations do ( State v. Smit h). This principle of law is subject to challenge, however, as communications technology evolves.

Cell phones also broadcast messages using radio signals, but not at standard FM frequencies. They still can be intercepted with illegal scanning devices. This fact has led some courts to hold that a cell phone user lacks a reasonable expectation of privacy ( Salmon v. State ).

Presumption of privacy more likely depends on the specific technology used to protect communications. Since such technology continues to change, courts probably will avoid hard and fast rules in this area. Communication of privileged information to an unknown third party via eavesdropping or inadvertent disclosure continues to be a risk. Accordingly, CPAs should exercise extreme caution in communicating confidential material over cordless or cell phones. New York, Iowa and Illinois bar associations have released ethics opinions stating that attorneys should warn clients that all cell phone conversations are not secure. Both attorneys and CPAs hired by attorneys should obtain client consent to communicate their business using cordless or cell phones—or they should refrain from discussing client-specific business on them.

There is technology to enhance confidentiality. For example, one device will “scramble” cordless or cell phone communications at a cost of several hundred dollars per scrambler.

Fax machines. In general a fax communication is protected by the attorney-client Kovel privilege (see United States Fidelity & Trust Co. v. Canady ). Faxes differ from cordless and cell phone communications because the machines use landline telephone technology for transmission, eliminating the interception possibility associated with radio waves. Despite possible misdirection of a fax transmission, a reasonable expectation of privacy still is afforded this medium.

CPAs can safeguard faxes with a cover sheet stating the information in it is privileged. It might say the following:

Privileged and confidential: All information transmitted hereby is intended only for the use of the addressee(s) named above. If the reader of this message is not the intended recipient or the employee or agent responsible for delivering the message to the intended recipient(s), please note that any distribution or copying of this communication is strictly prohibited. Anyone who receives this communication in error should notify us immediately by telephone and return the original message to us at the above address via the U.S. mail.

The legal effect of the confidentiality legend depends on which of the three waiver theories a court follows. A legend will have no impact on a court that adheres to the strict responsibility approach, but a court that subscribes to the “no waiver” approach may not even require a legend to put opposing counsel on notice. A court that follows the balancing approach probably would consider the legend a reasonable precaution.

E-mail. Communication by e-mail also is a gray area of the law. The private internal e-mail systems used by accounting and law firms do not create the potential for inadvertent waiver of the Kovel privilege. Nonprivate e-mail systems, on the other hand, evoke questions about whether such communications carry a reasonable expectation of privacy.

In a lawsuit challenging the Communications Decency Act, a federal district court ruled that unencrypted e-mail is not secure ( American Civil Liberties Union v. Reno ). However, in a case involving America Online (AOL) e-mail transmissions, a federal appellate court held that the sender of an e-mail message had a reasonable expectation of privacy ( United States v. Maxwell ). AOL e-mail messages are afforded more privacy than messages on other Internet-access providers because AOL privately stores them for retrieval in its centralized, privately owned computer. Use of an Internet service provider such as AOL, in which access to e-mail communications is protected by a password, is supportable as due care.

E-mail is vulnerable to both interception and inadvertent disclosure. One common method to enhance the confidentiality of e-mail communications and the probability of a successful claim of Kovel privilege is encryption, which can make a plain-text message unreadable by processing it with a mathematical algorithm. The use of encryption can substantially reduce the likelihood of waiver of privilege due to inadvertent disclosure, but it can be an expensive way to foil interception.

Case law shows that procedural safeguards help preserve attorney-client privilege and its extension to CPAs under Kovel . A practitioner who does litigation consulting should document the circumstances of his or her hiring, obtain an engagement letter from the lawyer, label the project’s work product “confidential,” properly conduct client meetings, directly invoice the attorney (not the client), send reports directly to the lawyer and make sure engagement report materials are segregated from other work files.

Document the hiring process. Whether the attorney calls you, an associate suggests you call or the subject comes up at a professional luncheon, document your participation in the legal matter as of the first conversation about it. Log relevant phone calls and appointments.

Be aware that at a corporation, outside counsel rather than in-house counsel should hire the CPA. If outside counsel cannot hire the CPA, in-house counsel rather than corporate management should engage the accountant. The probability of a successful claim of privilege is diminished when corporate management hires the CPA.

An attorney generally should not hire the client’s existing CPA; doing so can make it difficult to establish the practitioner has advised in the context of litigation rather than business. If counsel hires a client’s accountant, matters covered by the privilege should be segregated to demonstrate the engagement was not part of any other services performed by the practitioner. If you are the CPA and work for a firm, recommend a colleague handle the litigation work. The firm then can erect a “Chinese wall” between the regular and the investigative accountants and their respective files.

Ask the attorney to issue the engagement letter. Be sure the attorney provides you with a written agreement that defines precisely the terms of the arrangement and describes the legal purpose of the accounting services. If appropriate, this letter should state that you are being hired in anticipation of litigation. Check the letter to make sure it has covered several important points, which follow.

The engagement agreement should state that all communications between the attorney, client and accountant are incidental to rendering legal services and are intended to remain confidential; that you (the CPA) and client may communicate outside the attorney’s presence as long as you do so at counsel’s direction; that none of the parties should disclose the nature or content of any communications or work product to any third party, including government officials, or privilege likely will be waived; that all documents including workpapers for the engagement are the property of the lawyer and are held by you solely for the attorney’s convenience, and that once your work is done, you will deliver all related files to the lawyer and will not retain copies.

If an engagement agreement isn’t used, the lawyer should use a “Kovel letter,” which is less formal. It should say the lawyer is retaining you to assist in his or her work for the client. A Kovel letter generally specifies the CPA will bill the attorney directly and that the project workpapers are the property of the attorney. It should instruct the accountant about the specific tasks to be performed and to maintain the confidentiality of all information received or generated.


If challenged in court, the attorney-client privilege extended to CPAs under the Kovel rule must be proved valid. A carelessly structured arrangement leaves the privilege susceptible to challenge.

A CPA hired by an attorney to obtain facts for a client’s case should get a written engagement agreement that precisely states the terms of the arrangement. The letter should state that all communications among the attorney, client and accountant are to remain confidential and that all CPA workpapers are the attorney’s property.

The CPA should label work product confidential, document client meetings, directly invoice the attorney, send reports directly to the lawyer and segregate litigation-related report materials from other client work product, if any.

CPAs should mitigate the risk of inadvertent disclosure and eavesdropping from the use of electronic communications by minimizing use of cordless or cell phones to discuss privileged information.

Fax privileged material with a cover sheet bearing a confidentiality legend (above). It offers some protection if a communication goes to the wrong person by mistake.

Use a methodology for preparing an investigative or litigation-related report to make it distinct from other work product, particularly if in the ordinary course of business you generate reports that look similar. However, the litigation report must be conventional enough that it doesn’t invite a challenge for failure to follow “acceptable” methods, and the methodology for each relevant transaction must be the same.

Label confidential CPA work product. Demonstrate your work product is protected by writing or typing “confidential” on such documents and by restricting circulation only to necessary persons. In Large v. Our Lady of Mercy Med. Ctr., the court found that merely tagging work product with a Post-it note was not an adequate protection. Work product marked as confidential should contain genuinely confidential information; “confidential” should not be routinely placed on your entire work product. Labeling truly confidential documents as such demonstrates the intent to keep them separate. Some CPAs keep a record of confidential documents in a privilege log. Any written work product should say it is being produced at the attorney’s request.

Conduct meetings properly. For meetings involving you, client representatives and/or the attorney, take minutes noting the date, who is present, the subject and legal reason for the meeting and the confidentiality of the proceedings. It’s important to state the legal purpose; a court may ask whether the meeting would have been held if litigation had never been a prospect. If the answer is “yes,” the meeting likely will be viewed as having a business purpose. Be aware that in a corporation, only employees with essential information should be in attendance.

Invoice the law firm. Bill the law firm for whom the work is being done. Don’t send invoices or copies of invoices to the law firm’s client. The law firm, not the client, should pay the CPA. In the event counsel hires you and you are the client’s current CPA, you should bill litigation-support services separately from other accounting and tax services ( United States v. Adlman ).

AICPA/AAML National Conference
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AICPA ABV E-valuation Alert.

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Publications and practice aids
Calculation of Damages from Personal Injury, Wrongful Death, and Employment Discrimination— Consulting Services Practice Aid 98-2. Discusses the types of engagements, scope and acceptance considerations, types of damages, approaches to damage estimation and methods of damage calculation for civil litigation cases (# 055293JA).

Communicating in Litigation Services: Reports— Consulting Services Practice Aid 96-3. Will help practitioners apply knowledge of organizational functions and technical disciplines during an engagement or consultation (# 055000JA).

Litigation Services & Applicable Professional Standards —Consulting Services Special Report 03-01. Gives guidance about applicable standards, rules and laws to practitioners serving as consultants, experts, triers of fact, special masters, mediators and arbitrators (# 055297JA).

Litigation Services Handbook: The Role of the Financial Expert by Roman L. Weil, Michael J. Wagner and Peter B. Frank, John Wiley & Sons, New Jersey, 200l. (Can be ordered at , # WI403091P0100DJA).

Send CPA reports to the attorney. Any litigation support or special project report you prepare should state at the outset that it has been generated for potential litigation purposes. You should send commissioned reports directly to the law firm, not to the client. If possible, discuss the content of reports only with counsel present and collect all copies at the conclusion of each meeting; document such actions.

Segregate report materials or methodology. If an accounting report contains information that can be used for purposes besides legal consultation, you and the attorney should separate the portions of the report applicable to business decisions from those related to the legal consultation. You should consider using a methodology for preparing an investigative or litigation-related report to make it distinct from other work product, particularly if in the ordinary course of business you generate reports that look similar. However, the litigation report must be conventional enough that it doesn’t invite a challenge for failure to follow “acceptable” methods, and the methodology for each relevant transaction must be the same.

On behalf of clients, attorneys frequently hire CPAs as nontestifying experts or consultants. Federal common law does not recognize an accountant-client privilege, but under the Kovel rule, a lawyer may shield a nontestifying accountant under third-party privilege. This rule insulates communications and work product when the attorney hires an expert to help in the provision of legal services. The privilege extends only to specific communications, not facts. Candid communication between a CPA and client is vital to providing the best possible service, but there may be pitfalls: If a client’s loss of a case turns on the inadvertent disclosure of an electronic communication, the attorney and/or accountant could be sued for malpractice or subject to disciplinary proceedings. The ability to deliver quality services in a manner that protects privilege depends on keeping sensitive communications and work product from disclosure or interception.

Case Citations
These cases are listed in the order of their appearance in the article.
United States v. Kovel, 296 F2d 918 (2d Cir. 1961).
Couch v. United States, 409 US 322 (1973).
Upjohn v. United States, 449 US 383 (1961).
Underwater Storage, Inc. v. United States Rubber Co., 314 FSupp. 546 (D.D.C. 1970).
Mendenhall v. Barber-Greene Co., 531 FSupp. 951 (N.D. Ill. 1982).
Lois Sportswear, USA, Inc. v. Levi Strauss & Co. (104 F.R.D. 103 (S.D.N.Y. 1985)).
United States v. Hall (488 F2d 193 (9th Cir. 1973)).
United States v. Mathias (96 F3d 1577 (11th Cir. 1996), cert. den. 117 S. Ct. 1699 (1997)).
State v. Smith (438 N.W. 2d 571 (Wis. 1989)).
Salmon v. S tate (426 S.E. 2d 160 (Ga. Ct. App. 1992)).
United States Fidelity & Trust Co . v. Canady (460 S.E. 2d 677 (W.Va. 1995)).
American Civil Liberties Union v. Reno (929 FSupp. 824 (E.D. Pa. 1996)).
United States v. Maxwell (45 M.J. 406 (C.A.A.F. 1996), later proceeding, 46 M.J. 413 (C.A.A.F. 1997)).
Large v. Our Lady of Mercy Med. Ctr. (76 Fair Empl. Prac. Cas. (BNA) 1054 (S.D.N.Y. 1998)).
United States v. Adlman, 68 F3d 1495 (2d Cir. 1995).
United States v. Cote, 456 F2d 142 (8th Cir. 1972).
United States v. Gurtner, 474 F2d 297 (9th Cir. 1973).
In re Bieter Co., 6 F3d 929 (8th Cir. 1994).

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