The Illinois Accountant-Client Privilege and Suggested Responses for a CPA whose Documents or Testimony are Subpoenaed

By Jeffrey C. Blumenthal, Esq. © All rights reserved.

A)  Illinois Law on the Accountant-Client Privilege

          The statutory privilege protecting communications between certified public accountants and their clients from disclosure has been in existence since 1943.[1] However, there are only 15 reported decisions discussing the privilege[2]. A communication or document protected from disclosure by the statutory accountant-client privilege generally has these three attributes: (1) the communication or document is confidential in nature; (2) both the accountant and client have not disclosed the communication or document to a third party; and, (3) the damage that could result to the accountant-client relationship from disclosure of the communication or document must be deemed greater than the benefit to the disposition of the litigation that would result from the disclosure.

          The leading case is In re October 1985 Grand Jury No. 746, 124 Ill. 2d. 456, 530 N.E. 2d 453 (1988), the sole Illinois Supreme Court case to discuss the statutory accountant-client privilege. The October 1985 Grand Jury case relied on the four-prong test articulated by Professor Wigmore in his Treatise, Wigmore on Evidence for gauging whether a privilege should exist to determine whether the accountant-client privilege applied. Accordingly, the Court reasoned at 124 Ill. 2d at 457 that the following four elements had to exist for an accountant-client document or communication to be privileged pursuant to the  accountant-client privilege contained in Section 27 of the Public Accounting Act[3] (emphasis in original):

            “(1) The communications must originate in confidence that they 

                  will not be disclosed.

             (2) The element of confidentiality must be essential to the full

                  and satisfactory maintenance of the relation between the parties.

             (3) The relation must be one which in the opinion of the

                  Community ought to be sedulously fostered.

             (4)  The injury that would inure to the relation by the disclosure

                   of the communication must be greater than the benefit

                   thereby gained for the correct disposition of the litigation.”

          In October 1985 Grand Jury No. 746, supra, the Illinois Attorney General’s office sought disclosure of certain personal and company tax returns, which the outside accountant for the individuals and company did not produce. The accountant had also invoked the privilege when being examined before the grand jury. The court ultimately held that the tax documents and information sought were not privileged because they had been prepared with the understanding that, within the accountant’s discretion, client documents and information could be disclosed to third parties.  As the Supreme Court reasoned at 124 Ill. 2d 457: “A tax client provides information to his accountant with the understanding that there may be, at the accountant’s discretion and judgment, a disclosure to a third party, the State, or other parties, e.g., federal and other taxing authorities.” Therefore, tax documents, such as personal and business tax returns were not confidential and thus, not subject to the privilege.[4]

          Brunton v. Krueger, 2014 Ill. App. (4th) 130421, 2014 Ill. App. LEXIS 200 (4th Dist. 3/27/14) is the most recently reported Illinois appellate decision on the statutory accountant privilege. The Brunton case not only applies and expands upon the basic reasoning of In re October 1985 Grand Jury, but also correctly rejects limitations placed on the statutory privilege by federal courts. If the Brunton Court’s reasoning is accepted by the Illinois Supreme Court and/or other appellate districts, as it should be, the scope of the statutory accountant privilege will be fundamentally enlarged.

          The ultimate issue in Brunton was whether documents relating to estate planning services that an accounting firm rendered to the decedent parents of the litigants were privileged in the context of a will challenge. In reaching its conclusion that the documents sought to be discovered were not privileged the Court relied heavily on In re October 1985 Grand Jury No. 746, supra.

          The Court not only applied the four prong test set forth in October 1985 Grand Jury No. 746, supra, but also similar to that case, the Court analogized to the attorney-client privilege in determining the contours of the statutory account privilege.[5] Accordingly, the Brunton Court concluded, that similar to the attorney-client privilege, there was a testamentary exception to the accountant-client privilege. In so ruling, the Brunton Court referenced the fourth element in the test to determine whether a privilege applied, and held that the subject estate planning documents were not privileged because the benefit to be gained by deeming the documents privileged was outweighed by the damage done to the truth seeking process. The Court reasoned at ¶46 that the executor and the heirs in a will contest are not adverse to the decedent and that the decedent would want the validity of the will determined in the fullest light of the facts. Notwithstanding the ultimate holding, the Court recognized at ¶33 that, under certain circumstances, the “privilege can apply to information imparted to an accountant in estate planning activities.”

          The primary significance of the Brunton case is that the Court rejected the line of federal cases, beginning with Dorfman v. Rombs, 218 F. Supp. 905, 907 (N.D. Ill. 1963), that have held that the accountant privilege set forth in Section 27 of the Public Accounting Act belongs/inures to the accountant and not the client and that only accountants can claim the privilege. See: Stopka v. Am. Family Mut. Ins. Co., 816 F. Supp. 2d 516, 525 (N.D. Ill. 2011); In re American Reserve Corp., 1991 U.S. Dist. LEXIS 1639*5 (N.D. Ill. 1991); Western Employers Ins. Co. v. Merit Ins. Co.,  492 F. Supp., 53, 54 (N.D. Ill. 1979); Baylor v. Madling Dugan Drug Co., 57 FRD 509, 510, fn.2 (N.D. Ill. 1972); See also: United States v. Balistrieri, 403 F. 2d 472, 481 (1968) vacated on other grounds, sub nom Balistrieri v. United States, 395 U.S. 710 (1969). The Dorfman Court held, at 218 F. Supp. 907, that the statutory privilege “spoke for itself” and, since it only mentioned the CPA and not the underlying client, the privilege had to belong solely to the accountant and the client could not claim it.  Citing to the Grand Jury case, the Brunton Court correctly recognized at ¶42 that: “Section 27 does not exist for the benefit of CPAs; it exists for the benefit of the clients, to encourage them to make full disclosures to their CPAs.”[6] Accordingly in ¶43, the Court “h[e]ld that the client, not the CPA, is the holder of the privilege that section 27 creates.”

          The holding in Brunton is a “game changer” because it not only means that the underlying client can raise the accountant privilege, but also should mean that, similar to the attorney-client privilege, documents and information will remain privileged in the client’s hands as well as the accountants. In the referenced federal cases the Courts had rejected privilege claims made under Section 27 of the Public Accounting Act either because the claims had been made by the underlying client rather than the accountant (Stopka v. Am. Family Mut. Ins. Co., 816 F. Supp. at 525 (N.D. Ill. 2011); In re American Reserve Corp., 1991 U.S. Dist. LEXIS 1639*5 (N.D. Ill. 1991);Baylor v. Madling Dugan Drug Co., 57 FRD at 510, fn.2 (N.D. Ill. 1972) Dorfman v. Rombs, 218 F. Supp. 905, 907 (N.D. Ill. 1963)); or the documents were in the client’s hands and the privilege did not apply (Western Employers Ins. Co. v. Merit Ins. Co.,  492 F. Supp., 53, 54 (N.D. Ill. 1979)). Under Brunton, a number of the above federal decisions may have had a different outcome. If followed, as the other appellate districts and the Illinois Supreme Court should, Brunton’s holding should result in a significant expansion of the privilege and how it is applied.

          In Brunton, the Court also rejected the limited interpretation given to the statutory privilege in PepsiCo, Inc. v Baird, Kurtz  & Dobson, LLP, 305 F. 3d 813, 816 (8th Cir. 2002), where the Eighth Circuit held that the privilege only applied to information obtained and documents related to audits of financial statements. In rejecting this interpretation, the Brunton Court stated in ¶29 that “often, if not most of the time, certified financial statements are intended to be read by third parties, most notably investors and regulators. It would be illogical to require CPAs to maintain the confidentiality of information they obtained in their audit of a financial statement if such information was destined to be used in their publicly disseminated opinion regarding the financial statement.”

          The Brunton Court also ruled that privileged accounting documents remain so in the hands of the CPA’s support staff, just as documents protected by the attorney-client privilege remain protected in the hands of a law firm’s support staff. The court recognized that the privilege has to be extended to an accounting firm’s support staff in order for the firm to properly function.

            As an alternative basis for production of the subject documents, the Brunton held that any privilege had been waived by the Respondents in the case. The Respondents, were the decedent’s personal representative and other heirs, and they had filed briefs requesting an Order requiring disclosure of the accounting firm’s estate planning documents to the Petitioner who had sought those documents. A number of earlier decisions involving the accountant privilege contained in Section 27 of the Public Accounting Act were also predicated on waiver. In Re Grabill Corp., 109 BR 329 (N.D. Ill. 1989); See also: Zepter v. Dragisic, 237 FRD 185 (N.D. Ill. 2006).

            B) Suggested Responses for an Accountant Whose Documents or

                 Testimony is Subpoenaed or Summoned

          Section 1430.3010 of the Rules applicable to Accountant Disciplinary Proceedings under the Illinois Administrative Code (Title 68, Chapter VII, Subchapter b, Part 1430, Section 3010) adopts nearly verbatim Ethical Rule 301 on the confidentiality of client information promulgated by American Institute of Certified Professional Accountants. Section 1430.3010 (a) provides in pertinent part that “A registered public accountant shall not disclose any confidential client information without the specific consent of the client.”  Section 1430.3010 (b) further provides that: “This Section shall not be construed… (2) to affect in any way his/her obligation to comply with a validly issued and enforceable subpoena or summons or to prohibit a registered accountant’s compliance with applicable laws and government regulations;”

      Because client confidentiality has the force of both statutory and disciplinary law, accountants who fail to maintain client confidentiality can be subject to both malpractice and/or disciplinary actions. Accordingly, every accountant and accounting firm should have a protocol that is followed when client documents or communications are subpoenaed or summoned.  

          The first step in any accountant/accounting firm protocol for responding to a subpoena or summons for client documents or information should be to promptly contact the underlying client by letter advising the client of the accountant’s receipt of the subpoena or summons. In fact, a copy of the subpoena or summons the accountant receives should be an attachment to the letter. The client should be asked to advise the accountant in writing if the client has no objection to the production of the documents or information requested in the subpoena or summons.[7]

          The accountant’s letter should also advise the client that if the client objects to the accountant’s production of the requested documents or information, the client must take prompt action to quash the subpoena or summons and notify the accountant that such action will be taken. Until such time as the Brunton case’s holding that the accountant-client privilege can be raised by the client, as well as the accountant, at a minimum, the accountant’s letter should also probably provide that the accountant is prepared to raise any colorable privilege objection to the requested production, provided the client agrees in writing to reimburse the accountant for its reasonable attorneys’ fees in making that objection.

          Since currently only the Fourth Appellate District in the Brunton case has expressly held that clients may raise the accountant-client privilege contained in 225 ILCS 450/27, the law on the accountant-client privilege is unsettled. An accountant who offers to raise a colorably valid privilege objection avoids the problem of a client contending that the accountant failed to take necessary action to preserve client confidences that only the accountant could effectively raise. The issue is whether the accountant is obligated to raise the privilege for a client who objects to the production of documents or information, but has neither independently taken action to have an attorney raise the objection nor agreed to reimburse the accountant for fees incurred by the accountant’s counsel in raising the privilege or otherwise objecting to the production of documents or information. At a minimum, in the above scenario, the accountant should consult with counsel on how to appropriately respond to the subpoena or summons.

          Finally, the letter should inform the client that the accountant is legally obligated to comply with applicable laws and government regulations, including producing client documents and communications requested in validly issued and enforceable subpoenas or summons to which no objection is made and sustained. Finally, the client should be advised that if no objection is made to the production or should the Court enter an Order requiring the production of the requested information or documents, the accountant will have no alternative but to produce as sought in either the unobjected to subpoena or summons or as directed by Court Order.