April 2003

Limits of Documentary Privilege Against Self-Incrimination

By Delwyn D. DeVries and Bruce D. Fisher

The Fifth Amendment to the U.S. Constitution declares that “[no person] shall be compelled in any criminal case to be a witness against himself.” The privilege against self-incrimination applies to individual corporate or partnership officers acting in that capacity as well as to individual CPAs, who may legally refuse to testify against themselves when criminal sanctions could result from their forced testimony. This right protects individuals when the state accuses them of a crime.

The privilege against self-incrimination applies in both federal and state criminal cases. Although this privilege protects individuals, it does not protect corporations. Partnerships and, presumably, limited liability partnerships (which is Andersen’s business form) cannot avail themselves of the privilege. Courts tend to examine the nature of the organization, and if it cannot be said to embody or represent the purely personal or private interests of its constituents, but rather represents their common or group interests only, courts do not allow the privilege.

Documentary Privilege Following Boyd v. U.S.

In 1886 in Boyd v. United States [116 U.S. 616 (1886)], the U.S. Supreme Court held that private papers were entitled to protection under the Fifth Amendment’s privilege against self-incrimination. In effect, Boyd held that the privilege applied not only to testamentary (oral) statements but also to documentary (written) communications.

Following Boyd, the lower federal courts interpreted the privilege as protecting a person from being forced to produce “personal” papers, but not the papers of an organization which the person happens to be keeping. Even after Boyd, courts avoided conferring the privilege beyond the individual, and also limited the types of documents under its protection. Books and records a person usually keeps, which are kept under professional rules, or are required by law to be kept, did not enjoy the privilege. Other documents that the courts have not considered privileged include the papers and records of a corporation, partnership, or other collective entity.

Subsequent to Boyd, the privilege had also been litigated with respect to documents produced and held by an accountant, called working papers. Several cases have dealt with the definition of working papers. One Seventh Circuit case, U.S. v. Zakutansky [401 F.2d 68, 71 (7th Cir. 1968)], involved an accountant’s notes and adding machine tapes assembled by the accountant while preparing the client’s income tax return. Such documents were held to be working papers even though the accountant was not engaging in a “certified public audit.” Another case [U.S. v. Pizzo, 260 F.Supp. 216 (S.D.N.Y 1966)] also involved an accountant’s “records” incident to preparing the client’s income tax return. There the court held that work papers means any papers “where you have records recorded on it and the common form of work papers are columnar paper.”

Another question is, “Who owns the work papers?” In one case [U.S. v. Tsukuno, 341 F.Supp. 839 (N.D. Ill. 1972)] dealing with a federal tax matter, an accountant had prepared “records” on behalf of the client, and the IRS issued a summons for them while they were in the accountant’s possession. There were two sets of records: the work papers developed by the accountant and used in determining the client’s tax liability, and the taxpayer’s personal books and records in the accountant’s possession and used to calculate the taxpayer’s taxes.

In examining the first group, the court held that an accountant’s work papers were presumptively the property of the accountant rather than the taxpayer and were not within the scope of the privilege against self-incrimination. The court’s ruling in Tsukuno indicated that the agreement between the accountant and the client could determine who owns the accountant’s work papers. Given the presumption accorded accountants in this case, perhaps it might be wise for the accountant not to draw the client’s attention to this issue during negotiations, thereby reserving working-paper title for the accountant.

But as for the taxpayer’s personal books and records turned over temporarily to the accountant, the court held that the taxpayer did have a Fifth Amendment privilege against self-incrimination and that this privilege was not waived by turning over the papers to an accountant or attorney. Here the privilege rested on the client’s property interest in the books and records, not who temporarily held them. Also, the fact that the client was an individual—not an artificial entity such as a corporation or LLP—appeared crucial. Because corporations or nonpersonal entities have no privilege against self-incrimination, it follows that corporations have no privilege against self-incrimination regarding their accountant’s work papers relating to the corporation.

Documentary Privilege Following Fisher v. U.S.

As noted above, after Boyd, in federal courts there was a privilege against self-incrimination as to documentary evidence. The U.S. Supreme Court decision in Fisher v. U.S. [425 U.S. 391 (1976)], however, completely rewrote the Fifth Amendment privilege against self-incrimination with regard to tax documents in federal matters. In Fisher, the Court held that in federal tax matters, the individual taxpayer’s documents turned over to his attorney are not constitutionally protected from a summons. The Court reasoned that the Fifth Amendment privilege against self-incrimination applied only to testimonial—not documentary—evidence. Thus presumably any document that the taxpayer has in her possession related to her federal taxes, or which the taxpayer has turned over to her attorney (or accountant), must be turned over to authorities. Second, after Fisher, the ownership of the documents sought by the government appears to be irrelevant with respect to the privilege. Because Fisher assumed that documents held by the taxpayer could be subpoenaed, the taxpayer’s turning over the document to an attorney would not create a privilege where none otherwise existed.

Also, the organizational form of the taxpayer’s advisor, which prior to Fisher could have been relevant to the existence of a privilege (individual accountants would probably be granted privilege if they were criminally targeted, but organizations would not), is no longer significant.

Following Fisher, a later U.S. Supreme Court case, U.S. v. Doe [465 U.S. 605 (1984)], held that the Fifth Amendment privilege against self-incrimination did not stop a grand jury from subpoenaing business-related records where the business was a sole proprietor and the prosecutor knew the documents, existed prior to the subpoena. Although this decision followed Fisher, it did create a slight opening by holding that “the act of producing the documents at issue in this case is privileged” if the prosecutor does not know of the documents’ existence prior to the request. In effect, producing the documents in such a context is “testimonial” to the fact of the documents’ existence. This would appear to limit the Fisher result. One distinction between Doe and Fisher is that Fisher was a tax case while Doe was not. Doe also squarely involved an individual’s privilege against self-incrimination. Thus Doe provided some hope that a limited privilege against self-incrimination for documents was still alive in at least some federal courts in non-IRS matters.

An answer was provided in U.S. v. Hubbell [530 U.S. 27 (2000)], where the Supreme Court reaffirmed its Doe exception to Fisher by conferring a “testamentary” privilege to 13,120 pages of documents the prosecutors did not know existed prior to the subpoena. The current rule for documents held by an individual seems to be that, if the prosecutor does not know of the existence of incriminating documents prior to subpoenaing them, forcing the defendant to produce them would amount to forcing the defendant to “testify” to the documents’ existence. Neither Doe nor Hubbell shields documents from subpoena from corporations, LLPs, or partnerships, because they are not individuals. Thus, most accounting firms would not have any documentary privilege against self-incrimination.

As a footnote to this discussion, some might wonder about the relevance of U.S. v. Arthur Young & Co. [455 U.S. 805 (1984)], where the U.S. Supreme Court was asked to rule on the validity of a work-product privilege that the U.S. Second Circuit Court of Appeals had created for accountants’ tax accrual work papers to comply with federal securities laws. The Court refused to recognize that such an accountant work product was entitled to privilege in federal courts, thereby reversing the Second Circuit. Arthur Young was not really a Fifth Amendment case, even though it did involve a criminal investigation.

One other loose end exists regarding the use of accountant/client privilege to stop disclosure of client information in the accountant’s possession. Although some states do have such a statutorily created privilege, it is not recognized in federal courts (Tsukuno). Thus, no such state privilege exists before the SEC or the IRS.

Documentary Privilege and Electronic Documents

The scant protection privilege afforded to accountants’ and auditors’ work product means that professionals must be prudent about how the many electronic documents they create are managed and retained. In the course of an audit, for example, many electronic documents and messages in various states of planning and revision can be created by all of the individuals involved as the work papers for the entire engagement are built up. The “final” version of these work papers, which should be retained, is the support for the audit report. Each preliminary version of these files, however, is neither complete nor final, and should not be retained.

Outside of the work papers themselves, electronic documents related to the audit engagement may also exist in other forms, such as e-mail, spreadsheets, databases, flowcharts, or word-processing documents. Firm policy may dictate that all documents and files relevant to the audit must be included within the electronic work papers as a control over extraneous files from other computer applications. Electronic files from other applications must be reviewed so that final versions of the documents are moved to the work papers and preliminary and backup versions are destroyed, not only on the computer network, but also in automated backup systems and archival files.

The intricacies of the criminal process are not well understood by either the general public or nonlegal professionals. Given the increasing tendency of the law to criminalize more areas of commercial endeavor, persons unfamiliar with criminal procedure would do well to increase their understanding of at least the rudiments of criminal procedure. It is advisable to implement computer systems that automatically purge electronic documents extraneous to final audit work papers, or tax regulatory filings. This can preserve client privacy as well as maximize the limited documentary privilege available to advisors.

Delwyn D. DeVries, PhD, CPA, CISA, is an assistant professor, and
Bruce D. Fisher, JD, LLM, a professor, both at the department of accounting and business law, the University of Tennessee, Knoxville, Tenn.

Dan L. Goldwasser, Esq.
Vedder, Price, Kaufman & Kammholz

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