Read This Before Testifying

September 01, 2010
Tips CPAs should know when responding to subpoenas.

Ronald C. Parisi, CPA, J.D.
As the “most trusted adviser,” CPAs are privy to a company or individual’s proprietary information or processes. So if things go wrong, CPAs may be called upon to testify in court. But they should have no fear. There are some things CPAs can review before stepping into that witness box.

Although CPAs should indicate their interest in cooperating with subpoenas and other requests for information, it’s appropriate to defer any comments or release of records until they receive advice from an attorney or professional liability insurance risk adviser. There are numerous reasons why, including
some subpoenas require documents, some require testimony and some require both. Here are some proactive guidelines:
  • Do not volunteer information. CPAs will be violating rules of the Internal Revenue Code and AICPA if they provide more than what is requested in the subpoena.
  • CPAs should not give interviews to an agent if the subpoena requests documents only; nor should CPAs give an interview without first seeking legal guidance.
  • Be sure that the documents being produced fit the description of the documents requested in the subpoena.
  • Never volunteer documents or other information before the due date stated on the subpoena without first consulting a qualified attorney or professional liability insurance risk adviser.
  • Not all subpoenas or information requests are valid and enforceable, and it can be difficult to determine from their face whether they are valid or enforceable.
  • Do not assume that the subpoena is proper just because it appears to be legal. CPAs could err by improperly responding to an invalid subpoena.
  • At the same time, do not ignore a subpoena, which can result in difficulties, including court-imposed penalties or fees.
  • Even if the subpoena is valid, it might not meet IRC requirements for release of client tax information. Simply complying with a subpoena could result in fines or penalties and may expose a CPA to liability from the client.
These are practical guidelines only, not legal advice. CPAs should seek legal advice before taking any action or making any related decision.
It is also important for CPAs to notify their professional liability insurance company to assure their coverage in the event of a claim.

Real-world Example
Here is a real-life example of a case involving a CPA who had been engaged by the trustee of a substantial family trust for a few years. It illustrates the complexities that can arise when responding to a subpoena, even when CPAs think they are doing the right thing.

While preparing tax returns and compiling financial statements for the trust, the CPA came across evidence that the trustee was probably misappropriating trust funds. The CPA requested more information from the trustee, but received nothing.

What was the CPA to do? By whistle-blowing and disclosing confidential client information to the trust beneficiaries, who are considered third parties to the trust, the CPA would have been in violation of confidentiality rules. The CPA, therefore, decided to wait for more information before taking any action.

Meanwhile, a special agent from the criminal investigations unit of the IRS made a surprise visit to the CPA’s office. The agent flashed her badge, handed the CPA a subpoena and requested an interview regarding the trustee in question. The CPA felt somewhat intimidated and wanted to cooperate with the agent, especially in light of his concerns about possible misappropriations by the trustee. The CPA agreed to the interview and decided to blow the whistle on the trustee by divulging information about the trustee’s suspicious financial dealings.

Several weeks later, the trustee’s attorney filed a complaint with the state board of accountancy against the CPA for improperly disclosing confidential client information to the IRS agent, whose subpoena called only for documents. The complaint included criminal and civil allegations of misconduct and negligence. Although the CPA spent hours responding to the state board’s information requests, it turned out that the trustee was misappropriating trust funds, and the complaint was withdrawn.

This case is instructive on several points.

By seeking advice from legal counsel or a risk adviser—and getting the advice in writing—the CPA could have gained a degree of protection from complaints that client confidentiality rules were violated. If counsel decides that the best course of action is to blow the whistle on a client to protect third parties or the public from potential fraud, CPAs can assert that they were acting on the advice of counsel with the intention of preventing further defrauding of third parties.
Ronald C. Parisi, CPA, J.D. is the national program director of CAMICO Mutual Insurance Company.
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