The Journal of The DuPage County Bar Association

Back Issues > Vol. 28 (2015-16)

Closing the GAAP: Newfound Strength for the Accountant’s Privilege in Illinois
By Peter J. Evans

Illinois law creates various evidentiary privileges, which prevent disclosure of private communications in certain circumstances. These include, obviously, the attorney-client privilege, as well as marital and doctor-patient communications among others. The majority of these privileges apply similarly and may only be waived by the party making the disclosure. Further, at least for the more common privileges, such as attorney-client, several exceptions exist to defeat the privilege and further Illinois’ general policy of disclosure. However, one privilege exists that bares little similarity to other evidentiary privileges – the accountant’s privilege. The Illinois Supreme Court recently ruled on the accountant’s privilege, further defining its differences from other evidentiary privileges.

History of the Accountant’s Privilege in Illinois. In Illinois, the accountant’s privilege is codified under Section 27 of the Public Accounting Act and provides that a “CPA shall not be required by any court to divulge information or evidence which has been obtained by him in his confidential capacity as a licensed or registered CPA.”1 The Illinois Supreme Court first interpreted the accountant’s privilege in 1988 in In re October 1985 Grand Jury No. 746.2 In October Grand Jury, the court focused on the “confidential capacity” language. Specifically, October Grand Jury addressed whether information obtained by a CPA for preparation of state and federal tax returns was privileged despite the tax returns subsequently being filed with a third party, such as the Internal Revenue Service.

In resolving the issue, the Illinois Supreme Court relied on federal opinions and common law principles to determine whether the accountant’s privilege applied.3 Ultimately, the court concluded that the privilege did not apply, stating that “[a] tax client provides information to his accountant with the understanding that there may be, at the accountant’s discretion and judgment, a disclosure of it to a third party, the State, or other parties, e.g., Federal and other taxing authorities.”4 Accordingly, “[i]nformation given to an accountant to prepare a client’s tax returns and the accountant’s workpapers in preparing the returns . . . are not confidential.”5 Thus, the accountant’s privilege did not apply and the information was discoverable.

The October Grand Jury decision, however, was not unanimous. Chief Justice William G. Clark wrote a scathing dissent, criticizing both the conclusion of the majority and the process by which it was reached. According to Justice Clark, the majority improperly relied on federal authority in determining whether the sought after information was protected because there is no federal equivalent to the accountant’s privilege.6 Similarly, Justice Clark considered the analysis of common law principles irrelevant because the accountant’s privilege is a statutory privilege with no basis in common law.7 But, more significantly, Justice Clark believed the majority’s opinion essentially gutted the privilege and contradicted the purpose for which it was created, writing as follows:

If society has an interest in protecting the accountantclient relationship in general, and in encouraging people to make use of professional accounting services, I see no reason why this interest does not extend to the use of professional accountants to prepare tax returns. Indeed, the vast majority of people only use the services of an accountant in this connection. In the absence of clear statutory language which excepts tax information from the privilege, I cannot agree that we can write such language in. Such an interpretation smacks of judicial legislation.8

Nevertheless, following October Grand Jury, information provided to a CPA for purposes of preparing state and federal tax returns was not privileged.

Recent Developments with the Privilege. For the next twenty-five years, the scope of the accountant’s privilege remained relatively unchanged. Then, in 2013, the legislature enacted Section 8.05 of the Public Accounting Act. Section 8.05(a) serves to define “accountancy activities” as “services performed by a CPA, including” preparing and signing financial statements, “accounting, management, financial or consulting services, compilations, internal audit, preparation of tax returns, furnishing advice on tax matters, bookkeeping, or representation of tax payers.”9 Shortly after Section 8.05(a) went into effect, in 2015, the Illinois Supreme Court found reason to revisit the accountant’s privilege.10 In Brunton v. Kruger, the Illinois Supreme Court defined and clarified the scope of the accountant’s privilege; though, it did not go so far as to expressly overturn October Grand Jury.

For starters, the Illinois Supreme Court held that the accountant’s privilege applies to all information obtained by the accountant in the course of providing any of the services listed in Section 8.05(a). Furthermore, the court found that the use of “including” in Section 8.05(a) “indicates a legislative intent that the list of accounting functions that follows is nonexhaustive.” 11 Therefore, while the Illinois Supreme Court in Brunton did not explicitly overturn October Grand Jury, it impliedly did so by ruling that the privilege applies to all conduct identified under Section 8.05(a), which specifically references tax services, as long as the information was not provided in the presence of a third party. In this regard, the current application of the privilege, when read in conjunction with Section 8.05(a), seems to adopt Justice Clark’s view of the privilege from his dissent in October Grand Jury.

In addition to seemingly expanding the reach of the accountant’s privilege, the Illinois Supreme Court clarified to whom the privilege belongs – the accountant.12 In Brunton, the Illinois Supreme Court specifically held that the language of Section 27 is clear and that “the privilege created by section 27 of the Public Accounting Act is held by the accountant and may be asserted or waived by him.”13 In support, the court stated that “[t]he Public Accounting Act, including its privilege provision, is directed entirely at the conduct of members of the profession,” noting that the Act “imposes licensure requirements and other standards, and it also confers a privilege on members of  the profession when they obtain confidential information within the scope of their duties.”14 Therefore, only the accountant may assert the privilege and the client cannot prevent the accountant from disclosing his records. However, the fact that the accountant controls the privilege does not preclude discovery of the privileged information from other sources. As the court stated, “[i]f the client is still living, the privilege does not bar the client from voluntarily producing the information” and “[i]f the client is involved in litigation and the information is otherwise discoverable, a court may order the client who is in possession of the information to disclose it.”15

Therefore, in the wake of Brunton, the accountant’s privilege has found new strength – at least it appears that way. Accordingly, if the information is provided to a CPA in confidence, i.e., not in the presence of any third party, and the CPA receives the information for the purpose of providing accounting services, including any of the services identified in Section 8.05(a) – such as tax preparation, the information is privileged and the accountant – not the client – may refuse production of his records.

Possibility of Exceptions. Furthermore, the explicit language of Section 27 creating the privilege raises the question regarding whether any exceptions exist. Section 27, in its entirety, provides as follows:

A licensed or registered CPA shall not be required by any court to divulge information or evidence which has been obtained by him in his confidential capacity as a licensed or registered CPA. This Section shall not apply to any investigation or hearing undertaken pursuant to this Act.16

So, the statute creates an express exception for administrative actions brought under the Public Accounting Act but otherwise states that a CPA “shall not be required by any court to divulge information or evidence.”17 Such clear and concise language seems to suggest no exceptions to the rule exist, such as those that may apply to other privileges.

In fact, the Illinois Supreme Court in Brunton specifically stated that the accountant’s privilege is different and operates independently from other evidentiary privileges.18 The court went so far as to state that the accountant’s privilege “was not intended to function purely as an evidentiary rule, but also as an attribute of the accounting profession,”19 as evidenced by the “legislative choice to treat [the accountant’s] privilege differently than others in the legislative scheme regarding privileges.”20 Further, by codifying the accountant’s privilege – a privilege that did not exist under common law – the legislature necessarily “determined that public policy trumps the truth-seeking function of litigation in certain circumstances.”21 As stated, the language adopted by the legislature strongly suggests no circumstances exist under which the accountant can be forced to waive the privilege. And, while a lack of any exception to the privilege may seem extreme, it must be remembered that the information received by the accountant may still be discoverable from other sources, including the accountant’s clients.

Finally, despite the above, the accountant’s privilege is not absolute. While there may not be any defined exceptions other than the one for administrative actions, the accountant’s privilege is a purely statutory creature with no equivalent in federal or common law. As such, the accountant’s privilege does not apply in actions involving federal claims or defenses and will not protect the accountant from disclosing his records in federal court.22

Conclusion. Whether this newfound strength for the accountant’s privilege stands up on appeal remains to be seen, but trial courts seem willing to read the Illinois Supreme Court’s ruling in Brunton as extending the privilege to any information received by a CPA in his or her capacity as an accountant. Most significantly, Illinois courts are willing to apply the privilege to information obtained for purposes of preparing tax returns. Although October Grand Jury may technically remain valid precedent, CPAs and their attorneys should not hesitate to invoke the statutory privilege and refuse production of records. Hopefully, it will not take another quarter-century to further define the scope of this enigmatic privilege.

1. 225 ILCS 450/27.
2. 530 N.E.2d 453, 124 Ill.2d 466 (1988).
3. Id. at 474-75.
4. Id. at 477.
5. Id.
6. Id. at 479-80 (Clark, J., dissenting).
7. Id.
8. See id.
9. 225 ILCS 450/8.05(a).
10. See Brunton v. Kruger, 32 N.E.3d 567, 2015 IL 117663 (2015).
11. Id. at ¶ 21.
12. Id. at ¶ 16.
13. Id. at ¶ 46.
14. Id. at ¶ 40.
15. Id. at ¶ 47.
16. 225 ILCS 450/27.
17. Id.
18. Brunton, 2015 IL 117663 at ¶ 46.
19. Id. at ¶ 36
20. Id. at ¶ 46
21. Id. at ¶ 64.
22. See In re Grand Jury Proceedings, 220 F.3d 568, 571 (7th Cir. 2000); Fed. Deposit Ins. Corp. v. Mercantile Nat’l Bank of Chicago, 84 F.R.D. 345, 349 (N.D. Ill. 1979).

Peter Evans is an attorney with Skawski Law Offices, LLC focusing on commercial, construction and personal injury litigation. He graduated from Vanderbilt Law School, earning the Law & Business Certificate, and Purdue University’s Krannert School of Management.

 
 
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