War story: responding to subpoenas

Editor’s Note: “War Stories,” drawn from Camico claims files, illustrate some of the dangers and pitfalls in the ac ounting profession. All names have been changed.

Walter Waverly, CPA, had been engaged for a few years by the trustee of a substantial family trust. While preparing tax returns and compiling financial statements for the trust, Waverly found evidence indicating that the trustee was probably misappropriating trust funds. The CPA requested more information from the trustee but received nothing. What was Waverly to do? By whistleblowing and disclosing confidential client information to the trust beneficiaries—who were considered third parties to the trust—he would have violated confidentiality rules. Waverly decided to wait for more information to develop before taking any action.

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

Several weeks later, the attorney for the trustee filed a complaint against Waverly with the State Board for Public Accountancy for improperly disclosing confidential client information to the IRS agent, whose subpoena called for documents—not for interviews or depositions. The complaint included criminal and civil allegations of misconduct and negligence, and Waverly spent many work hours responding to the state board’s requests for information. When it was revealed that the trustee was indeed misappropriating trust funds, the complaint was withdrawn.

This case is instructive on several points. Seeking written advice from legal counsel or a risk adviser could have provided Waverly with a certain degree of protection from complaints that he violated client confidentiality rules. If counsel decides that the best course of action is to blow the whistle on a client in order to protect third parties or the public from potential fraud, the CPA can assert that he or she was acting on the advice of counsel, with the intention of preventing the further defrauding of third parties.

Responding to subpoenas
Although CPAs should indicate their interest in cooperating with subpoenas and other requests for information, it is appropriate to defer any comments or release of records until you receive advice from an attorney or your professional liability insurance risk adviser. Reasons to do so include the following:

•Some subpoenas require documents, some require testimony and some require both. Some guidelines:

  • Do not volunteer information. This violates rules of the Internal Revenue Code and the AICPA, if you provide more than what is requested in the subpoena.
  • Under no circumstances should you give interviews to an agent when the subpoena requests documents only, nor should you ever 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 your professional liability insurance risk adviser.

•Not all subpoenas or requests for information 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.You could be responding to an invalid subpoena.
  • At the same time, do not ignore a subpoena. Failing to respond can result in courtimposed penalties or fees.
  • Even if the subpoena is valid, it might not meet IRC requirements for the 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. 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.

By working closely with attorneys, insurance carriers and other risk specialists to determine whether and how to respond, a CPA is more likely to avoid complaints and emerge from these challenging situations intact.

Ronald C. Parisi, CPA, J.D., is executive vice president of risk management for Camico
(www.camico.com). In that capacity, he is responsible for executive oversight of the company’s underwriting and claims functions.

For information on the Camico program, contact:
Upstate:
Guy Piddington
Poole Professional–New York
585-385-0428

Downstate:
Dan Hudson
Chesapeake Professional Liability
Brokers, Inc.
410-757-1932

Or call Camico direct at 800-652-1772.

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