Page 2 - On Congressional Subpoenas to Accounting Firms

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On May 20, the federal district court in grand jury investigating one of the accoun- seeks irrelevant information or is unrea-
Washington, D.C. issued an opinion tant’s clients for tax violations and asserted sonably cumulative or duplicative, or to
rejecting the President’s improper purpose that his communications with the client protect a person from annoyance, embar-
challenge and found that Congress enjoys were protected by the attorney-client priv- rassment, oppression, or undue burden or
very broad authority to conduct investi- ilege. Although most jurisdictions do not expense. Courts are generally hesitant to
gations as long as the subjects of the recognize an accountant-client privilege, limit discovery, and the individual or entity
investigation fall within the power to leg- the court of appeals in Kovel recognized seeking relief bears the burden of showing
islate, which is in turn also given a broad an exception when an accountant commu- that the subpoena should be quashed or
interpretation. Notably, the court reasoned nicates with a client in confidence for the modified; however, the burden is generally
that Congress’s true motives in issuing a purpose of obtaining legal advice. It is lower in cases seeking to modify rather
subpoena—for example, political advan- unclear from the public record whether or than to quash. In the May 20 opinion
tage—are irrelevant to the question of not the accounting firm worked with attor- described above, the court reasoned that it
whether Congress acted legislatively when neys in connection with its work for the lacked the authority to engage in a line-
it did so. The court does not appear to President. If this is the case, at the very by-line review of the subpoena in an
have considered the ethical conflict raised least the firm might argue that its commu- attempt to narrow its scope. In this context,
by the plaintiffs; presumably, compliance nications with the President and his staff however, it would appear that, at the very
with a court order to turn over materials concerning the firm’s accounting work fall least, the accounting firm may argue that
sought by a subpoena subsequently found within the Kovel privilege; as such, the a subpoena seeking essentially all aspects
valid by a federal court will provide the subpoena should be modified to omit those of the firm’s work for the President over
accounting firm with a defense against a period of multiple years represents an
any claims that it violated AICPA ethics undue burden and that retaining attorneys
standards. Of course, the President has a to compile, review, and produce such a
right to appeal the court’s decision (and vast amount of financial information pre-
in fact filed an appeal the day after the The subpoena, if sents an undue expense. There may also
court issued its ruling), but the court be a valid argument that a request seeking
refused to grant a stay of its ruling pend- ultimately enforced, will both finalized statements and reports, as
ing appeal. Thus, unless the court of well as all underlying source material, is
appeals reverses and finds that a stay have a chilling effect on unreasonably cumulative and duplicative.
pending the appeal is warranted, it appears
that the accounting firm will have little the relationship between A Question of Trust
choice but to comply with the subpoena. CPAs are trusted advisors who often
taxpayers and their enjoy long-term and close relationships
Kovel Challenge with clients and become intimately famil-
Of course, while the argument described accountants. iar with clients’ personal financial lives.
above may ultimately have merit in the The Oversight Committee’s subpoena to
context of a Congressional subpoena issued the President’s accountants includes
to a president’s accountants, it is unlikely requests for detailed financial information
that a similar argument can be made in the during a period when Mr. Trump was a
case of an accounting firm that is on the private citizen and operated private com-
receiving end of a similarly broad subpoena communications. One way or the other, panies. If ultimately enforced in all
seeking information from a less high-profile the case offers a useful reminder that, respects, the subpoena will establish a
client. Therefore, more traditional when working with a high-profile client troubling precedent that is likely to under-
approaches to responding to a subpoena or otherwise engaged in a potentially sen- mine future relationships between accoun-
should be explored. sitive matter, it often makes sense to work tants and their clients. It is hoped that
One of the most common responses to closely with tax counsel to help ensure that Congress or the courts will endeavor to
a subpoena seeking underlying work prod- the Kovel privilege is available in any sub- limit future subpoenas that threaten to
uct and communications between an sequent litigation. undermine the special relationship of trust
accountant and a client is the privilege rec- between CPAs and their clients. q
ognized in U.S. v. Kovel [296 F.2d 918 Other Challenges
(2d Cir. 1961)]. In Kovel, an accountant Finally, a party may seek to quash or Brian P. Ketcham, JD, is an associate at
refused to answer questions posed by a modify a subpoena if it can show that it Kostelanetz & Fink, LLP, New York, N.Y.

JULY 2019 / THE CPA JOURNAL 59