The Accountant’s Discovery Obligations Under the Texas Client-Confidentiality Statute

Accountants responding to discovery requests in litigation or to a third-party document subpoena must carefully navigate their client confidentiality obligations. In Texas, those obligations can be found in the Public Accountancy Act under a section entitled “Accountant-Client Privilege.” See Tex. Occ. Code §901.457. But this title may be a misleading misnomer. Texas courts have concluded that this statute does not, in fact, create an evidentiary privilege. Rather, what it does is impose on the accountant strict client-confidentiality obligations that can trap the unwary in responding to discovery. 

The Accountant-Client Privilege as an Evidentiary Privilege

The starting point is to identify the appropriate governing law and determine whether that law provides a basis for refusing to produce client communications. Some states have enacted statutes that expressly protect accountant-client communications from disclosure during legal proceedings pursuant to an evidentiary privilege, which is similar to the attorney-client privilege. For example, Illinois law provides: “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.” 225 Ill. Comp. Stat. Ann. §450/27; see also Col. Stat. §13-90-107(1)(f) (“A certified public accountant shall not be examined without the consent of his or her client as to any communication made by the client to him or her in person or through the media of books of account and financial records or his or her advice, reports, or working papers….”). 

When determining whether a confidentiality statute creates a privilege that bars otherwise lawful discovery, courts have a “duty to avoid a construction that would suppress otherwise competent evidence unless the statute, strictly construed, requires such a result.” In re Grand Jury Investigation, 2017 WL 11140345, at *3 (D.D.C. Oct. 23, 2017). And if the statute does not have the word “privilege” or other language that purports to make documents immune from discovery, the statute does not create an evidentiary privilege. See Lawrence v. Van Aken, 2004 WL 228989, at *5 (W.D. Mich. Jan. 14, 2004), aff’d, 316 F. Supp. 2d 547 (W.D. Mich. 2004) (“Conspicuously absent from either the text of the rule or the Michigan cases decided thereunder is any indication that the rule creates an evidentiary privilege. The text of the rule does not mention the word “privilege,” nor does it purport to make the files of the JTC immune from discovery in a proper civil or criminal action.”).

Courts interpreting the Texas statute have concluded that “accountant-client communications are confidential, but not privileged.” Cantu v. TitleMax, Inc., 2015 WL 5944258, at *6 (W.D. Tex. Oct. 9, 2015); see also, In re Arnold, 2012 WL 6085320, at *3 (Tex. App.—Corpus Christi Nov. 30, 2012, mand. dism’d) (“[T]he existence of an accountant-client privilege based on section 901.457 is doubtful.”). Although Texas courts have not provided any in-depth analysis for this conclusion, some have pointed to the line of case law stating “statutory provisions providing for duties of confidentiality do not automatically imply the creation of evidentiary privileges binding on courts.” In re Patel, 218 S.W.3d 911, 920 n.6 (Tex. App.—Corpus Christi 2007, no pet.) (quoting Pearson v. Miller, 211 F.3d 57, 68 (3d Cir. 2000). It is also important to note that, even though the statute’s heading is “Accountant-Client Privilege,” the section’s text does not contain the word “privilege” or otherwise use language that purports to make client documents immune from discovery. See Tex. Occ. Code, §901.457. And under the Texas Code Construction Act, its heading carries little weight when construing the meaning of the section’s language. Tex. Gov’t Code §311.024 (“The heading of a title, subtitle, chapter, subchapter, or section does not limit or expand the meaning of a statute.”). 

Several other jurisdictions, including California and New York who have accountant-client confidentiality statutes similar to that of Texas, do not recognize the existence of an evidentiary privilege. See Quantlab Group, LP v. Dempster, 2019 WL 6913303 (S.D. Tex. Aug. 17, 2019) (interpreting Cal. Bus. & Prof. Code §5063.3 and granting motion to compel accountant documents); United States v. People v. PriceWaterhouseCoopers, LLP, 150 A.D. 3d 578 (N.Y Ct. App. 2017) (“New York does not recognize an accountant-client privilege.”). Federal courts also refuse to recognize an accountant-client evidentiary privilege. Arthur Young & Co., 465 U.S. 805, 817, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984).

In short, if Texas law governs the accountant’s obligations to respond to discovery requests, it is doubtful the court will recognize an accountant-client evidentiary privilege that would serve as a basis for the accountant to refuse to produce the documents.

The Accountant Should Seek Client Input and Permission Before Producing Client Documents

If an accountant-client evidentiary privilege does not apply, an accountant should next consider his client-confidentiality obligations before producing documents. The Texas statute, for example, sets forth the cardinal rule that a license holder cannot disclose confidential client information without permission from the client:

A license holder or a partner, member, officer, shareholder, or employee of a license holder may not voluntarily disclose information communicated to the license holder or a partner, member, shareholder, or employee of the license holder by a client in connection with services provided to the client by the license holder or a partner, member, shareholder, or employee of the license holder, except with the permission of the client or the client’s representative. Tex. Occ. Code, §901.457(a).  

Thus, the best practice is sharing the discovery request with that client and seeking the client’s written permission before producing documents. If the client raises legitimate concerns about the scope of document requests, the accountant can work hand-in-hand with the client to serve appropriate objections and confer with the opposing counsel to limit the scope or types of client documents produced. Once the scope of discovery is sufficiently narrowed to the client’s satisfaction, the client may then give his permission to produce.

If Permission is Not Possible, the Accountant Should Seek an Appropriate Court Order 

If, for some reason, the client cannot or refuses to give permission, the Texas client-confidentiality statute provides for an exception that applies to civil litigation. Specifically, it states:

This section does not prohibit a license holder from disclosing information that is required to be disclosed…

  • (3) under a court order signed by a judge if the order:
    • (A) is addressed to the license holder;
    • (B) mentions the client by name; and
    • (C) requests specific information concerning the client[.]

901.457(b)(3).  One Texas appellate court concluded that a trial court’s denial of a motion to quash a subpoena for records from a party’s accountant, in effect, satisfies the court order requirement in section 901.457. In re Patel, 218 S.W.3d 911, 921 (Tex. App.—Corpus Christi 2007, no pet.).  

If, however, the client’s permission is not forthcoming and there is no independent, good-faith basis for objecting to the request for documents, the accountant continues to owe a duty of confidentiality and should obtain an appropriate court order before producing the documents. In such cases, the best practice would be to work with the requesting party’s attorney and seek from the court an unopposed order compelling the production of those client documents. That order should, as required by the Texas statute, be addressed to the accountant license holder, identify the accountant’s client, and specifically identify the client information to be produced. 

In conclusion, an accountant responding to discovery in litigation must always consider client-confidentiality obligations before producing. Although some jurisdictions protect accountant-client communications from discovery, the Texas courts that have considered the issue have, so far, concluded there is no such evidentiary privilege in Texas. Despite its title, the Texas “Accountant-Client Privilege” statute has been interpreted to impose client-confidentiality obligations on the license holder, and nothing more. When a Texas license holder responds to discovery requests, the best practice is to work closely with the client and obtain his permission to produce the client communications. If permission is not forthcoming, the accountant should obtain an appropriate court order.

DAVID MCATEE
JEFFREY PRICE
By | 2021-05-24T16:22:51+00:00 May 14th|Press Release|0 Comments