Document Retention or Destruction
Spelling Out Louisiana's Rules

By Tom Fischer

Events over the last several months have highlighted the importance of having a written policy dealing with the retention and destruction of documents generated or collected during an engagement. For years, the Treasury Department has had regulations dealing with the retention of income tax returns, claims for refund and related information. But the majority of states have not adopted rules concerning document retention that apply specifically to CPAs. However, for nearly ten years Louisiana has had a specific statute (La. R.S. 37:89) that attempts to spell out when you may discard documents after an engagement, and thereby insulate yourself from civil damages that otherwise might be claimed as a result of the destruction of the documents. Although this statute never has been interpreted by a court, it provides ample guidelines for the establishment of and adherence to a routine document retention and destruction policy.

Before adopting a written policy on document retention, you must give primary consideration to the nature of your practice. Tax practitioners must draft their policy to comply with federal and state regulations concerning the retention of documents. Some clients may incorporate specific document retention requirements in the engagement letter. CPAs who conduct compliance audits for governmental agencies and entities may well be subject to specific requirements concerning document retention. CPA firms engaged in audits of insurance companies may be required to retain audit work papers for a period of five years. Finally, if you perform work in a state other than Louisiana, you should investigate the possibility of any unique requirements in that state.

However, one thing is certain. Document retention and destruction should be pursuant to a written policy that is applied consistently. The destruction of client documents on a random, case-by-case basis is asking for trouble if problems arise in the future. The statute discussed below is an attempt by the Louisiana legislature to give some certainty to most Louisiana CPAs concerning document retention and destruction.

Background
In 1992, the legislature added a provision to the then applicable accounting statute which provided guidelines to accountants concerning the retention of documents. When the Louisiana Accountancy Act of 1999 was enacted, the substance of this provision was carried forward into the new act as La. R.S. 37:89.

Although, as with most state laws, the legislative history, and therefore the reason for passing the law, is sketchy, one can look at the legal situation facing CPAs in 1992 and divine the purpose of the law.

In 1992, no legal privilege existed between CPAs and their clients to protect documents from production in lawsuits involving former or present clients.1A party suing a CPA’s client merely had to request that a court issue a subpoena to a CPA to produce that client’s documents. In many types of civil litigation, those subpoenas were easy to secure and frequently issued.
Furthermore, particularly with small clients, CPAs ran the risk of becoming document depositories for their clients. “See my accountant” likely was a common refrain for many small companies when a financial document was requested either by friend or foe. Without some guidelines from the legislature, CPAs faced the danger of either incurring the expense of retaining documents relevant to an engagement indefinitely, or disposing of those documents and running the risk of a lawsuit from a client or third person. The document retention law sought to achieve a balance between the public’s need for information generated by accountants with the unfairness of requiring CPAs either to retain documents forever or to destroy documents at their own risk.

The Law
The “general rule concerning document destruction” is contained in Section 89A of the Louisiana Accountancy Act:

A. No licensee who has retained documents generated during, or relevant to, the performance of an engagement for at least three years after completion of that engagement shall have any obligation to a client or any other party to continue to retain such documents. After the expiration of three years from the completion of any engagement, such licensee performing that engagement may dispose of all documents generated during the course of, or relevant to, that engagement by any means, including physical destruction, without thereby incurring liability for damages in tort, contract, or quasi contract to any person.

Section 89B specifically states that the term “document”, as used in Section 89, is to be defined as broadly as it is defined for purposes of the civil discovery provisions of the Louisiana Code of Civil Procedure. Therefore, any “document” which can be discovered in a civil lawsuit also can be destroyed if the requirements of Section 89 are met. The term “licensee” is defined in La. R.S. 37:73 as the holder of a license, that is a certificate of a certified public accountant or a permit to practice as a CPA firm issued in accordance with the Louisiana Accountancy Act.

The general rule is broad. It applies to “documents generated during or relevant to the performance of an engagement”. However, the general rule is subject to exceptions.

Exceptions to the Rule
The exceptions to the general rule concerning document destruction are contained in Section 89C:

C. If a licensee receives written notice of the commencement of a review panel pursuant to Part II of this Chapter or any judicial proceeding or ethical investigation arising out of or relating to his or its performance of any engagement, then the effect of Subsections A
and B of this Section shall be suspended until the termination of the review panel, judicial proceeding or ethical investigation. A judicial proceeding shall be terminated by final judgment. An investigation or administrative proceeding arising therefrom shall be terminated by written notice by the administrative, regulatory, or professional society of termination of the investigation or proceeding. A review panel shall be terminated as provided in Part II of this Chapter.

In order for one of the exceptions to apply, a CPA must receive written notice before a document has been destroyed of the commencement of one of the following proceedings:

1. A review panel under Louisiana law – a public accountant review panel must review all claims against CPAs unless there is an agreement to submit a claim to binding arbitration;

2. A judicial proceeding;

3. An administrative, regulatory, or professional investigation or proceeding arising from the investigation.

If you do not receive written notice of such a proceeding, then you cannot be
held civilly liable for destroying documents three years after the completion of an engagement.

Some important caveats must be noted. This statute protects you from civil liability if you destroy documents in accordance with the rules established in the statute. It does not bar a person from seeking production of documents from you, even after the three year period, if a document still exists because you have not destroyed it. The adoption and consistent implementation of a written document retention and destruction policy is the way to avoid this problem.

Secondly, the statute is designed to shield you from liability for damages if you comply with its terms. It does not specifically speak to criminal liability. Asnoted at the outset of this article, courts have yet to interpret the extent of the protection given to you by this statute. So let us assume that you are made aware through media publicity or otherwise that you or a client is under criminal investigation for an engagement that was completed thirty-seven months ago. You have not received any written notice of a judicial proceeding as is called for in Section 89C, but you are aware of the criminal investigation. Can you destroy the documents from the engagement? Good faith, consistent compliance with the document retention policy might give you a good argument that there was no violation of a criminal statute, or at least no criminal intent. However, this is an area fraught with peril, and you should contact your counsel before taking any action.

Keep Your Client Informed
La. R.S. 37:87 and State Board Rule 1705 entitles clients to obtain copies of certain work papers. The relevant Board Rule reads as follows:

2. Records. A licensee shall furnish to his client or former client upon request:

1. A copy of a tax return of the client; and
2. A copy of any report, or other document, issued by the licensee to or for such client; and
3. Any accounting or other records belonging to, or obtained from, or on behalf of, the client which the licensee removed from the client’s premises or received for
   the clients account, but the licensee may make and retain copies of such documents when they form the basis for work done by him; and
4. A copy of the licensee’s working papers, to the extent that such working papers include records which would ordinarily constitute part of the client’s books and records and are not otherwise available to the client;
5. Examples of records described in this Section include but are not limited to computer generated books of original entry, general ledgers, subsidiary ledgers, adjusting, closing and reclassification entries, journal entries and depreciation schedules, or their equivalents.
6. The information should be provided in the medium in which it is requested if it exists in that format (for example electronic or hard copy). The licensee is not required to convert information to another format.
7. The requested information shall be furnished by the licensee to the client in a timely manner.
8. A licensee is not required to retain any documents beyond the period prescribed in R.S. 37:89.
   

3. The nonpayment of professional fees and/or out-of-pocket expenses shall not be a basis for failure to furnish the records referred to in §1705.B.3, 4 and/or 5. A licensee shall be permitted to collect in advance of issuance a reasonable fee for time and expenses of issuing or reproducing documents referred to in §1705.B.1, 2, 4 and 5.

Although neither the statute nor the rule requires you to advise a client when documents are to be destroyed, doing so may help you avoid any misunderstanding or loss of good will.

Closing Thoughts
Having the right to destroy documents is one thing. If you choose to destroy documents in accordance with Section 89 of the Louisiana Accountancy Act, make sure they are destroyed. Certainty obviously can be achieved by doing it yourself. However, depending upon the size of your practice, the time and expense of such an undertaking may be daunting. The geometric increase of paper in today’s business world has spawned companies who provide document destruction services. However, buyer beware! When investigating this alternative choose a reputable company, bonded and insured, who will provide separate receptacles at your office in which documents to be destroyed can be placed, and pick-up service by its employees at your office for delivery to its destruction facility. Such a service gives you a tight “chain of custody” of documents and provides to you the greatest comfort that you cannot be blamed if a document somehow is not destroyed. You do not want to face the anger of a client, or worse, the defense of a lawsuit, if a document destined for the shredder instead finds its way into unfriendly hands.

Finally, the adoption of a written policy for document retention and destruction need not be a time consuming puzzle. A model written policy can be found on the LCPA’s Web site (www.lcpa.org) under Professional Issues, which can be updated and adapted to your particular needs. Such a neutral policy applied as part of your normal business operating procedures can help to reduce your risks in the future.

1 As discussed in the November 2001 issue of Lagniappe, pp. 4-7, the new statute granting a legal privilege to most discussions between a CPA and his clients now restricts the amount of information that you must disclose to third parties.

Editor’s Note: Tom Fischer is a partner in the New Orleans firm of Simon, Peragine, Smith & Redfearn, L.L.P.

His practice consists primarily of complex commercial litigation, including the defense of accounting malpractice suits. He and his firm have assisted the LCPA in drafting many of the Louisiana statutes relating to CPAs, including the 1999 Louisiana Accountancy Act.