The Accountant-Client Privilege in Illinois

Illinois recognizes an accountant-client privilege.  Though limited, it allows accountants to shield certain documents and communications from disclosure in litigation. 

Source of the Privilege

The privilege is codified in Section 27 of the Illinois Public Accounting Act.  In relevant part, Section 27 establishes that 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.”[1]  As this language indicates, it is the accountant, not the client, who “shall not be required” to disclose information.  Therefore, only the accountant can assert the privilege.[2]

Scope of the Privilege

The Illinois Public Accounting Act

As set forth in Section 27, the accountant-client privilege only protects documents the accountant obtains in his or her “confidential capacity as a licensed or registered CPA.”  While the Act does not define the precise term “capacity as a licensed or registered CPA,” it does come close in that Section 8 defines “practicing as a licensed CPA.”  This occurs any time a CPA “sign[s], affix[s] or associate[s]” his or her name “to any report expressing or disclaiming an opinion on a financial statement based on an audit or examination of that statement, or expressing assurance on a financial statement.”[3]  Further, Section 8.05 adds a non-exhaustive list of “accountancy activities,” which include “accounting, management, financial or consulting services, compilations, internal audit[s], preparation of tax returns, furnishing advice on tax matters, bookkeeping, or representations of taxpayers” or “the teaching of any of these areas at the college or university level.”[4]  In short, the Act offers significant guidance as to what kinds of material accountants can shelter under the privilege. 

Illinois Case Law

Illinois courts have imposed some concrete limits on the accountant-client privilege.  For example, the privilege does not cover information derived from an accountant’s “nonfinancial services.”[5]  Further, accountants can only shield information their clients actually provide them.  As such, documents like an accountant’s workpapers are not privileged.[6]    

These restrictions aside, no Illinois court has articulated a blanket rule for what qualifies as protected information under the Act.   Instead, they have examined the issue on a case-by-case basis, relying on the same four-factor test courts use to determine whether to establish any privilege against disclosing communications:

  1. The communications must originate in a confidence that they will not be disclosed;
  2. This element of confidentiality must be essential to the full and satisfactory maintenance of the relation between the parties; 
  3. The relation must be one which in the opinion of the community ought to be sedulously fostered; and
  4. The injury that would inure to the relation by the disclosure of the communications must be greater than the benefit thereby gained for the correct disposal of litigation.[7]

Most disputes over the privilege concern the first element: “The communications must originate in a confidence that they will not be disclosed.”  In particular, courts have had to decide whether the information was disclosed or meant to be disclosed to third parties.

In Grand Jury No. 746, a grand jury investigating a couple’s alleged underpayment of occupation taxes and state income taxes subpoenaed documents from their accountant.[8]  The subpoena requested any documents the couple gave to the accountant to prepare their taxes.[9]  The accountant moved to quash on the grounds that documents from his clients were protected by the privilege in Section 27.[10]  But the Illinois Supreme Court disagreed.  Specifically, the Court deemed the privilege inapplicable because the couple did not provide the documents with the expectation the accountant would keep them confidential.  Indeed, the couple gave him documents with the intention he would at least pass the information on them to a third party – the government.[11]  As such, the communications did not satisfy the first element of the privilege test.

Conversely, when the documents are not prepared for third parties, the privilege will attach.  FMC is an example.  There, FMC filed a declaratory judgment suit in California to require a group of insurers to provide coverage for claimed environmental liabilities against FMC.[12]  Illinois subpoenas were served against KPMG, a nonparty in the California suit, seeking records from audits it did for FMC.  KPMG moved to quash, arguing Section 27 protected the records from disclosure.[13] 

According to the First District, the “majority of the documents requested” fell within the accountant privilege.[14]  The main factor was that FMC did not hire KPMG to prepare tax returns, SEC filings or any other documents intended to be filed with a third party.[15]  This meant KPMG could withhold requested documents concerning FMC’s environmental costs or liabilities, or bilateral communications between FMC and KPMG about those subjects.  On the other hand, the Court ordered KPMG to produce any documents prepared for filing with third parties, given voluntarily to third parties or received from third parties.[16]

Even if the document is not intended for third parties, the privilege evaporates when they are voluntarily disclosed to third parties.  So it was in Brunton, where an accountant refused to produce documents in response to a subpoena from one party in an underlying will contest.[17]  The accountant’s firm had already produced the documents in response to a subpoena from the opposing party.[18]  After a detailed analysis, the Illinois Supreme Court held that the documents did fit within Section 27’s privilege, but the privilege was waived because the documents had already been disclosed voluntarily.[19][20]

As these cases demonstrate, the accountant-client privilege is limited.  Courts are only apt to bar disclosure when the accountant has been hired for reasons other than a government filing and the accountant has not already given the disputed information to a third party.  As at least the first situation is a common reason for hiring an accountant, this narrows the circumstances where the privilege would apply.

Terry Brennan represents financial professionals – including accountants – in a wide variety of matters. For more information, see the “Practice Areas” section of this website.

[1] 25 ILCS 450/27

[2] Brunton v. Kruger, 2015 IL 117663, ¶46; See FMC v. Liberty Mutual Ins., 236 Ill. App. 3d 355, 357 n.1 (1st Dist. 1992).

[3] 25 ILCS 450/8

[4] 25 ILCS 450/8.05(a)(3); See Brunton, 2015 IL at ¶21.

[5] Stopka v. American Family Mut. Ins. Co., Inc., 816 F. 3d 516, 526 (N.D. Ill. 2011).

[6] In re October 1985 Grand Jury No. 746, 124 Ill. 2d 466, 477 (1988).

[7] Id. at 475; FMC, 236 Ill. App. 3d at 358; See Stopka, 816 F. 3d at 525.

[8] In re October 1985 Grand Jury No. 746, 124 Ill. 2d at 470.

[9] Id. at 469-470.

[10] Id.

[11] Id. at 477.

[12] FMC, 236 Ill. App. 3d at 356.

[13] Id.

[14] Id. at 360.

[15] Id. at 359.

[16] Id. at 360-361.

[17] Brunton, 2015 IL at ¶¶7-8.

[18] Id. at ¶7.

[19] Id. at ¶¶87-88.

[20] The Court also ruled disclosure was not involuntary, simply because the accountant’s firm disclosed pursuant to a subpoena. Id. at ¶¶85.

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