As many accountancy firms will testify, a request from a (typically former) client for access to the accountant's file of papers can often be the precursor to a professional negligence action. The need to ensure that accountants are aware of their rights and obligations in this context cannot be overstated; it can make all the difference from a claims perspective.
The basic principles:
- Documents belonging to clients must be given to clients (or their agents) promptly on request or on ceasing to hold office, except in circumstances whereby the accountant is able to exercise a right of lien;
- For documents belonging to the accountant, the decision whether or not to allow a client to inspect the documents rests with the accountant. The client does not have a right to demand access.
The question of ownership:
In order to determine whether documents belong to the client or the accountant, it is necessary to consider (i) the contract between the accountant and the client (typically evidenced by the engagement letter), (ii) the capacity in which the accountant has undertaken the work and (iii) the purpose for which the documents have been created.
The ICAEW recommends that accountants should make express provision regarding the issue of ownership of documents in the initial engagement letter. Any specific agreement reached between the accountant and the client will override all other considerations.
Assuming there is no specific agreement with the client, it is important to consider whether the accountant acted as 'principal' or 'agent.' In practice, an agency relationship is likely to be the least common, but may exist (for example) in circumstances whereby the accountant is instructed to negotiate a client's tax liability with HMRC. In an agency situation, the Court of Appeal has determined that documents created by an agent belong to the client.
However, that proposition is reversed when the accountant acts as principal, for example when acting as an auditor or on a consultancy/advisory basis such as giving tax or other advice to the client. Whilst the end product of the work, such as the auditor's report, belongs to the client (who has ultimately paid for the work product), documents created during the course of the engagement (including but not limited to drafts, working papers or internal file notes) are typically the property of the accountant.
The above principles have recently been reinforced by the Senior Courts Costs Office, albeit in the context of a claim against a firm of solicitors, but for which the same principles apply. The Court reiterated the principle that it was for the claimants to show that they were entitled, as of right, to receive copies of the defendant's property, notwithstanding their agreement to pay the cost of supplying it.
If a client requests access to documents that belong to them, the accountant should grant access, subject to any considerations of lien.
The client's agenda underpinning the request for access to the accountant's papers will often dictate an accountant's overall willingness to supply documents that belong to them.
It is a delicate balancing act. On the one hand, supplying a copy of the full file of papers may increase the overall likelihood of a professional negligence claim against the accountant. That may be the case even where it seems to the accountant that no obvious litigation risk exists.
On the other hand, permitting access to the full file of papers (including drafts and working papers) can often create an element of transparency and openness. Clients, or liquidators/Administrators, can be influenced against pursuing bad claims through a transparent approach.
A further important factor in the equation is the likelihood (or otherwise) that the parties will end up in litigation. If a claim does materialise, the accountant will be ordered to supply the documents under the the standard disclosure process if they are 'relevant' to the dispute between the parties, notwithstanding considerations of ownership. If documents disclosed at the disclosure stage of proceedings are going to cause damage in the context of the claim, it may be better to recognise this and pursue a strategy based upon early full or partial disclosure and settlement. Litigation (with all the attendant costs consequences) may be avoidable with some disclosure provided in the first instance.
The decisions taken in relation to granting access to the papers at the very outset of a matter can have a monumental impact on the direction of a potential claim by the client. Adopting the right strategy at the right time may avoid a claim altogether.
Regardless of the decision taken, the accountant should always remember to keep a copy and a complete record of the papers disclosed to the client. That is particularly important in the context of supplying original files.
It is important to stress that this article is only intended to cover the basic principles.