Respondent certified public accountant firm, as the independent
auditor for respondent corporation, was responsible for reviewing
the corporation's financial statements as required by the federal
securities laws. In the course of reviewing these statements, the
accounting firm verified the corporation's statement of its
contingent tax liabilities, and, in so doing, prepared tax accrual
workpapers relating to the evaluation of the corporation's reserves
for such liabilities. When a routine audit by the Internal Revenue
Service (IRS) to determine the corporation's income tax liability
for certain years revealed that the corporation had made
questionable payments from a "special disbursement account," the
IRS instituted a criminal investigation of the corporation's tax
returns. In that process, the IRS, pursuant to § 7602 of the
Internal Revenue Code of 1954 -- which authorizes the Secretary of
the Treasury to summon and "examine any books, papers, records, or
other data which may be relevant or material" to a particular tax
inquiry -- issued a summons to the accounting firm requiring it to
make available to the IRS all of its files relating to the
corporation, including its tax accrual workpapers. When the
corporation instructed the accounting firm not to comply with the
summons, the IRS commenced an enforcement action in Federal
District Court, which, upon finding that the tax accrual workpapers
were relevant to the IRS investigation within the meaning of § 7602
and refusing to recognize an accountant-client privilege that would
protect the workpapers, ordered the summons enforced. The Court of
Appeals affirmed in part and reversed in part. While agreeing that
the workpapers were relevant to the IRS investigation, the court
held that the public interest in promoting full disclosure to
public accountants, and in turn ensuring the integrity of the
securities markets, required protection under a work-product
immunity doctrine for the work that independent auditors perform
for publicly owned corporations. Accordingly, because it found that
the IRS had not made a sufficient showing of need to overcome the
immunity and was not seeking to prove fraud on the corporation's
part, the court refused to enforce the summons insofar as it sought
the tax accrual workpapers.
Held:
1. The tax accrual workpapers are relevant within the meaning of
§ 7602. As § 7602's language indicates, an IRS summons is not to
be
Page 465 U. S. 806
judged by the relevance standards used in deciding whether to
admit evidence in court. The language "may be" reflects Congress'
intention to allow the IRS to obtain items of even potential
relevance to the ongoing investigation, without reference to its
admissibility. As a discovery tool, a § 7602 summons is critical to
the IRS's investigative and enforcement functions. That the tax
accrual workpapers are not actually used in the preparation of tax
returns by the taxpayer or its accountants does not bar a finding
of relevance within the meaning of § 7602. Pp.
465 U. S.
813-815.
2. The tax accrual workpapers are not protected from disclosure
under § 7602. Pp.
465 U. S.
815-821.
(a) While § 7602 is subject to traditional privileges and
limitations, any other restrictions upon the IRS summons power
should be avoided "absent unambiguous directions from Congress."
United States v. Bisceglia, 420 U.
S. 141,
420 U. S. 150.
There are no such unambiguous directions that would justify a
judicially created work-product immunity doctrine for tax accrual
workpapers summoned under § 7602. Indeed, § 7602 reflects a
congressional policy favoring disclosure of all information
relevant to a legitimate IRS inquiry. Pp.
465 U. S.
815-817.
(b) In light of
Couch v. United States, 409 U.
S. 322, which held that no confidential
accountant-client privilege exists, the Court of Appeals' creation
of a work-product privilege was misplaced, and conflicts with
Congress' clear intent. P.
465 U. S. 817.
(c) Nor is a work-product immunity for accountants' tax accrual
workpapers a fitting analogue to the attorney work-product
doctrine. An independent certified public accountant performs a
different role from an attorney, whose duty, as his client's
confidential adviser and advocate, is to present the client's case
in the most favorable possible light. In certifying the public
reports that depict a corporation's financial status, the
accountant performs a public responsibility transcending any
employment relationship with the client, and owes allegiance to the
corporation's creditors and stockholders, as well as to the
investing public. Pp.
465 U. S.
817-818.
(d) The integrity of the securities markets will not suffer
absent some protection for accountants' tax accrual workpapers. The
independent auditor's obligation to serve the public interest
assures that that integrity will be preserved, without the need for
a work-product immunity for such workpapers. Pp.
465 U. S.
818-819.
(e) Nor does enforcement of an IRS summons for accountants' tax
accrual workpapers give the IRS an unfair advantage in negotiating
and litigating tax controversies. Since the Securities and Exchange
Commission or a private plaintiff in securities litigation would be
entitled to obtain the tax accrual workpapers at issue, there is no
good reason, in
Page 465 U. S. 807
light of § 7602's broad congressional command, for conferring
lesser authority upon the IRS. Pp.
465 U. S.
820-821.
677 F.2d 211, affirmed in part, reversed in part, and
remanded.
BURGER, C.J., delivered the opinion for a unanimous Court.
CHIEF JUSTICE BURGER delivered the opinion of the Court.
We granted certiorari to consider whether tax accrual workpapers
prepared by a corporation's independent certified public accountant
in the course of regular financial audits are protected from
disclosure in response to an Internal Revenue Service summons
issued under § 7602 of the Internal Revenue Code of 1954 (Code), 26
U.S.C. § 7602.
Page 465 U. S. 808
I
A
Respondent Arthur Young & Co. is a firm of certified public
accountants. As the independent auditor for respondent Amerada Hess
Corp., Young is responsible for reviewing the financial statements
prepared by Amerada as required by the federal securities laws.
[
Footnote 1] In the course of
its review of these financial statements, Young verified Amerada's
statement of its contingent tax liabilities, and, in so doing,
prepared the tax accrual workpapers at issue in this case. Tax
accrual workpapers are documents and memoranda relating to Young's
evaluation of Amerada's reserves for contingent tax liabilities.
Such workpapers sometimes contain information pertaining to
Amerada's financial transactions, identify questionable positions
Amerada may have taken on its tax returns, and reflect Young's
opinions regarding the validity of such positions.
See
infra at
465 U. S.
810-813.
In 1975, the Internal Revenue Service began a routine audit to
determine Amerada's corporate income tax liability for the tax
years 1972 through 1974. When the audit revealed that Amerada had
made questionable payments of $7,830 from a "special disbursement
account," the IRS instituted a criminal investigation of Amerada's
tax returns as well. In that process, pursuant to Code § 7602, 26
U.S.C. § 7602, [
Footnote 2] the
IRS
Page 465 U. S. 809
issued an administrative summons to Young, which required Young
to make available to the IRS all its Amerada files, including its
tax accrual workpapers. Amerada instructed Young not to comply with
the summons.
The IRS then commenced this enforcement action against Young in
the United States District Court for the Southern District of New
York.
See 26 U.S.C. § 7604. [
Footnote 3] Amerada intervened, as permitted by 26 U.S.C.
§ 7609(b)(1). [
Footnote 4] The
District Court found that Young's tax accrual workpapers were
relevant to the IRS investigation within the meaning of § 7602, and
refused to recognize an accountant-client privilege that would
protect the workpapers.
496 F.
Supp. 1152, 1156-1157 (1980). Accordingly, the District Court
ordered the summons enforced.
B
A divided United States Court of Appeals for the Second Circuit
affirmed in part and reversed in part. 677 F.2d 211
Page 465 U. S. 810
(1982). The Court of Appeals majority agreed with the District
Court that the tax accrual workpapers were relevant to the IRS
investigation of Amerada, but held that the public interest in
promoting full disclosure to public accountants, and in turn
ensuring the integrity of the securities markets, required
protection for the work that such independent auditors perform for
publicly owned companies. Drawing upon
Hickman v. Taylor,
329 U. S. 495
(1947), and Federal Rule of Civil Procedure 26(b)(3), the Court of
Appeals fashioned a work-product immunity doctrine for tax accrual
workpapers prepared by independent auditors in the course of
compliance with the federal securities laws. Because the IRS had
not demonstrated a sufficient showing of need to overcome the
immunity and was not seeking to prove fraud on Amerada's part, the
Court of Appeals refused to enforce the summons insofar as it
sought Young's tax accrual workpapers.
One judge dissented from that portion of the majority opinion
creating a work-product immunity for accountants' tax accrual
workpapers. The dissent viewed the statutory summons authority, 26
U.S.C. § 7602, as reflecting a congressional decision in favor of
the disclosure of such workpapers. The dissent also rejected the
policy justifications asserted by the majority for an accountant
work-product immunity, reasoning that such protection was not
necessary to ensure the integrity of the independent auditor's
certification of a corporation's financial statements.
We granted certiorari, 459 U.S. 1199 (1983). We affirm in part
and reverse in part.
II
Corporate financial statements are one of the primary sources of
information available to guide the decisions of the investing
public. In an effort to control the accuracy of the financial data
available to investors in the securities markets, various
provisions of the federal securities laws require
Page 465 U. S. 811
publicly held corporations to file their financial statements
with the Securities and Exchange Commission. [
Footnote 5] Commission regulations stipulate that
these financial reports must be audited by an independent certified
public accountant in accordance with generally accepted auditing
standards. [
Footnote 6] By
examining the corporation's books and records, the independent
auditor determines whether the financial reports of the corporation
have been prepared in accordance with generally accepted accounting
principles. [
Footnote 7] The
auditor then issues an opinion as to whether the financial
statements, taken as a whole, fairly present the financial position
and operations of the corporation for the relevant period.
[
Footnote 8]
See
n 13,
infra.
Page 465 U. S. 812
An important aspect of the auditor's function is to evaluate the
adequacy and reasonableness of the corporation's reserve account
for contingent tax liabilities. This reserve account, known as the
tax accrual account, the noncurrent tax account, or the tax pool,
represents the amount set aside by the corporation to cover
adjustments and additions to the corporation's actual tax
liability. Additional corporate tax liability may arise from a wide
variety of transactions. [
Footnote
9] The presence of a reserve account for such contingent tax
liabilities reflects the corporation's awareness of, and
preparedness for, the possibility of an assessment of additional
taxes.
The independent auditor draws upon many sources in evaluating
the sufficiency of the corporation's tax accrual account.
Initially, the corporation's books, records, and tax returns must
be analyzed in light of the relevant Code provisions, Treasury
Regulations, Revenue Rulings, and case law. The auditor will also
obtain and assess the opinions, speculations, and projections of
management with regard to unclear, aggressive, or questionable tax
positions that may have been taken on prior tax returns. In
exploring the tax consequences of certain transactions, the auditor
often engages in a "worst-case" analysis in order to ensure that
the tax accrual account accurately reflects the full extent of the
corporation's exposure to additional tax liability. From this
conglomeration of data, the auditor is able to estimate the
potential cost of each particular contingency, as well as the
probability that the additional liability may arise.
The auditor's tax accrual workpapers record this process of
examination and analysis. Such workpapers may document the
auditor's interviews with corporate personnel, judgments on
questions of potential tax liability, and suggestions for
alternative
Page 465 U. S. 813
treatments of certain transactions for tax purposes. Tax accrual
workpapers also contain an overall evaluation of the sufficiency of
the corporation's reserve for contingent tax liabilities, including
an item-by-item analysis of the corporation's potential exposure to
additional liability. In short, tax accrual workpapers pinpoint the
"soft spots" on a corporation's tax return by highlighting those
areas in which the corporate taxpayer has taken a position that
may, at some later date, require the payment of additional
taxes.
III
In seeking access to Young's tax accrual workpapers, the IRS
exercised the summons power conferred by Code § 7602, 26 U.S.C. §
7602, which authorizes the Secretary of the Treasury to summon and
"examine any books, papers, records, or other data which may be
relevant or material" to a particular tax inquiry. [
Footnote 10] The District Court and the
Court of Appeals determined that the tax accrual workpapers at
issue in this case satisfied the relevance requirement of § 7602,
because they "might have thrown light upon" the correctness of
Amerada's tax return. [
Footnote
11] Because the relevance
Page 465 U. S. 814
of tax accrual workpapers is a logical predicate to the question
whether such workpapers should be protected by some form of
work-product immunity, we turn first to an evaluation of the
relevance issue. [
Footnote
12] We agree that such workpapers are relevant within the
meaning of § 7602.
As the language of § 7602 clearly indicates, an IRS summons is
not to be judged by the relevance standards used in deciding
whether to admit evidence in federal court.
Cf. Fed.Rule
Evid. 401. The language "may be" reflects Congress' express
intention to allow the IRS to obtain items of even
potential relevance to an ongoing investigation, without
reference to its admissibility. The purpose of Congress is obvious:
the Service can hardly be expected to know whether such data will,
in fact, be relevant until they are procured and scrutinized. As a
tool of discovery, the § 7602 summons is critical to the
investigative and enforcement functions of the IRS,
see United
State v. Powell, 379 U. S. 48,
379 U. S. 57
(1964); the Service therefore should not be required to establish
that the documents it seeks are actually relevant in any technical,
evidentiary sense.
Page 465 U. S. 815
That tax accrual workpapers are not actually used in the
preparation of tax returns by the taxpayer or its own accountants
does not bar a finding of relevance within the meaning of § 7602.
The filing of a corporate tax return entails much more than filling
in the blanks on an IRS form in accordance with undisputed tax
principles; more likely than not, the return is a composite
interpretation of corporate transactions made by corporate officers
in the light most favorable to the taxpayer. It is the
responsibility of the IRS to determine whether the corporate
taxpayer, in completing its return, has stretched a particular tax
concept beyond what is allowed. Records that illuminate any aspect
of the return -- such as the tax accrual workpapers at issue in
this case -- are therefore highly relevant to legitimate IRS
inquiry. The Court of Appeals acknowledged this:
"It is difficult to say that the assessment by the independent
auditor of the correctness of positions taken by the taxpayer in
his return would not throw 'light upon' the correctness of the
return."
677 F.2d at 219. We accordingly affirm the Court of Appeals'
holding that Young's tax accrual workpapers are relevant to the IRS
investigation of Amerada's tax liability.
IV
A
We now turn to consider whether tax accrual workpapers prepared
by an independent auditor in the course of a routine review of
corporate financial statements should be protected by some form of
work-product immunity from disclosure under § 7602. Based upon its
evaluation of the competing policies of the federal tax and
securities laws, the Court of Appeals found it necessary to create
a so-called privilege for the independent auditor's workpapers.
Our complex and comprehensive system of federal taxation,
relying as it does upon self-assessment and reporting, demands that
all taxpayers be forthright in the disclosure of relevant
information to the taxing authorities. Without such
Page 465 U. S. 816
disclosure, and the concomitant power of the Government to
compel disclosure, our national tax burden would not be fairly and
equitably distributed. In order to encourage effective tax
investigations, Congress has endowed the IRS with expansive
information-gathering authority; § 7602 is the centerpiece of that
congressional design. As we noted in
United States v.
Bisceglia, 420 U. S. 141,
420 U. S. 146
(1975):
"The purpose of [§ 7602] is not to accuse, but to inquire.
Although such investigations unquestionably involve some invasion
of privacy, they are essential to our self-reporting system, and
the alternatives could well involve far less agreeable invasions of
house, business, and records."
Similarly, we noted in
United States v. Euge,
444 U. S. 707,
444 U. S. 711
(1980):
"[T]his Court has consistently construed congressional intent to
require that, if the summons authority claimed is necessary for the
effective performance of congressionally imposed responsibilities
to enforce the tax Code, that authority should be upheld absent
express statutory prohibition or substantial countervailing
policies."
While § 7602 is "subject to the traditional privileges and
limitations,"
id. at
444 U. S. 714,
any other restrictions upon the IRS summons power should be avoided
"absent unambiguous directions from Congress."
United States v.
Bisceglia, supra, at
420 U. S. 150.
We are unable to discern the sort of "unambiguous directions from
Congress" that would justify a judicially created work-product
immunity for tax accrual workpapers summoned under § 7602. Indeed,
the very language of § 7602 reflects precisely the opposite: a
congressional policy choice
in favor of disclosure of all
information relevant to a legitimate IRS inquiry. In light of this
explicit statement by the Legislative Branch, courts should be
chary in recognizing exceptions to the broad summons authority of
the IRS or in fashioning new privileges that would curtail
disclosure under
Page 465 U. S. 817
§ 7602.
Cf. Milwaukee v. Illinois, 451 U.
S. 304,
451 U. S. 315
(1981). If the broad latitude granted to the IRS by § 7602 is to be
circumscribed, that is a choice for Congress, and not this Court,
to make.
See United States v. Euge, 444 U.S. at
444 U. S.
712.
B
The Court of Appeals nevertheless concluded that "substantial
countervailing policies,"
id. at
444 U. S. 711,
required the fashioning of a work-product immunity for an
independent auditor's tax accrual workpapers. To the extent that
the Court of Appeals, in its concern for the "chilling effect" of
the disclosure of tax accrual workpapers, sought to facilitate
communication between independent auditors and their clients, its
remedy more closely resembles a testimonial accountant-client
privilege than a work-product immunity for accountants' workpapers.
But as this Court stated in
Couch v. United States,
409 U. S. 322,
409 U. S. 335
(1973),
"no confidential accountant-client privilege exists under
federal law, and no state-created privilege has been recognized in
federal cases."
In light of Couch, the Court of Appeals' effort to foster candid
communication between accountant and client by creating a
self-styled work-product privilege was misplaced, and conflicts
with what we see as the clear intent of Congress.
Nor do we find persuasive the argument that a work-product
immunity for accountants' tax accrual workpapers is a fitting
analogue to the attorney work-product doctrine established in
Hickman v. Taylor, 329 U. S. 495
(1947). The
Hickman work-product doctrine was founded upon
the private attorney's role as the client's confidential adviser
and advocate, a loyal representative whose duty it is to present
the client's case in the most favorable possible light. An
independent certified public accountant performs a different role.
By certifying the public reports that collectively depict a
corporation's financial status, the independent auditor assumes a
public responsibility transcending any employment
relationship with the client. The independent public accountant
Page 465 U. S. 818
performing this special function owes ultimate allegiance to the
corporation's creditors and stockholders, as well as to the
investing public. This "public watchdog" function demands that the
accountant maintain total independence from the client at all
times, and requires complete fidelity to the public trust. To
insulate from disclosure a certified public accountant's
interpretations of the client's financial statements would be to
ignore the significance of the accountant's role as a disinterested
analyst charged with public obligations.
We cannot accept the view that the integrity of the securities
markets will suffer absent some protection for accountants' tax
accrual workpapers. The Court of Appeals apparently feared that,
were the IRS to have access to tax accrual workpapers, a
corporation might be tempted to withhold from its auditor certain
information relevant and material to a proper evaluation of its
financial statements. But the independent certified public
accountant cannot be content with the corporation's representations
that its tax accrual reserves are adequate; the auditor is
ethically and professionally obligated to ascertain for himself, as
far as possible, whether the corporation's contingent tax
liabilities have been accurately stated. If the auditor were
convinced that the scope of the examination had been limited by
management's reluctance to disclose matters relating to the tax
accrual reserves, the auditor would be unable to issue an
unqualified opinion as to the accuracy of the corporation's
financial statements. Instead, the auditor would be required to
issue a qualified opinion, an adverse opinion, or a disclaimer of
opinion, thereby notifying the investing public of possible
potential problems inherent in the corporation's financial reports.
[
Footnote 13]
Page 465 U. S. 819
Responsible corporate management would not risk a qualified
evaluation of a corporate taxpayer's financial posture to afford
cover for questionable positions reflected in a prior tax return.
[
Footnote 14] Thus, the
independent auditor's obligation to serve the public interest
assures that the integrity of the securities markets will be
preserved, without the need for a work-product immunity for
accountants' tax accrual workpapers. [
Footnote 15]
Page 465 U. S. 820
We also reject respondents' position that fundamental fairness
precludes IRS access to accountants' tax accrual workpapers.
Respondents urge that the enforcement of an IRS summons for
accountants' tax accrual workpapers permits the Government to probe
the thought processes of its taxpayer citizens, thereby giving the
IRS an unfair advantage in negotiating and litigating tax
controversies. But if the SEC itself, or a private plaintiff in
securities litigation, sought to obtain the tax accrual workpapers
at issue in this case, they would surely be entitled to do so.
[
Footnote 16] In light of
the broad congressional command of § 7602, no sound reason exists
for conferring lesser authority upon the IRS than upon a private
litigant suing with regard to transactions concerning which the
public has no interest.
Congress has granted to the IRS "broad latitude to adopt
enforcement techniques helpful in the performance of [its] tax
collection and assessment responsibilities."
United States v.
Euge, 444 U.S. at
444 U. S. 716,
n. 9. Recognizing the intrusiveness of demands for the production
of tax accrual workpapers, the IRS has demonstrated administrative
sensitivity to the concerns expressed by the accounting profession
by tightening its internal requirements for the issuance of such
summonses.
Page 465 U. S. 821
See Internal Revenue Manual § 4024.4 (CCH 1981).
[
Footnote 17] Although these
IRS guidelines were not applicable during the years at issue in
this case, their promulgation further refutes respondents' fairness
argument and reflects an administrative flexibility that reinforces
our decision not to reduce irrevocably the § 7602 summons
power.
V
Beyond question, it is desirable and in the public interest to
encourage full disclosures by corporate clients to their
independent accountants; if it is necessary to balance competing
interests, however, the need of the Government for full disclosure
of all information relevant to tax liability must also weigh in
that balance. This kind of policy choice is best left to the
Legislative Branch. Accordingly, the judgment of the Court of
Appeals is affirmed in part and reversed in part, and the case is
remanded for proceedings consistent with this opinion.
It is so ordered.
[
Footnote 1]
See, e.g., Securities Exchange Act of 1934, §§
12(b)(1)(J)-(L), 48 Stat. 892, as redesignated, 78 Stat. 565, 15
U.S.C. §§ 781(b)(1)(J)-(L); Regulation S-X, 17 CFR § 210
et
seq. (1983).
See also n 5,
infra.
[
Footnote 2]
Section 7602 of the Code, 26 U.S.C. § 7602, provides as
follows:
"For the purpose of ascertaining the correctness of any return,
making a return where none has been made, determining the liability
of any person for any internal revenue tax or the liability at law
or in equity of any transferee or fiduciary of any person in
respect of any internal revenue tax, or collecting any such
liability, the Secretary is authorized -- "
"(1) To examine any books, papers, records, or other data which
may be relevant or material to such inquiry;"
"(2) To summon the person liable for tax or required to perform
the act, or any officer or employee of such person, or any person
having possession, custody, or care of books of account containing
entries relating to the business of the person liable for tax or
required to perform the act, or any other person the Secretary may
deem proper, to appear before the Secretary at a time and place
named in the summons and to produce such books, papers, records, or
other data, and to give such testimony, under oath, as may be
relevant or material to such inquiry; and"
"(3) To take such testimony of the person concerned, under oath,
as may be relevant or material to such inquiry."
[
Footnote 3]
Section 7604 of the Code, 26 U.S.C. § 7604, provides:
"If any person is summoned under the internal revenue laws to
appear, to testify, or to produce books, papers, records, or other
data, the United States district court for the district in which
such person resides or is found shall have jurisdiction by
appropriate process to compel such attendance, testimony, or
production of books, papers, records, or other data."
[
Footnote 4]
The IRS summons served upon Young sought the production of
records concerning the business transactions and affairs of Young's
client, Amerada. Accordingly, under Code § 7609(a)(1), 26 U.S.C. §
7609(a)(1), Amerada was entitled to notice of the IRS summons.
Section 7609(b)(1) provides that
"any person who is entitled to notice of a summons under
subsection (a) shall have the right to intervene in any proceeding
with respect to the enforcement of such summons under section
7604."
[
Footnote 5]
See Securities Act of 1933, Schedule A (25) (27), 48
Stat. 88, 15 U.S.C. § 77aa (filing of audited financial statement
prior to registration of new stock issue); Securities Exchange Act
of 1934, §§ 12(b)(1)(J)-(L), 48 Stat. 892, as redesignated, 78
Stat. 565, 15 U.S.C. §§ 781(b)(1)(J)-(L) (filing of audited
financial statement prior to listing securities on an exchange);
Securities Exchange Act of 1934, §§ 13(a)(2), 13(b), 48 Stat. 894,
as amended, 15 U.S.C. §§ 78m(a)(2), 78m(b); 17 CFR §§ 249.310,
249.460 (1983) (filing of annual reports); Securities Exchange Act
of 1934, § 14, 48 Stat. 895, as amended, 15 U.S.C. § 78n; Schedule
14A, Item 15, 17 CFR § 240.14a-101 (1983) (filing of audited
financial statement in connection with proxy and information
statements).
[
Footnote 6]
Regulation S-X, 17 CFR § 210
et seq. (1983), prescribes
the qualifications of accountants and the contents of the
accountants' reports that must be submitted with corporate
financial statements. In particular, 17 CFR § 210.1-02(d) (1983)
requires that the financial statements of a public corporation must
be audited by an accountant "in accordance with generally accepted
auditing standards." "Generally accepted auditing standards" are
promulgated by a committee of the public accounting profession's
national organization, the American Institute of Certified Public
Accountants (AICPA).
See 1 AICPA Professional Standards
(CCH) § 150.02 (1972).
[
Footnote 7]
See 1 AICPA, Statement on Auditing Standards § 110.01
(1972). Promulgated by the accounting profession's Financial
Accounting Standards Board, "generally accepted accounting
principles" are the conventions, rules, and procedures that define
accepted accounting practices.
See W. Meigs, E. Larsen,
& R. Meigs, Principles of Auditing 25-26 (5th ed.1973); H.
Stettler, Auditing Principles 12-16 (5th ed.1982).
[
Footnote 8]
See 1 AICPA Professional Standards (CCH) § 509
(1974).
[
Footnote 9]
For example, the characterization of the proceeds of a sale as
capital gain instead of ordinary income, the claiming of an
investment tax credit, and the attribution of a transaction to a
future tax year are decisions requiring judgment calls in gray
areas of the Code, any one of which might result in a recomputation
of the corporation's outstanding tax liability.
[
Footnote 10]
In
United States v. Powell, 379 U. S.
48 (1964), the Court refused to impose a probable cause
requirement in connection with the enforcement of an IRS summons
under § 7602. Instead, the Court held that the IRS need show
only
"that the investigation will be conducted pursuant to a
legitimate purpose,
that the inquiry may be relevant to the
purpose, that the information sought is not already within the
Commissioner's possession, and that the administrative steps
required by the Code have been followed. . . ."
Id. at
379 U. S. 57-58
(emphasis added).
[
Footnote 11]
The relevance standard employed by the Second Circuit -- whether
the documents at issue "might have thrown light upon the
correctness of the return" -- appears to be widely accepted among
the Courts of Appeals.
See, e.g., United States v. Wyatt,
637 F.2d 293, 300 (CA5 1981);
United States v. Turner, 480
F.2d 272, 279 (CA7 1973);
United States v. Ryan, 455 F.2d
728, 733 (CA9 1972);
United States v. Egenberg, 443 F.2d
512, 515-516 (CA3 1971);
Foster v. United States, 265 F.2d
183, 187 (CA2),
cert. denied, 360 U.S. 912 (1959). In
United States v. Harrington, 388 F.2d 520, 524 (1968), the
Second Circuit amplified this test by stating that
"the 'might' in the articulated standard, 'might throw light
upon the correctness of the return,' is . . . an indication of a
realistic expectation, rather than an idle hope that something may
be discovered."
But in
United States v. Cooper & Lybrand, 550 F.2d
615 (1977), the Court of Appeals for the Tenth Circuit held that
tax accrual workpapers not prepared in connection with the filing
of a corporate tax return were not relevant within the meaning of §
7602.
[
Footnote 12]
The petition for certiorari did not question the relevancy of
the tax accrual workpapers, and respondents have not filed a
cross-petition raising the issue. Respondents have, however, argued
before this Court that the Court of Appeals erred in holding that
Young's tax accrual workpapers were relevant to the IRS
investigation of Amerada within the meaning of § 7602. Respondents
were clearly entitled to do so, for our precedents establish that a
prevailing party may urge any ground in support of the judgment,
whether or not that ground was relied upon or even considered by
the court below.
See, e.g., United State v. New York Telephone
Co., 434 U. S. 159,
434 U. S. 166,
n. 8 (1977);
Dandridge v. Williams, 397 U.
S. 471,
397 U. S.
475-476, n. 6 (1970).
[
Footnote 13]
An
unqualified opinion, the most favorable report an
auditor may give, represents the auditor's finding that the
company's financial statements fairly present the financial
position of the company, the results of its operations, and the
changes in its financial position for the period under audit, in
conformity with consistently applied generally accepted accounting
principles.
See 1 AICPA, Statement on Auditing Standards
§§ 510, 511.01 (1973). Alternatively, the auditor may give a
qualified opinion, which states that the financial
statements are fairly presented except for, or subject to, a
departure from generally accepted accounting principles, a change
in accounting principles, or a material uncertainty.
Id. §
512. An
adverse opinion is a reflection of the auditor's
determination that the corporation's financial statements do not
fairly present the financial position, results of operations, or
changes in financial position of the company in conformity with
generally accepted accounting principles; an adverse opinion is
issued when the auditor determines that the corporation has
materially misstated certain items on its financial statements.
Id. § 513. Finally, a
disclaimer of opinion
expresses the auditor's inability to draw a conclusion as to the
accuracy of the corporate financial records. A disclaimer of
opinion is generally issued when the auditor lacks sufficient
information about the financial records to issue an overall
opinion.
Id. § 514.
See generally A. Arens &
J. Loebbecke, Auditing: An Integrated Approach 643-660 (1976).
[
Footnote 14]
The inclusion in an audited financial statement of anything less
than an unqualified opinion could send signals to stockholders,
creditors, potential investors, and others that the independent
auditor has been unable to give the corporation an unqualified bill
of financial health. Such a public auditor's opinion could well
have serious consequences for the corporation and its
shareholders.
[
Footnote 15]
Indeed, rather than protecting the investing public by ensuring
the accuracy of corporate financial records, insulation of tax
accrual workpapers from disclosure might well undermine the
public's confidence in the independent auditing process. The SEC
requires the filing of audited financial statements in order to
obviate the fear of loss from reliance on inaccurate information,
thereby encouraging public investment in the Nation's industries.
It is therefore not enough that financial statements he accurate;
the public must also
perceive them as being accurate.
Public faith in the reliability of a corporation's financial
statements depends upon the public perception of the outside
auditor as an independent professional. Endowing the workpapers of
an independent auditor with a work-product immunity would destroy
the appearance of auditor's independence by creating the impression
that the auditor is an advocate for the client. If investors were
to view the auditor as an advocate for the corporate client, the
value of the audit function itself might well be lost.
See
generally Arens & Loebbecke,
supra, at 55-58.
[
Footnote 16]
See, e.g., Securities Act of 1933, § 19, 48 Stat. 85,
15 U.S.C. § 77s(b) (for purposes of all "necessary and proper"
investigations, SEC is empowered to "require the production of any
books, papers, or other documents which the Commission deems
relevant or material to the inquiry"); Securities Exchange Act of
1934, § 21, 48 Stat. 899, 15 U.S.C. § 78u(b) (same); Fed.Rule
Civ.Proc. 26(b)(1) (parties may obtain discovery of "any matter not
privileged, which is relevant to the subject matter involved in the
pending action").
[
Footnote 17]
The new IRS guidelines provide that access may be had to
accountants' tax accrual workpapers only in "unusual
circumstances," and only as a "collateral source for factual data."
The guidelines require the prior written approval of the Chief of
the Examination Division of the IRS before an examining agent may
request tax accrual workpapers; in addition, they state that the
examiner should first take all reasonable means to secure the
information from the corporation itself before issuing a summons to
the independent auditor.