Work-Paper Retention Policies

By John F. Raspante

Camico has long advocated, primarily from a liability perspective, that CPA firms establish a written policy for the retention of work papers, and that firms apply that policy consistently to all clients. Now some states, including New York, are requiring CPAs to establish such a policy to address issues of record retention and destruction.

The state of New York’s Regents Rule Amendment, effective Jan. 3, 2003, requires state CPA licensees not only to establish a formal written policy for the retention of work papers, but also to ensure that work papers are retained for a minimum of seven years (unless law requires a longer period for certain papers). The amendment broadly defines work papers as records associated with “a work product produced in the practice of public accountancy as defined in section 7401 of the Education law, including, but not limited to, an audit, review, compilation, forecast or projection.”

The amendment also requires work papers to contain “sufficient documentation to enable a reviewer with relevant knowledge and experience, but having no previous connection with the specific work product, to understand the nature, timing, extent and results of the procedures performed for the work product, and the identity of the persons who performed and reviewed the work for the work product.”

The documentation requirement in effect shifts the burden of proof toward the CPA. For instance, if observations, interviews and “other means” utilized in an engagement are not documented, it may be presumed later in a court of law that the CPA did not do the work that was needed for the work product.

The amendment also requires work-paper retention policies to “identify the process and authorization requirements for the destruction of work papers after the expiration of the retention period.” Issues such as “substantive alterations,” work papers in “electronic form,” and work papers related to state investigations or disciplinary proceedings also are addressed. The full text of the amendment can be found on the NYSSCPA website at www.nysscpa.org.

There are other factors CPA firms should consider when establishing a written policy for the retention of work papers, such as the cost of storage, your firm’s space limitations, the level of service you seek to provide your clients, and liability exposure concerns.

Another consideration in establishing a policy is, “What is best for the clients?” For example:

• Should different record-retention periods be allocated for different types of clients and different scopes of service? A policy for tax services may differ from a policy for attest services, depending on statutory requirements and what works best for the clients and your firm.
• Should a shorter record-retention period be allocated for former clients and a longer one for current clients? At Camico, we have found that the likelihood of having a claim filed against your firm is not affected by whether or not the claimant is a current or former client.

Your written retention and destruction policy also should include an exception to destroying documents that are—or are likely to be—the subject of litigation or formal inquiries. The New York Regents Rule Amendment requires CPA licensees to ensure that work papers are retained during the term of a state investigation or disciplinary proceeding that is reasonably related to such work papers. The amendment also prohibits licensees from disposing of such work papers until notified in writing by state authorities.

If your client has been sued with regard to a material misstatement in the financial statements, the work papers related to your client’s engagements should be kept indefinitely. This holds true even if your firm has not been named in the suit.

Camico claims experience shows that good documentation is one of your best defenses against a client lawsuit. In the event of litigation, work papers provide evidence that services were in compliance with professional standards. Camico’s claims department has seen claims arise 10 years after work was completed. Naturally, it is easier to defend a claim when there is appropriate supporting documentation, as opposed to no documentation.

Camico recommends retaining records for at least five years for tax engagements and at least seven years for all other engagements, unless longer periods are required by law. Camico also encourages CPAs to consider implementing the following steps prior to destroying records, in accordance with your written policy, to further minimize your risk of liability exposure:

• Attempt to contact the client or former client to inform him or her of your intentions; allow them an opportunity to pick up their documents.
• Give the client a specific date that is the client’s deadline for picking up any documents.
• Have your clients sign an itemized list of the documents they pick up from you.
• Keep an itemized list of the documents that were destroyed if a client does not pick up his or her documents.

CPAs may want to consider communicating their record retention and destruction policies in writing as part of an engagement letter. These are guidelines, but ultimately, you are the best judge when it comes to how long you should retain records, within regulatory requirements, in order to provide the level of service you want to provide. If you have any questions or concerns about work-paper retention, consult with your attorney or risk advisor.