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The Importance of the Attorney/Accountant Relationship for Business Owners

Posted by Nicole Liotine | May 18, 2017 | 0 Comments

Companies are more likely to succeed when their attorneys and accountants work in tandem.  Professional services are more effective and efficient, and financial and legal interests are best protected.

Enhanced Professional Services

Attorneys and accountants have several characteristics in common.  Both are professionals.  Both engage in a course of education to learn how to provide services in their respective areas of expertise.  Both are licensed by the state.  And both owe a fiduciary duty to their clients the highest standard of care imposed by law.

Business owners often count on the expertise of attorneys and accountants to help them navigate through financial and legal issues such as:

  • Selecting or changing business structure
  • Adopting or changing internal policies and procedures
  • Deciding how long to keep  and when to destroy  different types of business records
  • Setting up and administering bookkeeping practices
  • Adopting and administering employee benefit plans
  • Valuing the business
  • Assessing risk
  • Handling tax disputes, such as audits and
  • Planning a business succession strategy

Legal and financial aspects in areas like these frequently overlap and implicate the same documents, such as tax records, meeting minutes, and internal policies.

It is most efficient for a company's accountant and attorney to work together to advise on business and financial issues efficiently and effectively.  Adopting business practices that facilitate cross-pollination of legal and accounting functions helps to meet these goals.

An experienced legal and accounting team can help educate company leaders about the potential legal implications of accounting and record-keeping practices.

Here's a concrete example:  Many companies are structured as corporations to reduce the likelihood that an owner will be held individually liable for corporate failure or wrongdoing.  Nevertheless, the manner in which corporate books and records are maintained, or not maintained, can jeopardize this significant corporate advantage.  For instance, if corporate and owner funds are commingled or if meeting minutes do not reflect a true separation of owner and business, a litigant is more likely to be able to pursue the individual owner's assets.

Protected Financial and Legal Interests

When working together for a business, attorneys and accountants can be more successful in shielding confidential information from third parties, such as the Internal Revenue Service (IRS) and opposing parties in lawsuits against a company.

Even though privacy is a central focus in today's society, most information is not protected by law. However, in some cases, Congress, state legislatures, and executive branch agencies have adopted narrow legal protections designed to advance important public policies.  At least three of these protections apply to either attorneys or accountants.

One of the most significant protections is called the attorney-client privilege.  All 50 states, including California, recognize the importance of clients being able to communicate freely with their attorneys.  For that reason, the attorney-client privilege protects confidential client communications that are made for the purpose of seeking legal advice from an attorney, as long as certain requirements are met.

Client communications with federally authorized tax practitioners receive similar protections.  In this case, Congress passed a law making tax communications between a taxpayer and his or her certified tax professional confidential.  However, this privilege is much more limited than the attorney-client privilege, as it applies only to tax advice and only in civil tax proceedings. Criminal proceedings are outside the scope of this privilege.

A different kind of legal protection exists for what is called “attorney work product.”  This includes the mental impressions and notes of an attorney made “in anticipation of litigation.”  An interesting aspect of this doctrine is that it can extend to work product created by someone else at an attorney's direction.  For example, California Evidence Code § 954 allows for accountant work to be protected if it is performed at the direction of an attorney and other requirements are met.

All of these protections are critical to clients, including businesses, because they keep confidential information out of the hands of adverse interests.  For example, if a civil tax audit is pending and the attorney-accountant relationship is structured properly, the IRS will be unable to access many materials relating to the investigation of the matter. A properly structured attorney-accountant relationship can provide a business with the benefits available under applicable law.

Conclusion: The Attorney Accountant Relationship

A business is best served when its attorney and accountant communicate and provide coordinated legal and accounting advice. Attorney Sunny D. Dobashi at HMS Law Group LLP has more than 30 years of experience providing tax and legal advice to California businesses.  Sunny understands that a business's accountant often has more regular contact with the client, and therefore may have more detailed information on the client's current business issues. Therefore, in our practice, we make it a point to communicate with our client's accountants as often as needed, and in most cases, at least once a year  at the client's annual shareholder and director meetings.

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