Legal status of imaging systems and optical storage of records.

The paperless office has been a goal of businesses since the computer became the primary of recording transactions. Yet only about 3% of all corporate information is maintained in a computerized format.(1) Data is stored so that it may be retrieved to support a transaction at a later time. Thus, the primary concerns with storage are that data can be retrieved when it is needed, and that the retrieved data will be believable and acceptable (in these litigious days) to the courts.

Since most data is now processed with computers, most of it is found originally in a digital format and is typically printed to paper only as a last step in the process. The image of this printed document may be recreated as part of its processing, or it may be scanned later and stored on optical storage media. The advantages of using digitized image over paper storage are indisputable. All of the documents in a three-drawer filing cabinet can be saved on one optical disk. With storage costs of upwards to $50 per square foot, the savings to a business from optical storage of records are tremendous. If the stored images need to be accessed, the optical disks can be accessed quickly by authorized users from anywhere on a network.

Even with all its advantages (lower cost, greater retrieval speed and image quality), optical storage is not widely used in many settings. And in one that is becoming increasingly important to CPAs, the court systems, the acceptability of the stored image as legal evidence has not been established. For the tax adviser the primary concern is the acceptability of optical storage by the IRS. Even here, unfortunately, the issue has never been directly addressed.

Rev. Proc. 81-46 did address the acceptability of microfilm as an acceptable storage medium. Also, in Rev. Proc. 91-59, the Service specified that digital storage of data was acceptable if the data was recorded in a digital form at the time of the transaction. In other words, for taxpayers with computerized systems, those computerized records may be kept and will be acceptable in matters before the IRS. Also, the Service will accept microfilmed data that was converted from paper data. However, the IRS has not directly addressed the issue of data converted to paper at the time of the transaction (e.g., a contract printed with a word processor and signed) and then at a later date--after the contract is completed--scanned and stored on optical disk.

There has been no litigation specifically addressing the use of optical disks for document storage. However, there is sufficient legal background in related areas primarily the Federal Rules of Evidence) to give an acceptable level of comfort to companies so that they may safely proceed to use imaging systems for data processing and optical storage media.

History of duplicates as evidence

As technology continues to evolve--from handwritten duplicates to copy machines and then to microfiche and other means of reliable duplication--and the laws have been adjusted to address the originality of documents, the courts have had to address the reliability of duplicates.

One method which the courts have carved out to address this problem is the "heresay" rule, which allows certain records to be admitted as evidence. (Note that the admission of these records under this exception simply indicates the records' existence, and does not go to the validity of their contents.)

To address the problem of the great number of copies and the loss of original documentation, the courts have adopted the Best Evidence Rule. This rule provides for the use of duplicates as evidence if the absence of the original can be explained to the satisfaction of the court or regulatory agency. The Federal government, regulatory agencies and each of the states have laws specifying the use of the Best Evidence Rule. Most have some variation of the Uniform Photographic Copies of Business and Public Records as Evidence Act (UPA) or the Uniform Rules of Evidence:

Uniform Photographic Copies of Business and Public Records as Evidence Act

1. Admissibility of reproduced records in evidence.

If any business, institution, member of a profession or calling, or any department or agency of government, in the regular course of business or activity has kept or recorded any memorandum, writing, entry, print, representation or combination thereof, of any act, transaction, occurrence or event, and in the regular course of business has caused any or all of the same to be recorded, copied, or reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic, or other process which accurately reproduces or forms a durable medium for so reproducing the original, the original may be destroyed in the regular course of business unless held in a custodial or fiduciary capacity or unless its preservation is required by law. Such reproduction, when satisfactorily identified, is as admissible in evidence as the original itself in any judicial or administrative proceeding whether the original itself is in existence or not .... (Emphasis added.)

Uniform Rules of Evidence

Rule 1001. Definitions.

For purposes of this Article the following definitions are applicable: ... (3) Original. An "original" of a writing or recording is the writing or recording itself or any counterpart intended to have the same effect by a person executing or issuing it. An "original" of a photograph includes the negative or any print therefrom. If data are stored in a computer or similar device, any printout or other output readable by sight, shown to reflect the data accurately, is an "original." (4) Duplicate. A "duplicate" is a counterpart produced by the same impression as the original, or from the same matrix, or by means of photography, including enlargements and miniatures, or by mechanical or electronic rerecording or by chemical reproduction, or by other equivalent technique which accurately reproduces the original. Rule 1003. Admissibility of duplicates.

A duplicate is admissible to the same extent as an original unless (1) a genuine question is raised as to the authenticity or continuing effectiveness of the original or (2) in the circumstances it would be unfair to admit the duplicate in lieu of the original.

There are several important factors in each of these statutes. The UPA applies only to microfilm and other forms of duplicates prepared "in the regular course of business," while the Uniform Rules of Evidence allow for their use in almost all situations. Also, the UPA requires that the duplicate accurately reproduce the original, or the duplicates must form "a durable medium for so reproducing the original." The Uniform Rules of Evidence have no specific guidelines for the creation of duplicates. And most importantly for this article, the UPA provides for the destruction of the original documentation, again "in the regular course of business." The Uniform Rules of Evidence do not specifically approach the issue of destruction of the original document, but this is obviously allowable through Rule 1003. If a duplicate "accurately reproduces the original" (Rule 1001, (4)) and a duplicate "is admissible to the same extent as an original" (Rule 1003), both records are admissible under law. Thus, one may be destroyed unless specifically prohibited elsewhere.

Imaging technology background and storage

Before relating optical storage to the current laws for duplicates, it is necessary to understand the way imaging technology captures and stores an image. The process is actually quite simple. The image is captured by a scanner, digital camera or other device that can download to a computer. The image is then sent to the computer as a series of dots, commonly referred to as a "bitmap." This image is then compressed and stored to an optical disk.

Although this is a straightforward process, there are several factors to consider. The type of capture device should be sufficient to "grab" all of the image. That is, the resolution must be sufficiently high to capture the detail required. The most common capturing device is the desktop scanner. It should have a resolution of at least 100 dots per inch (dpi) to reproduce character data (e.g., typed or handwritten information). The resolution should be at least 300dpi for any type of graphics capture (e.g., photographs). Next, an appropriate storage device, providing a durable medium that will retain the same image as originally captured, must be chosen.

Any type of optical device or magnetic disk could be used if the proper internal controls were in place to prevent alteration of the document. But nonerasable disks make things easier and are the most widely used. The write once read many (WORM) format offers a durable, unalterable medium that can store a high volume of information.

The question of the durability of a CD-ROM had remained unanswered until quite recently. However, newer CDs have a claimed archival life of up to 600 years, under the proper conditions.2 This should expel any doubt about the durability of optical storage.

To make the documents useful there must be an appropriate indexing scheme to retrieve the data. The indexing should be researched carefully to fit the needs of the users and should follow conventional database design. Finally, a suitable means of reproduction must be used. The output image has to "accurately reproduce ... the original" to be acceptable.

Conclusion

Optical storage is still too new for the multiple legislative bodies of this country to catch up with and address its legality. In fact, it will probably be several years before case law for optical storage will catch up to that of microfilm and other duplication procedures (which for many years have been acceptable to the courts). The important questions, then, are the legal foundation for establishing the acceptance of optically stored information and how the installation of an imaging system should be approached.(3)

The adoption of appropriate internal controls is the critical factor in all of the applicable statutes and is also the answer to these questions. From the creation of an original document to the duplication and storage of that document, internal controls must be followed and documented for any system to produce records to be used as legal evidence. In the design phase of a record storage system, the creators should review all state and Federal statutes, including those specific to their industry and application, and look for any specific exceptions.

With sufficient, well-documented internal controls, companies of any size can implement a cost-effective imaging system without worrying about future legal or regulatory implications or complications. (1) Major, "The Great Paper Chase: Handling the Reality and Rhetoric of Document Imaging," Midrange Systems, Vol. 6, No. 10 (5/25/93), at 31(3). (2) Banet and Seybold, "CD-ROM Comes of Age--But the Age of CD-ROM May Not Last Long," The Seybold Report on Desktop Publishing, Vol. 7, No. 9 (5/3/93), at 11(6). (3) Williams, Legality of Optical Storage (Cohasset & Associates, Chicago, Ill., 1987).

This month's column was written by Russell Holland, Jr., a graduate student in information systems, Virginia Polytechnic Institute ansd State University, Blacksburg, Va., and Sam A. Hicks, Ph.D., CPA, Associate Professor, Virginia Polytechnic Institute and State University, Blacksburg, Va.

Editor's note: Mr. Love, Mr. Rubenstein and Dr. Hicks are members of the AICPA Tax Division Tax Computer Applications Committee.