Quality review and confidentiality laws.

In preparing for reviews under the new AICPA Guidelines for Voluntary Tax Practice Review, a firm needs to plan to avoid possible problems with state confidentiality statutes. When preparing quality control documents and reviewing a practice using the guidelines for a self-review, items that would affect the firm in an outside review must also be addressed. The first major stumbling block is state law. For example, in Spring 1991, Alaska passed a new accountancy act. Much attention was given to the new quality review provisions governing accounting and auditing practices. In defining those sections, the confidentiality section of the new law was changed to allow disclosure of client information during a quality review pursuant to state law. The effect of this provision is that this disclosure applies only when the quality review is performed under the mandatory provisions of Alaska law and the review work is done by a person who holds a certificate in the state. Luckily, the statute does have a provision that allows the release of information if it is authorized by the client.

A review of other states discloses that Alaska is not alone in its provisions regarding confidentiality. At least 19 jurisdictions (Alaska, Arizona, Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Missouri, Nevada, New Mexico, New York, Pennsylvania, Tennessee and Puerto Rico) have some form of accountants' confidentiality statute. Each state statute differs and the regulations may restrict or allow quality reviews.

In the future, state boards may adopt regulations and statutes to allow disclosure of information in a review as the AICPA quality review program and reviews under the Voluntary Tax Practice Review (VTPR) encounter these problems.

At this point, practitioners are faced with several choices for a VTPR. The first choice is to scale down the scope of the review to limit it to an administrative review. A tax practice administrative review is designed so that reviewers will not need access to any client information. An administrative review concentrates on tax practice policies and procedures and, to the extent possible without reference to client documents, the implementation of those policies and procedures. The administrative review is a good starting point in the review process and may accomplish the results sought without violating state law. Many firms have decided that the administrative review is the best way to review their system of controls and to develop new controls or systems that will help improve their tax practice.

The second choice is to plan around the state confidentiality rules. Alaska's statute allows disclosure with client permission. Regulations may vary on this issue but normally the permission must be written. The easiest way to get this permission is to add a paragraph to the firm's standard engagement letter explaining that the firm participates in a voluntary tax practice review program and asking the client to authorize disclosure of information to the CPA reviewer. Currently, under Alaska's statute, accounting and auditing engagement letters must include a similar provision regarding participation in the AICPA quality review program. The wording of the engagement letter requires the practitioner to start planning the review during the current season to obtain authorization in advance of the review.

Disclosure of tax information is also restricted by Sec. 7216, for which final regulations were issued on Dec. 26, 1991. The regulations permit tax return information to be disclosed during a quality or peer review if it is conducted by person\s listed in the regulations, including CPAs. The regulations contain restrictions on the disclosure of information in evaluative reports and require the return of any information that may identify the client at the completion of the review. A firm should examine these regulations to insure full and proper compliance.