Save every last scrap - Records Retention

California CPA, Nov, 2002 by Ric Rosario

Can you say "pack rat"? It's the image California's new record retention and documentation standards conjure up for some CPAs. Effective Jan. 1, 2003, all California CPA firms must abide by new, more rigorous audit documentation standards that exceed the standards set in SAS 96, Audit Documentation.

CAREFUL CONSIDERATIONS

CAMICO has long advocated that accounting firms establish a written record retention policy that is applied consistently to all engagements.

With AB 2873, the California Board of Accountancy will require CPAs to have both a written audit documentation retention and destruction policy that includes how, when and who will do the destruction. New regulations are forthcoming, so existing policies should be reviewed to ensure compliance.

When developing a record retention and destruction policy, you should consider the level of service your firm provides as well as what is best for your 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 versus one for audit services may depend on statutory requirements as well as on what works best for your firm and the client.

* Should a shorter record retention period be allocated for former clients (at least seven years for audit services) and a longer one for current clients? Incidentally, the likelihood of having a claim filed against your firm is not affected by whether the claimant is a current or former client.

You'll also want to consider the potential impact of your record retention policy on storage costs and space limitations.

Don't forget to factor in the impact of potential litigation. For instance, not keeping records long enough can negatively impact a claim's defense, and keeping them for too long can increase litigation costs.

SAVING RECORDS IS YOUR BEST DEFENSE

When a client leaves your firm, your records become your only physical evidence for supporting the reports, opinions and other services that you provided.

In the event of litigation, work papers provide evidence that services were in compliance with professional standards. CAMICO claims experience shows that good documentation is one of your best defenses against a client lawsuit.

By the same token, work papers also can be used by potential claimants to attempt to prove that you acted in some inappropriate manner, or that the engagement was not in compliance with standards.

HIGH DOCUMENTATION STANDARDS

Documentation can come back to haunt you if it doesn't meet certain standards. Consider the following as you document:

* Documentation should be factual and professional. Avoid personal comments about an employee or client's performance. These may be considered inappropriate and could damage the integrity of the documentation.

* Only maintain the final version of a work product (e.g., tax return, financial statements, letter) and not all of the prior drafts.

* Do not keep review notes in your work papers past the time they have some value. Destroy them when you are finished with them, as they can come back to haunt you.

* Think about the documents in your client files (hard copy or electronic) and ask yourself whether or not you would be harmed if the documentation was presented to the "ladies and gentlemen of the jury." If your answer is yes or maybe, you may have a problem with the adequacy and appropriateness of your documentation.

IT'S NOT THERE? IT WASN'T DONE

Some firms have chosen to destroy documents after one or two years thinking that this would reduce the chances of litigation and costly claims. However, most courts allow ajury to infer from a firm's destruction of work papers that those papers would have demonstrated malfeasance.

Additionally, now in California disciplinary proceedings, a rebuttable presumption has been established for audit documentation. If the work isn't there, it is presumed that the auditor did not do the work.

AB 2873 requires that audit documentation in California be done at the GAO "Yellow Book" level: "Audit documentation shall contain sufficient documentation to enable a reviewer with relevant knowledge and experience, having no previous connection with the audit engagement, to understand the nature, timing, extent, and results of the auditing or other procedures performed, evidence obtained, and conclusions reached, and to determine the identity of the persons who performed and reviewed the work."

MAKE EXCEPTIONS

Record retention policies should include an exception to destroying documents that are--or are likely to be--the subject of litigation or other inquiry.

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

DOCUMENT PROPERLY

CPAs are known for having detailed documentation in their work papers to meet the standards required for audit work. However, for many other services, such as consulting engagements, CPAs often fail to keep detailed records to support their work. As a general rule, any advice or practice area that can result in adverse tax or financial consequences is at high risk. In some instances, where client confidentiality is an issue, documentation may be inappropriate and considered unprofessional conduct.