United States v. Arthur Young & Company

Federal law required that publicly held corporations file financial reports with the Securities and Exchange Commission. An independent certified public accountant had to audit these financial reports pursuant to generally accepted auditing standards. To conduct an audit, an auditor had to examine the corporation’s books and records to determine whether the corporation’s financial reports complied with generally accepted accounting principles. Every public company had a reserve account, often known as a tax-accrual account. A tax-accrual account contained funds set aside to cover any additional tax liability that might arise. In addition to in-depth examinations of the company’s books, records, and tax returns, an auditor had to discuss potential tax issues with management to determine whether the company might face additional tax liability. Overall, an auditor analyzed all available information to find a company’s soft spots with respect to potential tax liability, so an auditor’s tax-accrual workpapers were quite a comprehensive window to the sensitive financial information of a company. Arthur Young and Company (Young) (defendant) was an accounting firm. Young served as the independent auditor for Amerada Hess Corporation (Amerada) (defendant). In performing its duties as auditor, Young prepared tax-accrual workpapers, which contained information about Amerada’s financial transactions, its questionable tax positions, and Young’s opinion regarding Amerada’s tax positions. In 1975, the Internal Revenue Service (IRS) (plaintiff) commenced a routine audit of Amerada’s tax liability. The IRS learned that Amerada had made some questionable payments and commenced a criminal investigation of Amerada’s tax returns. The IRS issued an administrative summons to Young. The summons required Young to make all of its files on Amerada available to the IRS, including Young’s tax-accrual workpapers. Young did not comply with the summons, as instructed by Amerada. In turn, the IRS commenced an enforcement action against Young in the district court, seeking an order that the summons be enforced. The district court rejected the assertion of an accountant-client privilege and ordered the summons be enforced. The court of appeals found that the tax-accrual workpapers were relevant to the IRS investigation, but it refused to enforce the summons, fashioning a de facto work-product immunity doctrine for the workpapers of independent auditors. The IRS appealed.