Concern about how long engagement files should be retained is a common issue presented to us.  There is frequently a conflict between the desire to discard older files to free up storage space, and the inherent reluctance to discard documents which contain a detailed record of the work which you have performed.  Similarly, there is a conflict between the the desire to discard workpapers which, anecdotally, they have heard can be used against CPAs in litigation, and the desire to preserve a record of the engagement which could potentially be used to vindicate the CPA in litigation. 

 

There are very few rules established in law for file retention by accountants.  One such rule relates to a requirement that tax preparers retain copies of tax returns for a period of three years.  Generally speaking, however, accountants are left without much guidance on the issue.

 

It is our experience that erring on the side of a more lengthy retention is the better course.  It is a tremendous benefit  for defense counsel to possess a detailed set of workpapers and other engagement documents relating to the particular matter in dispute.  Armed with such documentation, they may more accurately assess the strengths and weaknesses of the defense case, and more appropriately recommend a settlement or defense strategy.  Simply put, if a mistake was made which would lead to liability, it is better to know that at the outset of the litigation so that the matter can be promptly settled.  Conversely, if the defendant was not negligent, the workpapers and other file materials will usually provide strong evidence of that fact, and are invaluable tools in vindicating the accountant.  In short, neither the defendant, the insurer nor defense counsel should be regretting the decision to retain engagement files.

 

Because of space limitations, however, some limit must be established.  It may be recommended to tie the record retention policy to the statute of limitations for professional liability actions in the insured’s jurisdiction.  We suggest that the insured ask a local attorney and/or the State Board of Accountancy or State Society, to identify the appropriate statute of limitations.  For example, in Massachusetts, there is a three-year statute of limitations for actions against accountants for negligence.  Because the statutory period does not begin to run until the potential plaintiff knows or should know that damages have been sustained, it is possible that the statutory period could extend beyond three years.  Generally, a period of six to ten years for retaining files of past engagements is sufficient.

 

One effective method of dealing with space limitations while maintaining files for as long as possible, is to gradually decrease the size of the files retained.  Thus, after six years, many of the contents of past engagement files can be discarded, and only essential summary documentation maintained in a more permanent file.  After ten years, the entire file could be discarded.  In all cases, we recommend that you should not discard original client records contained in your files without client consent.  If the client’s consent cannot be obtained, we suggest that the original client records be delivered back to the client for the client to deal with in it’s own way.