By Stacy Collett
When employees at Arthur Andersen LLP began shredding documents shortly after the Enron scandal broke, auditors were not the only professional firms forced to take a new look at what important client documents and correspondence were being kept and exactly who was keeping them.
A closer look at document retention policies shows that most firms do a satisfactory job of keeping documents, but many don't have formal policies in place. Also, governing bodies do little to create enforceable rules for retaining documents at professional services firms, and consulting firms are known to have the same lackluster policies.
An informal poll of large and small consulting firms by Consulting shows that just two in five firms have a formal document retention policy. For the most part, documents are decentralized, and possession of documents varies from human resources staff to legal counsel to engagement partners.
"Putting information, knowledge management, and records management practices in the hands of a firm that advocates a retention policy of 'Keep it if it's important, otherwise destroy it,' is clearly ludicrous," asserts Carl Frappaolo, executive vice president of the Delphi Group of Boston.
What's more, even when document retention policies are present, some partners feel that they're above the law when it comes to keeping their own records. Industry observers say that firms need to realize the vulnerabilities and exposure risks they create by not centralizing documents.
Retention Policies Today
"When a firm sets a records retention policy, it won't just cover a firm's audit practice, it will cover tax and consulting practices," says Chuck Landes, director of audit and attest standards at the American Institute of Certified Public Accountants in New York. That's why the AICPA guidelines often reach into the consulting industry, he adds. Yet the AICPA offers only loose guidelines to its members because of the varying nature of work performed by their diverse community.
"We think that the firms have to accept responsibility for making their own decisions based upon their own facts and circumstances," Landes says. Document retention standards can vary depending on the type of industry, legal counsel recommendations, insurance concerns, and the state a firm operates in, because states have different statutes of limitations for filing lawsuits.
Even firms that are making efforts to streamline their document management processes are running into cultural issues that are challenging to crack.
Delphi Group last year helped one Big Five firm study its document retention processes. "Memos, letters of agreement, contracts — they didn't necessarily know where they all were," Frappaolo recalls. The firm had a "records manager" at the corporate level, but her role was more that of an archivist focused on saving historical data rather than that of a keeper of engagement information. "Records managers had very little power in the organization, with no authority to make consultants and partners adhere to what they were suggesting," Frappaolo says.
After realizing the vulnerabilities of not keeping close tabs on documents, the firm put in place some document retention structure and control "so that at least they know what it is that they've got." But the policy ran into snags when it came to mandatory participation by the firm's partners.
"You would think they would have an even greater awareness of what could happen, but they're very loose with records management because partners feel they should be able to do what they want," Frappaolo says. The firm is now working to make participation mandatory, but they're not there yet, he adds.
Why Keep Documents?
All types of records must be considered for retention — from e-mails to interoffice memos. All too common are instances where clients refuse to pay for all or part of a project. According to Landes, it's important to keep any and all documents "to support your opinion if ever challenged. If I issue a report on a particular client and my statements are fairly stated, then my documentation needs to provide the evidence that I can use, if challenged, to prove to a reasonable person that in fact I did perform my job within generally accepted standards."
Automated document management systems substantially reduce time, decrease errors, improve record keeping, and provide an audit trail — not to mention eliminate reams of paper in a warehouse. At about $700,000 to $1 million for an automated system, "it's a very small amount compared to what a firm's bringing in and what their vulnerability is," Frappaolo says.
Creating a Records Retention Policy
A well-structured records retention policy can save firms money and time, limit legal exposure, and improve client relations, according to Caryl Masyr Smith, former executive vice president of information management consulting firm Masyr Smith & Smith, Inc., in New York. Smith offers some tips on how to begin creating a retention policy.
• Develop a document collection policy. This policy defines what should remain in the file at the conclusion of a matter according to the practice of the firm (e.g., drafts, work product, closing papers, correspondence, etc.).
• Determine ownership of records. Which records belong to the firm, and which belong to the client?
• Develop a retention policy based on protection of the clients, protection of the firm, historical and archival interest, retrieval capability, and reduction in costs.
• Establish when to discuss retention. Should it be during the engagement process or at the close of the matter?
• Develop procedures for each step of the process: return of original documents, compliance with any existing confidentiality agreement, and review of a file at the close of a matter.
• Establish appropriate methods of destruction as related to confidentiality as well as to environmental standards.
• Assign accountability and responsibility for each step of the process.
Despite recent events and the need for better retention policies, the AICPA says that it won't change its guidelines significantly and will continue to leave the responsibility up to audit firms in the future. "It's more of a legal issue than an auditing/accounting standards issue," Landes says. "We feel that our guidelines are very good ones."
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