Access to Records

An article in the latest Journal of Accountancy caught our attention. It seems that IRS has "rolled-out" a program to request the QuickBooks or Peachtree file from small business taxpapyers under examination. IRS revenue agents (i.e. auditors) are requesting the complete accounting software files from businesses under audit.

The AICPA (American Institute of Certified Public Accountants) has registered concern over the practice. In many cases, the software file contains data involving more than the year under examination, and the file may contain other data that could be considered private, confidential, and beyond the scope of the pertinent information for the audit. An accounting software file may contain taxpayer's client or customer list. In the case of an attorney or someone in the medical profession, it may contain information clearly considered confidential under the law.

The IRS is not deterred. In a written response to the AICPA, they stated that "it is important an exact copy of the original electronic data file be provided to the examiner and not an altered version. Only an exact copy of the original file includes the unaltered meta data which allows examiners to properly consider the integrity and veracity of the electronic files through use of such means as reports generated by the software program that may help to identify deleted or altered entries. For example, the original data file may provide the date a transaction was originally created, dates of subsequent changes, what changes were made, and the user name of the person who entered or changed that transaction. This type of information is directly relevant to the evaluation of the taxpayer's internal controls."

The IRS suggested that small businesses create a backup file immediately at the close of the audit year. In the even of an audit, the backup process will lessen the amount of data provided to the IRS, The IRS also suggested that prior year information be "condensed" so that it does not provide details. This response does not address the AICPA's concerns about the "proprietary" nature of data included in the the native data files.

This brings up the question concerning the contracting officer's (or the contracting officer's representative, DCAA) right to access the complete accounting system data file. In short, they do not have a right to the files. The data rights granted to the Government under the terms of the contract are limited to information relevant to determining the reasonableness, allocability, and allowability of costs charged to Government contracts. Accounting system files contain much more than that, revenues, profits, customer information, etc). Under no circumstances should a contractor be compelled to turn over its accounting system data files to a contract auditor. If an auditor needs a listing of transactions charged to a particular account, contractors can export to the data to Excel and provide it electronically. Exporting data from the accounting system in Excel format however is not the same as providing the complete data file.

There is also a practical aspect to such a request. The contracting community, and specifically the contract audit organizations) have not deployed accounting software for the purpose of "reading" contractor data files. They have not installed QuickBooks, Peachtree, or any other accounting software. Thus, there would be no way for them to "read" the files once they had them. It is likely then that if you encounter any such request, you are dealing with a rogue element within the organization.

You can read the AICPA letter and the IRS response here and here, respectively.