Revisiting the Document Retention Policy

By Ramesh Narasimhan, CPA

December 14, 2005

A carefully conceived and well-implemented document retention policy is an important component of an effective corporate compliance program. Past events, including the corporate misbehavior that lead to passage of the Sarbanes-Oxley Act, have made reviewing and updating corporate document retention policies a priority for most companies.

There are several keys to an effective document retention program:

• Establishing a framework within which important documents are available when needed, while other documents can be destroyed in the ordinary course of business without exposing the company to liability
  
• Recognizing circumstances that impose special document preservation obligations
  
• Ensuring compliance with retention and destruction policies.

Why Have a Document Retention Policy?

An effective document retention program will provide a system for complying with retention laws; ensure that valuable documents are available; protect against allegations of selective destruction; and provide for routine clearing of superfluous documents.

A legal duty to retain documents may arise from a number of sources, including statutes and regulations, common law, and contracts.

Statutes and Regulations. A number of laws expressly require that documents be retained for specified periods of time:

• Internal Revenue Code
  
• state and federal environmental statutes
  
• labor and employment laws
  
• criminal statutes that punish obstruction
  
• Sarbanes-Oxley Act and related SEC regulations
  
• industry-specific regulations that impose unique retention requirements
  
• US Patriot Act and related regulations, require financial institutions to collect and maintain information relating to customers, customer accounts, and certain transactions
  
• statutes of limitations that may indirectly impose retention obligations on certain documents, such as contracts and personnel files, relevant to potential disputes
  
• Codes of ethics and professional rules, that may require certain materials to be protected from destruction
  

Common Law. Court decisions may also impose duties to retain documents. One of the most important common law document retention obligations arises out of the doctrine of "spoliation," which is the improper destruction of evidence relevant to a pending or reasonably foreseeable lawsuit or legal proceeding.

Contracts. Many contracts contain provisions requiring that certain materials be preserved for future use.

How Do You Create an Effective Document Retention Policy?

No single policy will suit the needs of every company. An effective document retention policy must be developed through a collaboration of company management, administrative staff, legal counsel, and auditors. These groups will play the following roles in developing an effective document retention program:

• Management of the company is responsible for establishing the corporate goals that the document retention policy will serve and for balancing the tradeoff between retaining documents for longer periods and the costs of retention.
  
• The administrative staff typically is most knowledgeable regarding the types of documents that are generated as part of normal business processes, and how particular document retention policies will impact day-to-day operations.
  
• Legal counsel is responsible for identifying the document retention requirements that are specifically applicable to the company.
  
• The company's auditors will be responsible for ensuring that the appropriate documents are retained for compliance with applicable auditing and tax requirements.

An effective document retention policy should specify several elements. First, identify documents that should be retained as well as the time periods. Then detail specific types of documents that should be retained, the process for destroying documents and the circumstances under which document destruction should be suspended. Finally, be sure to document compliance with the retention policy.

What Are the Consequences of Improper Document Destruction?

A company that destroys documents improperly could face serious penalties. Criminal sanctions for obstruction of justice can be imposed if documents under subpoena or relevant to a government investigation are destroyed. Criminal sanctions may also be imposed for the destruction or alteration of documents used in "official proceedings."

A document retention policy that is not consistently enforced is not effective protection against allegations of bad-faith document destruction. Suspicions will be raised by a sudden, vigorous enforcement of a policy that had been only sporadically enforced. Moreover, selective destruction of documents after a subpoena has been issued could open up criminal liability for conspiracy to defraud the government.