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Authoritative and nonauthoritative
guidance for the litigation-support specialist

Professional Standards in the Courtroom

By D. Edward MartinIn Brief

Does the guidance help or hurt?

Some would prefer that there be no standards or guidance pertaining to litigation and dispute resolution service engagements on the grounds that it would be either misdirected or too restrictive and could be seen as more binding on a practitioner in a legal proceeding than was intended. Others believe that any such guidance can only enhance the quality of work being performed.

Such work is subject to the authoritative guidance contained in the AICPA Statement on Standards for Consulting Services No. 1, Consulting Services: Definitions and Standards. The management consulting arm of the AICPA has also published a number of related nonauthoritative booklets. Two of these, focusing on communications and fraud investigations, are likely to have a significant impact in this area.

Despite the guidance available, practitioners must be practical in their approach in such engagements and be wary of limitations placed on their work as it progresses.

For some time now, there has been a small but sometimes stormy controversy brewing within the accounting profession over the development of standards for the performance of litigation and dispute resolution (L&DR) service engagements. (The term dispute resolution, which encompasses arbitration and mediation, is now frequently linked with litigation when this expanding area of practice is discussed. Accountants are frequently requested to be involved in arbitration and mediation cases in many of the same ways as they are in actual or potential lawsuits.)

Those opposed to standards for L&DR services believe the wide variety of ways in which a practitioner may be involved in this area is likely to make any authoritative guidelines either misdirected or too restrictive. They are also concerned that even nonauthoritative guidance--principally that being produced by the AICPA--is subject to misinterpretation or manipulation in the adversarial environment of a legal proceeding. Accordingly, formalized rules may be seen by a judge or jury as being more binding on the practitioner than was intended. On the other hand, those who support an expansion of written assistance for CPAs (or non-CPAs employed by public accounting firms) with L&DR practices believe such nonauthoritative publications can only enhance the quality of work being performed and be readily explained as nonauthoritative if and when it becomes necessary.

Existing Authoritative Guidance

The accounting profession has several major areas in which technical standards underlying the performance of this work could apply, including those related to auditing and attestation, accounting and review services, and management consulting. Although any of these supporting standards could conceivably come into play for a particular L&DR services engagement, as a general rule assurance standards are simply not on point for such matters. For example, an interpretation of the AICPA's Statements on Standards for Attestation Services (SSAEs) expressly excludes the SSAEs from applying to litigation services that involve pending or potential formal legal or regulatory proceedings before a trier of fact (i.e., a court, regulatory body, or government authority; their agents; a grand jury; or an arbitrator or mediator), in any of the following circumstances:

  • The service comprises being an expert witness.

  • The service comprises actually being a trier of fact or acting on behalf of one.

  • The practitioner is engaged by an attorney to do work that will be protected by the attorney's work product privilege and such work is not intended to be used for other purposes.

  • The practitioner's work under the rules of the proceedings is subject to detailed analysis and challenge by each party to the dispute.

  • The practitioner does not issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.

Accordingly, L&DR services are considered a type of consulting service. As such, they are governed by AICPA Statement on Standards for Consulting Services (SSCS) No. 1, Consulting Services: Definitions and Standards. SSCS No. 1 is a relatively brief document, especially when compared to other authoritative guidance embodied in pronouncements of the AICPA and FASB. Of course, all CPAs who are members of the AICPA are also subject to the Institute's Code of Professional Conduct, which sets forth the general principles and rules for any area of public practice by accountants, including L&DR services. Accordingly, the SSCS reinforces the basic standards of the AICPA code of ethics and requires the practitioner in a consulting engagement to perform the following:

  • Undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence;

  • Exercise due professional care in the performance of professional services;

  • Adequately plan and supervise the performance of professional services;

  • Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed;

  • Serve the client interest by seeking to accomplish the objectives established by the understanding with the client, while maintaining integrity and objectivity;

  • Establish with the client a written or oral understanding about the responsibilities of the parties and the nature, scope, and limitations of services to be performed and modify the understanding if circumstances require a significant change during the engagement; and

  • Inform the client of conflicts of interest that may occur, significant reservations concerning the scope or benefits of the engagement, and significant engagement findings or events.

Nonauthoritative Literature

The management consulting arm of the AICPA--which has oversight and development responsibility for the principles and practices related to the performance of L&DR services by accounting professionals--has been working to assist those practitioners who work with attorneys in a wide variety of legal matters. For example, the AICPA's MCS Business Valuations and Appraisals Subcommittee seeks to improve practitioners' technical skills as they relate to valuations and appraisals, which are frequently an element in L&DR services engagements. The AICPA's other working group, the MCS Litigation and Dispute Resolution Services Subcommittee, has thus far produced the following L&DR booklets, which, despite their somewhat imposing appearance, are nevertheless neither authoritative nor binding on L&DR practitioners:

  • Consulting Services Special Report 93-1, Application of AICPA Professional Standards in the Performance of Litigation Services;

  • Consulting Services Special Report 93-2, Conflicts of Interest in Litigation Services Engagements;

  • Consulting Services Special Report 93-3, Comparing Attest and Consulting Services: A Guide for the Practitioner;

  • Consulting Services Practice Aid 93-4, Providing Litigation Services;

  • Consulting Services Practice Aid 95-2, Communicating Understandings in Litigation Services: Engagement Letters;

  • Management Advisory Services Practice Administration Aid No. 3, Written Communication of Results in MAS Engagements;

  • Consulting Services Practice Aid 96-3, Communicating in Litigation Services: Reports; and

  • Consulting Services Practice Aid 97-1, Fraud Investigations in Litigation and Dispute Resolution Services.

The most recent two of these documents--released in early 1997 and likely to have a significant impact on most accountants' L&DR practices--are discussed below.

Communication in an L&DR Services Engagement. Communications in L&DR services engagements can take a variety of oral and written forms. Although Practice Aid 96-3 takes note of the importance of oral communications (e.g., live testimony or other representations presented in court or before other administrative bodies, depositions prior to testimony, etc.), it is directed principally toward describing and illustrating a practitioner's written work product, such as--

  • reports submitted to the court or other trier-of-fact;

  • exhibits that explain the accounting expert's testimony;

  • documents submitted to the client (which may be an attorney or the attorney's client, or, in some contexts, be both);

  • declarations or affidavits presented to the trier-of-fact in the place of live testimony; and

  • damage models and calculations, working papers, and various supporting documents submitted to others through the legal discovery process.

The appendices to Practice Aid 96-3 have sample written reports that should prove helpful to L&DR practitioners, whether they have previously prepared a number of litigation-related reports, or none at all. The examples include a report in support of a defendant in a wrongful termination case in Federal court; a report on damages (lost profits) incurred by a plaintiff, also prepared for Federal court; and a report to support the expert's valuation of a business in a matrimonial dispute, as tried before a state court. The latter sample report is included in Exhibit 1.

Practice Aid 96-3's cover, unlike those of its predecessor publications, is emblazoned with the caveat, "A Nonauthoritative Guide," as a further reminder that practitioners are not obligated under professional standards or ethics to follow its contents. Nonetheless, its categories of information--such as the forms of L&DR communications, the general considerations for written documents, the description of the Federal Rules of Civil Procedures (worthwhile even if the matter is tried in a state court, where, depending on the state, the equivalent of the Federal rules may or may not apply), and, of course, the various sample reports--make it a valuable tool for any CPA practicing in L&DR services.

Fraud Investigations. Coincidentally released at the same time as the widely publicized but unrelated AICPA Statement of Auditing Standards No. 82, Consideration of Fraud in a Financial Statement Audit, Practice Aid 97-1 brings together in a single document a discussion of the diverse elements of malfeasance that may occur in a business environment, beginning with a comprehensive definition of fraud (excerpted as accompanying Exhibit 2). Unlike audit or attestation engagements, there is no specific standard terminology used to describe the CPA's assignment when fraud is suspected or alleged. Some descriptive terms are currently used interchangeably; for example, "fraud" and "forensic" (which has an established place in litigation terminology), are frequently seen as adjectives for examination, investigation, or accounting. This lack of uniformity probably results from the variety of tasks a fraud investigation may entail, and from the variety of ways a CPA may be asked to participate.

Acting as either a consultant or expert witness, or as both, the practitioner engaged in a matter alleging fraud may be asked to perform, or assist in performing, a wide range of tasks. Some may be considered typical for CPAs, such as developing loss calculations and damages estimates or assisting in quantifying and tracing of assets. Other responsibilities--while still appropriate for accountants--may not be usual, run-of-the-mill practice. Practice Aid 97-1 reinforces the point that the CPA's involvement in a fraud-related matter may require skills other than those related to financial records and documents. For example, one section of the practice aid focuses on the process for conducting fact-finding interviews--not only of background witnesses but perhaps of the investigation targets themselves. The publication stresses the importance the underlying interview procedures and discussion notes may have on the structure of the case. The use of other professionals, such as private investigators, and the need for possible interaction with law enforcement or other authorities are also topics addressed by the practice aid. These kinds of topics obviously make fraud investigations a very special area of involvement for practitioners, even those with prior L&DR experience.

While it is not a "how-to" publication, Practice Aid 97-1 provides an excellent starting point for the accounting specialist who needs to understand the unique nature of fraud-related work. Its readers will also find--

  • descriptions of the various types of fraud engagements and services performed by accountants;

  • outlines of engagement scope, acceptance, and performance considerations;

  • descriptions of the investigative process, including how to approach an investigation, document results, and report findings;

  • examples of when fraud may exist;

  • lists of certain criminal violations and the related statutes; and

  • lists of selected fraud schemes.

Practical Considerations

Although there are obviously "pieces of paper" that L&DR practitioners may rely on when engaged for a matter, these specialists must be careful to structure their work in a way that addresses the practicalities of providing nontraditional assistance. There are a variety of inherent pressures that may be brought to bear on a CPA in litigation-related circumstances, and the accountant acting as a consultant or expert witness must be careful to avoid the possible vulnerability that can accompany them. Aside from the damage to a professional reputation, there can also be exposure to fee disputes, or even lawsuits from unhappy clients or other parties to the case.

Even with L&DR services at their fingertips, CPAs must be attuned to the potential for limitations on their ideas for structuring approaches to the job or even on the work itself. Accordingly, in most fraud-related engagements, the CPA should discuss his or her role with the client--be it the party to the matter itself or the party's legal counsel--so that the nature of the assignment and his or her ability to address it are fully outlined and understood. To assure that the full scope of work to be performed is clear to all parties, it is also important that a detailed work plan (including commentary on the underlying tests and analytical procedures) be prepared early in the process.

Unfortunately, problems may sometimes arise as the CPA gathers and assesses information in investigative engagements, such as those alleging fraud. For example, if the accountant is conducting a particular line of inquiry, the results may touch upon other areas, related or otherwise, that an entity or its legal counsel may not wish to have explored. Perhaps the accountant's focus in a particular area will simply not be relevant, or will open up topics that leave the organization's case vulnerable in some fashion. Or, there may be concern that targets of the investigation may be alerted to the scrutiny being directed toward them. Or, care may just need to be taken to ensure that innocent or uninvolved persons are not inadvertently placed in a bad light or made to seem the focus of inquiry.

In any case, the client may ask that the CPA not pursue certain avenues of investigation or may limit the CPA's access to documents or to people who can provide essential information. At issue, then, is to what extent the L&DR professional's engagement has been limited by concerns or matters that are quite legitimate to the client, but nonetheless pose a restriction on his or her professional judgment.

The ongoing demands of objectivity and due professional care require the L&DR professional to craft an approach that will address the engagement's goals and to carry it out without undue interference. It the CPA believes the assignment will be compromised or that the ability to comply with professional standards may be damaged, he or she should discuss the matter with the client to determine what alternative steps may be appropriate. While there may occasionally be complicated issues to address--attorney-client privilege, for example--other investigative or testing procedures can often be substituted, or perhaps the engagement itself can be reconfigured. Given the flexibility of reporting for L&DR matters, it may be that the accountant's report can be designed in a way that will provide adequate disclosure of any limitations imposed. Otherwise, there may be little choice for the CPA but to withdraw from the engagement.

Guidance Is Here to Stay

The "bottom line" is that, in the context of professional ethics at least, there has long been guidance for practitioners in the area of L&DR services. And, while some may prefer that there be no formal direction at all for such work, the AICPA is nonetheless continuing to formulate an extensive body of nonauthoritative literature for this segment of consulting practice. In short, the best thinking of the profession to date is arguably contained in the the MCS special reports and practice aids. This kind of guidance is essential to high quality and consistency in the performance of L&DR services assignments.

D. Edward Martin, CPA, is a partner with Richard A. Eisner & Company, LLP. He is a member of the NYSSCPA Litigation Support Committee and a former member of the AICPA MCS Litigation and Dispute Resolution Services Subcommittee.

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