Litigation Support Best Practices
By John F. Raspante
Many commercial and even domestic disputes involve accounting issues, and CPAs are increasingly being retained by lawyers to provide consulting services and expert testimony on such issues. According to AICPA membership data, litigation support services were among the top 10 CPA growth niches in the 1990s. Some of the services CPAs provide include the following:
The traditional loss prevention practices of client screening, engagement letters, and documentation have become extremely important in litigation support engagements, due to the challenging legal environment in which they are performed. Special considerations are needed to supplement traditional techniques.
Conflicts of Interest
Any relationship with individuals on either side of the suit could interfere with the CPA’s objectivity. This also applies to potential witnesses and third-party defendants determined during the course of the attorney’s investigation of fact. The bigger the case, the longer the list of potential conflicts.
If a CPA’s own clients are in dispute with each other, conflict of interest charges might be brought in the dispute. Divorcing couples and partners in litigation will sometimes assert that their CPA gave the other party a benefit, to their detriment. Partnerships and marriages require equal treatment of each partner by the CPA, regardless of ownership percentages or fees. Divorcing spouses often present a potential conflict of interest when they ask their CPA to provide advice and services to both of them. Although it is not prohibited by professional standards, representation of both spouses is not recommended. If the CPA chooses to represent both spouses, the CPA should fully disclose the potential conflicts and have both spouses sign the disclosure form. The CPA should remain on guard because conflict situations are difficult to manage even when disclosed.
A properly drafted engagement letter should be prepared with the signatures of both parties. A comprehensive resource for engagement letter language is the CPA’s Guide to Effective Engagement Letters (reviewed in the November 2002 CPA Journal; Aspen Publishers, www.aspenpublishers.com). It may be appropriate to disengage from one or both parties, even though this can create its own problems and challenges. CPAs should disengage from the client once work has been completed and the disengagement will not damage the client’s business. CPAs should not wait until the last minute to disengage.
Identification of the Client
Client identification is important to clarify payment issues, stop-work clauses, and record retention issues. Privileged communications between attorneys and clients can also complicate engagements for CPAs. Engagement letters for litigation support services often have dual signature lines for the attorney and the client, to make sure that all parties understand the terms and conditions of the engagement. The engagement letter should spell out in detail the responsibilities of the CPA, the attorney, and the client, as well as fee and collection issues.
In many litigation support engagements, the courts assign the CPA to the client, or the CPA is retained by an attorney. In such cases, CPAs are not familiar with the client. In conservatorship engagements, the CPA might never meet the client, who could be disabled or institutionalized.
Background checks and references from other professionals are invaluable. The predecessor accountant can be an excellent source of information. The litigation support CPA should ask the predecessor accountant the following questions:
With corporate clients, credit checks and public record checks are critical. The following questions should be asked:
If the CPA enters into a litigation support engagement, an engagement letter should be written and its contents reviewed with a risk advisor or specialist. The engagement letter is effectively a written contract between the CPA, the attorney, and the client. It allocates, in limiting language, the responsibilities of the engagement for each party.
If the CPA firm is being retained by an attorney, the letter should be addressed to the attorney but signed by both the client and the attorney, especially if the client is responsible for paying the bills. In most litigation support engagements, it is generally recommended that the CPA contract with the attorney, who then acts as the lead party in the engagement.
Expert witnesses should receive a retainer up front. The CPA cannot withdraw on the eve of trial because he has not been paid. He may be held in contempt of court for a last-minute disengagement as an expert witness. In order to avoid fee disputes, make it clear that the retainer amount is not an estimate of the total fee. The tasks to be performed should be clearly specified. An example might be the following:
The information the CPA will need should be specified, as should any assumptions required for analysis. Engagement letters are important as a first line of defense in the event a client makes a claim against the CPA. The engagement letters should describe the limitations of certain services proposed. The Sidebar contains some sample engagement letter paragraphs excerpted from model letters.
In addition to an engagement letter, a valuation report used in business valuation engagements should include a paragraph on assumptions made in the valuation, particularly for special property appraisals, and on limited conditions.
Contemporaneous documentation procedures should be utilized in all litigation support engagements. Jury studies have shown that the jurors perceive CPAs to be experts in documentation. CPAs who fall short of this expectation may be deemed negligent by a jury. Documentation is often the only tangible evidence of a CPA’s work product, and it can be used to demonstrate the CPA’s compliance with professional standards. Some CPAs think that their documentation will be used against them by a trial attorney attempting to point out deficiencies in their work, but without documentation the conclusions could appear unsupported. In such cases the benefit of the doubt generally goes against the CPA. Expert witnesses are held to high standards by juries because of their purported expertise.
Litigation support services generally produce reports required by the courts. Detailed analyses of various alternatives in matrimonial tax issues and in valuations require detailed documentation. The reasons behind using certain methodologies should also be documented. Any advice or recommendation should be put into writing.
The competency of the CPA is extremely important in litigation support engagements. Juries and judges have a high expectation of CPAs and an even higher expectation of specialists. For example, a forensic specialist may be portrayed by opposing counsel as less than competent if they do not possess the Certified Fraud Examiner (CFE) designation. Similarly, a valuation specialist without an Accredited in Business Valuation (ABV) or Certification in Business Valuation (CBV) designation may be portrayed as less than fully competent.
Various professional organizations have ethical standards and requirements for a practitioner to disclose to clients a lack of expertise or competency in specific areas. CPAs should obtain training and competency in any particular field before they take on engagements. The field of litigation support is especially demanding in this regard, and the level of professional due care is relatively high.
Litigation support engagements should be weighed carefully in terms of the professional standards of due care, competence, objectivity, and independence. If applied effectively, the risk management techniques discussed above can be invaluable in minimizing losses and making these specialized engagements financially and professionally rewarding.
Dan L. Goldwasser, Esq.
Vedder, Price, Kaufman & Kammholz
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