The American Institute of CPAs has a new forensic accounting standard due to take effect at the beginning of next year, and it promises to give CPAs a leg up in terms of their credibility in providing litigation support as expert witnesses on the stand at trials.
The AICPA issued the standard in July (see AICPA issues new forensic accounting standards). The Statement on Standards for Forensic Services No. 1 (SSFS 1) has an effective date for engagements accepted on or after Jan. 1, 2020, and applies to any member of the institute, or employee of a member firm, who provides services to a client as part of a litigation or investigation engagement. It’s said to be the first time that forensic accountants will have compliance standards like a CPA with the AICPA codifying best practices for the litigation and investigation consulting work done by forensic accountants.
“Historically our forensic work fell under the consulting standards, which under the codification is CS 100,” said Dave Duffus, a partner in the global forensic and litigation services practice at Top 15 Firm Baker Tilly who also chairs the AICPA’s Economic Damages Task Force and sits on the AICPA’s Forensic and Litigation Services Committee. “That standard covered the waterfront of not just forensic standards, but also other management consulting services, like systems implementation work and things of that nature. That CS 100 standard has been in place since the early 1990s and was actually issued by the old Management Consulting Services Exec Committee, which doesn’t even exist anymore. Part of the impetus of putting forward forensic standards was a recognition that if there were some required edits or changes to the standards, we really had no control over it because there was no standard-setting authority who would be able to provide the revisions, so the [Forensic and Valuation Services Executive Committee] took on the challenge of actually issuing the forensic standard.”
For purposes of the standard, a litigation engagement is defined as “an actual or potential legal or regulatory proceeding before a trier of fact or a regulatory body as an expert witness, consultant, neutral, mediator or arbitrator in connection with the resolution of disputes between parties.” The term “litigation” isn’t limited to formal litigation but is inclusive of disputes and all kinds of dispute resolution.
An investigation engagement is defined as “a matter conducted in response to specific concerns of wrongdoing in which a member is engaged to perform procedures to collect, analyze, evaluate or interpret certain evidential matter to assist the stakeholders (for example, client, board of directors, independent auditor, or regulator) in reaching a conclusion on the merits of the concerns.”
When a CPA accepts a forensic engagement, the member is required to undertake all work with professional competence, due professional care, adequate planning and supervision, sufficient relevant data; integrity and objectivity. The CPA also has to have a clear understanding with the client about the responsibilities of the parties, and the nature, scope and limitations around the services to be performed, along with adequate communication to inform the client of any conflicts of interest, significant reservations surrounding the scope or benefits of the engagement, and significant engagement findings or events.
The new standard encompasses most of the requirements of the old standard, but with two main changes. “The central tenets of the standard pull in what was set forth in CS 100, and what’s also in the general standards that apply to all CPAs,” said Duffus. “Essentially, the concepts of having professional confidence when we do our work, exercising due professional care, ensuring that our work rests on sufficient relevant data, etc. So there’s no change there with respect to that. But I do think the two biggest changes that are set forth in CS 100 and that are called out in the new forensic standard are that when we as CPAs are retained as expert witnesses, there are specific prohibitions in terms of doing that work under a contingent fee arrangement. That was not a specific callout before under the consulting standards, although I think tacitly most CPAs would recognize that it would not be appropriate to do expert work under a contingent fee arrangement. And then the second thing is it very explicitly states that we should not be rendering opinions about whether fraud has or hasn’t been committed. That’s a role for the trier of fact in a case, so we can present evidence that may be related to indicia of fraud but ultimately it’s up to a trier of fact to make that decision as to whether fraud has actually occurred.”
SSFS 1 requires that a member engaged as an expert witness in a litigation engagement may not provide opinions under a contingent fee arrangement, unless explicitly allowed under the Contingent Fee Rules; and members refrain from rendering any opinions regarding the occurrence of fraud, as that is a determination for the trier of fact. CPAs who provide forensic accounting services have typically adhered to a set of standards that generally applied to all members of the profession. However, a standard specific to forensic engagements was never codified. SSFS 1 now does that. It clarifies and removes confusion about the kinds of engagements that can be performed, including when “agreed upon procedures” engagements are or aren’t appropriate. An agreed-upon procedures engagement doesn’t lead to an opinion, so they’re usually not suitable for expert work where opinions are required.
SSFS 1 also removes uncertainty about how CPAs and their firms can be compensated for their work in forensic engagements, as well as what type of opinion, if any, can be provided in connection with the investigation of suspected fraud. The standard continues to build on the professional and ethical guidelines followed by CPAs and CPA firms, but aims to improve the quality of services provided by CPAs in forensic engagements.
It may also provide CPAs and their firms with some help on the liability risk side too, but there are more important benefits in terms of credibility. “I don’t know that it necessarily removes liability risk per se, but I think it does keep us within our lane, if you will, in terms of what our expertise is,” said Duffus. “That’s with respect to the fraud side of the equation. And then in terms of the contingent fee, I think it does help to insulate us because to go off and testify as an expert and for it to come out that essentially your opinion is contingent upon how big or how small the number is, it can do serious harm to our credibility, so calling that out is important.”
The FVS Executive Committee is putting together a set of frequently asked questions about the new standard. While the standard becomes effective on Jan. 1, 2020, early adoption is permitted and even encouraged, according to Duffus. The new standard could give CPAs an edge over some of the competition in the litigation support area.
“My anecdotal feedback is that it’s been well received by CPAs,” said Duffus. “That’s for a couple of reasons. Having a specific forensic standard has been viewed favorably, particularly by folks like me who often testify as an expert witness. For instance, in cases that I get involved in, I may come up against, say, a university professor in finance or economics who’s been retained on valuation or damages issues. They’re typically not subject to a set of professional standards like we are as CPAs, so I think having a standard that we can point to in support of our expert opinions — essentially that whenever we’ve done the work we’ve performed, that it’s supported or was done in accordance with a set of standards — gives us credibility vis-a-vis others who are not subject to the same kinds of standards. That’s my general impression of how other CPAs view it. A lot of our work is we’re retained by attorneys and law firms, and I think they view it favorably in terms of bolstering our credibility as expert witnesses.”
The AICPA may require familiarity with the new standard as a requirement for at least one of its credentials. “The two key credentials that I see in the forensic side of the AICPA house are the Certified in Financial Forensics, or CFF, and the ABV, which is Accredited in Business Valuation,” said Duffus. “I think it will become particularly relevant and will become part of the training for the CFF. In terms of the ABV, there’s a Statement on Standards for Business Valuation Services that came out back in 2007. It’s still in place, but I think this will kind of sit side by side with that in terms of valuation work that’s done in a litigation setting.”