Providing Effective Litigation Services (Part 2 of 4)

Professional accounting valuation accrediting standards for effective litigation

In this second part of his four-part series, Mark Shirley, CPA/ABV, CVA, MAFF, CFE, focuses on complicated professional standards. Here, the article examines AICPA’s Code of Professional Conduct and Statement on Standards for Consulting Services (SSCS), which sets forth the scope and limitations of  practice. While the AICPA has not promulgated litigation reporting standards, it has incorporated a judicial exception in SSVS and issued at least two non-authoritative Consulting Services Practice Aids addressing effective litigation services.

Providing Effective Litigation Services

The practice of public accounting is unique in that the standards of practice are usually codified in a state’s professional statutes and require compliance with standards of practice promulgated by the American Institute of Certified Public Accountants (AICPA).  All professional services performed by a licensed public accountant are subject to the AICPA Code of Professional Conduct (ET) and one or more Statement of Standards.  It is important to consider that only a licensed CPA firm can express an attestation opinion, review, audit or agreed-upon procedures relating to compliance with Generally Accepted Accounting Principles (GAAP).  This places non-public accountants at a disadvantage in litigation where financial reporting standards are an issue and when identifying “generally accepted” or peer reviewed methods of analysis and governing professional standards of practice.

This is not to imply that non-public accountants cannot provide effective expert testimony.  It simply acknowledges the dominant authoritative position of the AICPA in promulgating standards and technical practice aids for attestation and non-attestation services. This dominance, particularly in the area of business valuation, has prompted other competing professional accrediting organizations to proxy their individual ethics and standards of practice on the AICPA pronouncements.

The AICPA and National Association of State Boards of Accountancy (NASBA) Uniform Accountancy Act (UAA) is an “evergreen” model licensing law developed to provide a uniform approach to regulation of the accounting profession.  The UAA provides a comprehensive system for enhancing public protection, facilitating consumer choice and supporting the efficient operation of the capital markets.  A model bill to regulate the practice of public accountancy was first published in 1916 by the American Institute of Accountants, the predecessor of the AICPA.

In 1984, the AICPA and NASBA published the first joint model bill, later renamed the Uniform Accountancy Act.  State statutes governing the practice of public accounting are usually modeled after the UAA since the AICPA promulgates the standards governing the practice of public accounting and the states have limited authority in the interpretation of these standards.

Litigation services are consulting services to which Statements on Standards for Consulting Services (SSCS) and the Code of Professional Conduct (ET) apply.  The practitioner’s function is to provide services related to a specific client transaction, generally with a third party.¹ The definition of consulting services excludes the following:²

Services subject to other AICPA Technical Standards such as Statements on Auditing Standards (SAS), Statements on Standards for Attestation Engagements (SSAE) or Statements on Standards for Accounting and Review Services (SSARS);

Engagements specifically to perform tax return preparation, tax planning/advice, tax representation, personal financial planning, bookkeeping services, situations involving the preparation of written reports or the provision of oral advice on the application of accounting principles to specified transactions or events, either completed or proposed, and the reporting thereof; (emphasis added) 

Recommendations and comments prepared during the same engagement as a direct result of observations made while performing the excluded services.

SSCS requires compliance with the General Standards of ET 201.³

• Professional competence
• Due professional care
• Planning and supervision
• Sufficient relevant data

The client’s interest⁴ is to be placed above that of practitioner’s.  The practitioner must serve the client with integrity and objectivity.⁵ Serving the client’s interest requires assisting the client in achieving a favorable outcome by the defense of positions properly taken.  The independence standards relate to the performance of attestation services only.⁶ Expert witness services do not constitute acting as an advocate for a client.

SSCS requires the practitioner have an understanding with the client⁷ regarding the scope and limitations of the professional services to be performed. A written or oral understanding must exist with the client concerning the responsibilities of the parties and the nature, scope and limitations of services to be performed. The understanding must be clear as to the issues, limitations, due dates of reports or work-product and evidentiary and demonstrative evidence required.  Limiting the area of analysis is acceptable; limiting the extent of the analysis is not. The nature and scope of work is determined solely by the agreement between the practitioner and the client.⁸ A written engagement letter is considered mandatory by the author. A letter of understanding should be prepared when serving under a court appointment.

SSCS requires communication with the client⁹  to inform the attorney and client of any direct or indirect (perceived) relationships which may actually impair impartiality and objectivity or could be perceived as a conflict of interest.  Any reservations regarding the engagement or the client’s preconceived benefits or outcome must be communicated, as well as any changes in scope or additional services required in completing the engagement. Finally, a communication must explain the engagement findings, opinion or conclusion.

Statements on Standards for Attestation Engagements (SSAE) generally do not apply to litigation services.

Services performed in accordance with the Statement on Standards for Consulting Services (SSCS), such as engagements in which the practitioner’s role is solely to assist the client (for example, acting as the company accountant in preparing information other than financial statements) or engagements in which a practitioner is engaged to testify as an expert witness in accounting, auditing, taxation or other matters, given certain stipulated facts.” ¹⁰

“The term stipulated facts as used in Section 101 paragraph .04(c) means facts or assumptions that are specified by one or more parties to a dispute to serve as the basis for the development of an expert opinion. It is not used in its typical legal sense of facts agreed to by all parties involved in a dispute.”¹¹

“Section 101 does not apply to litigation services that involve pending or potential formal legal or regulatory proceedings before a trier of fact in connection with the resolution of a dispute between two or more parties in any of the following circumstances:  when the practitioner has not been engaged to issue and does not issue an examination, a review or an agreed-upon procedures report on subject matter, or an assertion about the subject matter that is the responsibility of another party.

Professional services as an expert witness include being a trier of fact or acting on behalf of one. The practitioner’s work product under the rules of the proceedings is subject to detailed analysis and challenge by each party to the dispute. The practitioner is engaged by an attorney to provide services which will be protected by the attorney’s work product privilege and such work is not intended to be used for other purposes.¹²

The professional standards governing the preparation of Financial Forecasts and Projections are defined at AT§301 and SSAE No. 10 and 11, however, do not provide standards or procedures for engagements involving prospective financial statements used solely in connection with litigation support services.¹³

[SSAE] …applies to litigation service engagements only when the practitioner is engaged to issue or does issue an examination, a review or an agreed-upon procedures report on subject matter, or an assertion about the subject matter that is the responsibility of another party.¹⁴

As with attestation services, Statements on Standards for Accounting and Review Services (SSARS) do not generally apply to litigation services.  SSARS No. 19¹⁵states that the use of the word “should” is a presumptively mandatory requirement which requires the accountant to comply with the requirement.  The use of the words “should consider” in SSARS No. 19¹⁶  provides little opportunity for deviation from AICPA Statements on Standards.

Lost profits damage computations are specifically excluded from the scope of Statements on Standards for Valuation Services (SSVS).¹⁷  Economic damages computations that incorporate a terminal value are also excluded from the scope of SSVS.¹⁸ SSVS applies only to an engagement to estimate value or determine the loss of value of a business or intangible asset.¹⁹

The AICPA Code of Professional Conduct applies to all engagements undertaken by a licensed practitioner.  Integrity and Objectivity are defined at ET Rule 102 and apply to both testifying expert witness and consulting expert engagements.

AICPA ET Rule 102 provides examples of the sources of potential conflicts of interest, which include situations where the practitioner has an actual or perceived vested interest in the final adjudication of the litigation:

• Delinquent professional fees
• Contingent fee agreements
• A prior engagement or relationship provides detrimental or confidential information damaging to opposing party’s position
• Each litigant believes expert is acting exclusively as their advocate or on their behalf
• Historic or continuing professional or other relationship with one or both litigants or a commonly owned entity

Confidential client information²⁰ generally does not convey a legally protected privilege and does not protect the member from compliance with a validly issued and enforceable subpoena or summons.²¹ Nor does it protect prior attestation, tax or consulting engagement work papers from discovery when engaged as an expert witness.  However, several states have recognized and codified accountant-client privilege.²² Statutory accountant-privilege excludes litigation services, when engaged as an expert witness, and as a fact witness in marital dissolution litigation.

Contingency fees²³ in litigation support services are intrinsically contingent on the findings or outcome of the litigation and are perceived as creating a vested interest in the final resolution of the litigation, which impairs (natural bias) objectivity and implying advocacy.  Fees should be based on hourly rates, per diem rates, or fixed fee.

The AICPA has not promulgated litigation reporting standards, and has incorporated a judicial exception in SSVS. However, it has issued at least two non-authoritative Consulting Services Practice Aids addressing litigation services.²⁴

The statutory requirements for expert reports are prescribed at Federal Rules of Civil Procedure (Fed.R.Civ.Proc.) Rule 26(a)(2)(B). These requirements are frequently codified in state code of civil procedure. The requirements are structural in nature and general in content:

• A complete statement of all opinions the witness will express and the basis and reasons for them
• The facts or data considered by the witness in forming them
• Any exhibits that will be used to summarize or support them
• The witness’s qualifications, including a list of all publications authored in the previous 10 years
• A list of all other cases in which, during the previous 4 years, the witness testified as an expert at trial or by deposition
• A statement of the compensation to be paid for the study and testimony in the case

Larger firms often have dedicated staff members responsible for performing the analysis and writing the report with expert testimony provided by a senior manager or partner. The court has found exception with ghostwritten reports and excluded the testimony in its entirety.²⁵ Only the actual author of the report can testify regarding the report.

Mark Shirley, CPA.ABV, CVA, CFFA, CFE is partner at V & L Consulting of Baton Rouge, LA.  He has concentrated on the disciplines of business valuation, forensic accounting, and financial analysis/modeling. He has provided contributions to a wide range of respected publishers and periodicals including Wiley Law Publications, Aspen Legal Press, The Valuation Examiner, The Practical Accountant, CPA Litigation Services Counselor, The Gatekeeper Quarterly and The Journal of Forensic Accounting among others.

Mr. Shirley has authored courses for NACVA’s Fundamental, Techniques & Theory; Forensic Institute and Consultant’s Training Institute and is a charter member of the LCPA’s Litigation Services Committee. He has been an adjunct faculty member at the National Judicial College, University of Nevada Reno since 1998 and serves on the Advisory Panel for Mdex Online; The Daubert Tracker, an on-line Daubert research data base and on the Ethics Oversight Board for NACVA.

¹ CS §100.05d