ValuePoint Consulting Group, LLC

Professional Standards and other Guidance for CPAs Providing Litigation Services

W. James Lloyd, CPA/ABV, CBA, Member and Director,
Valuation & Litigation Services Group, McWilliams & Company, PLLC
Knoxville, TN
Chairman, TSCPA Business Valuation Committee

D. Michael "Mike" Costello, CPA/ABV, Consulting Services Partner,
Decosimo Corporate Finance
Chattanooga, TN
Member, TSCPA Business Valuation Committee

Published in Tennessee CPA Journal June 2004

CPAs, particularly those practicing in the business valuation arena, are often asked to use their skills and training to help resolve legal disputes. For example, as CPAs, we may be asked to render an opinion and testify regarding the value of a business for purposes of settling a dispute between two or more shareholders or to determine the amount of damages incurred by one business as a result of the actions of another. Due to the large number commercial lawsuits that are commonplace today, the demand for litigation services from financial experts is very high and continues to grow. This article is intended to provide the reader with a general understanding of the professional standards that apply to CPAs who are involved with litigation support engagements and to discuss some practical issues associated with providing these types of services.

Overview of Litigation Services

The AICPA defines litigation services as "consulting services that ordinarily 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." A trier of fact may be a court, jury, regulatory body, government authority, grand jury, arbitrator, or mediator of a dispute. Therefore, litigation services is a broad term used to describe a CPA retained to assist the parties involved in a legal dispute with understanding certain financial aspects connected with the matter.

There are numerous types of litigation services or functions that CPAs may be requested to provide such as determining the value of a business or business interest: analyzing business transactions; computing economic damages; fraud prevention, detection, and investigation; bankruptcy consultant, trustee or examiner; tax computations and analysis; marital dissolution assessment and analysis; business interruption and other insurance claims assessment and analysis; and others. Functions related to these types of services include analysis of transactions, assistance with discovery, document management, negotiations, arbitration, mediation, settlement assistance, and others.

In addition, litigation services practitioners can be retained in a number of different rolls including expert witness, consultant, trier of fact, special master, referee, arbitrator, or mediator. An expert witness is one who is designated to render an opinion before a trier of fact. A consultant on the other hand does not testify regarding his or her expert opinion but is rather hired to advise about the facts, issues and strategy of a particular matter. A significant distinction between the rolls of an expert witness and a consultant is that all work performed by the expert witness related to the litigation is potentially discoverable, whereas the work performed by a consultant is generally protected from discovery by the attorney work-product privilege.

Applicable Professional Standards

CPAs providing litigation services should be knowledgeable of the professional standards that apply to them. In March 2003, the AICPA issued Consulting Services Special Report 03-1, Litigation Services and Applicable Professional Standards, which supersedes Consulting Services Special Report 93-1, Application of Professional Standards in the Performance of Litigation Services. Special Report 03-1 is a comprehensive document that provides clear guidance on the existing professional standards and related responsibilities that affect the CPA litigation services practitioner.

The following professional standards are specifically identified and explained in Special Report 03-1:
Statement on Standards for Consulting Services - Because litigation services are consulting services, adherence with AICPA Statement on Standards for Consulting Services (SSCS) is required. SSCS No. 1 establishes several standards of its own and incorporates others by reference. The following general standards apply to CPAs providing litigation support as well as other consulting services:

Client Interest - The client's interest must be placed above the CPA practitioner's. This is accomplished by providing the consulting services with integrity and objectivity.
Understanding with Client - CPAs providing consulting services are required to have a written or oral understanding with the client regarding the responsibilities of the parties and the nature, scope, and limitations of the services to be performed.
Communication with Client - This standard requires the CPA to inform the client of (a) conflicts of interest that may occur under Rule 102 of the Code of Professional Conduct, (b) significant reservations concerning the scope or benefits of the engagement, and (c) significant engagement findings or events.

AICPA Code of Professional Conduct - All members of the AICPA are required to comply with the general standards contained in the Code of Professional Conduct regardless of the services being rendered. However, Special Report 03-1 identifies the following sections of the Code of Professional Conduct as having particular significance to litigation services engagements:

Rule 102, Integrity and Objectivity- CPAs who are engaged as experts in a litigation matter should always remember their roll is to assist the trier of fact with resolving the matter. In order to maintain credibility with the trier of fact, the expert must demonstrate integrity and objectivity by being an advocate for their work only and not for the client's position.
Rule 201, General Standards - Each of the general standards, which include professional competence, due professional care, planning and supervision and sufficient relevant data, have significant relevance with respect to litigation services engagements. For example, unless the CPA practitioner has or can obtain the necessary skills to complete the litigation services requested with competence, he or she should not accept the engagement. In addition, adequate planning and supervision is essential in any engagement involving litigation.
Rule 202, Compliance with Standards- The compliance with standards rule requires CPAs to adhere to Statement on Standards for Consulting Services No. 1, Consulting Services: Definition and Standards.
Rule 301, Confidential Client Information- CPA practitioners are often entrusted with confidential client information, particularly during litigation services engagements. Such information must not be disclosed without the client's consent.
Rule 302, Contingent Fees - Contingent fee arrangements for consulting services are not prohibited under Rule 302, as long as the service is being provided to a non-attest client. However, CPAs providing litigation services under a contingent fee arrangement may appear to be an advocate for the client and thereby lose credibility with the trier of fact.

In some instances, the following standards will also apply:

Rule 101, Independence -CPAs are not required to be independent when performing consulting services for non-attest clients. However, if litigation or other consulting services are being performed for an attest client, the CPA practitioner should be keenly aware of recently revised Interpretation 101-3, "Performance of Other Services." The revised Interpretation 101-3 substantially restricts the ability of CPAs to perform litigation support, business valuation and other consulting services for attest clients.
Rule 203, Accounting Principles - The accounting principles rule only applies if generally accepted accounting principles (GAAP) are applicable to the litigation services engagement.

Attestation Standards - Although litigation engagements generally do not involve attestation services, under certain circumstances they may. For this reason, Special Report 03-1 addresses the relationship and related issues between attestation standards and litigation services.

Attestation services involve the CPA's assessment of written assertions made by others, whereas in litigation support engagements, the practitioner is generally expressing an expert opinion or providing other consulting services based upon his or her own individual analysis and judgment. For this reason, Special Report 03-1 makes it clear that attestation standards do not apply to litigation engagements unless the practitioner issues a report expressing an opinion about the assertion of another party.

Reporting Standards - Although SSCS No. 1 does require communicating the results of a consulting engagement to the client, there are no specific reporting standards that apply to litigation or other consulting services engagements. However, CPAs providing litigation services should be aware that certain federal and state courts have prescribed formats that are required for written expert reports. Two excellent resources that should be consulted for assistance with writing expert reports are Consulting Services Practice Aid 96-3, Communicating in Litigation Services: Reports and Writing and Defending Your Expert Report, The Step-by Step Guide with Models.

Other Standards and Requirements - Consideration should also be given to the requirements for testifying in federal and state courts. For example, in Tennessee, CPAs are required to have at least 20 hours of continuing professional education in the most recent reporting or current period for the subject area of expert testimony (accounting, attest, tax, or management advisory services) before giving an expert opinion in a court of law. Therefore, CPA practitioners should be prepared to document their continuing education in the subject area before testimony is given.

Practice Pointers

The following practice pointers can help make litigation services engagements much more enjoyable and profitable experiences:

Client Screening - Due to the inherent nature of litigation services engagements, CPA practitioners will be well advised to carefully screen potential clients. A quick and simple way to do this is by checking their references from other professionals and performing background and credit checks. If the potential client is seeking to change from another CPA firm, find out why they are leaving and if bills were paid on time.

Engagement Letters - A written engagement letter is critical in any litigation services engagement. As a general rule, if the CPA is being retained as a testifying expert, the engagement letter will be addressed to the client. However, if the CPA is being hired as a consultant, the engagement letter will be addressed to the attorney representing the client.

The engagement letter should clearly identify the services to be performed, timing issues, and fees.
Retainers and Fees- If you don't request and receive a substantial retainer up front on your first litigation engagement, you most likely will on the next one. Because of the open-ended nature of most litigation engagements, it is difficult to accurately estimate the amount of time that will be required. Therefore, litigation services are generally performed on an hourly fee basis. To avoid potential fee disputes and the appearance of not being independent and objective, all fees should be fully paid before testifying or issuing an expert opinion report.

Competent Staffing - Because of the complexities involved with most litigation services engagements, more senior level staffing is generally required. Staff members working on litigation engagements should be detail oriented and possess excellent analytical skills. Utilizing the wrong staff members on a large litigation engagement will substantially increase the risk of errors, which can be detrimental to your client's case and to your practice and career.
Conflicts of Interest- Before accepting a litigation services engagement, CPA practitioners should ensure that no conflicts of interest exist with either party involved in the lawsuit. A process for checking potential conflicts of interest is an essential ingredient for any litigation support practice. As a general rule, the larger the practice, the more formal the process should be. If a conflict does exist, the attorney representing the client should be informed immediately. In most cases, CPAs will be well advised to decline litigation engagements where a conflict exists even if both parties agree to waive it.

Marketing Litigation Services - Most litigation support engagements will originate as referrals from attorneys. Therefore, developing close working relationships with quality law firms is a must. To get started, schedule lunch with several attorneys that you already know. Tell them that you're considering expanding into litigation services and that you would like their input. Ask to be placed on their referral list and considered for the next case. Other marketing ideas include newsletters, speaking engagements and of course writing articles.

Summary
Litigation services is a fast growing consulting niche that is providing substantial opportunities for many CPA firms. CPAs wishing to endeavor into this area of practice will most likely find plenty of opportunities to do so. As CPAs practicing in today's business environment, it is critically important that we are aware of and understand the professional standards and other responsibilities that apply to us. Consulting Services Special Report 03-1 is an excellent resource that identifies and explains the professional standards that apply to litigation engagements and should be utilized by anyone providing these types of services.