Litigation Services: Standards and Ethics

Litigation services are gaining popularity with CPAs. However, many practitioners may not be aware of which professional standards and ethics rules apply to such engagements. This article reviews the major rules and discusses their relative importance to litigation services.

NATURE OF SERVICES
A litigation service is any professional assistance CPAs provide to lawyers in the litigation process. Anecdotal evidence shows that more than 90% of CPAs litigation activities fall into one of these areas: business valuations, damage calculations, forensic accounting, accounting principles, accounting and statistical analyses, tax issues and accountant and auditor professional performance. Some CPA firms provide litigation services in areas requiring expertise in other disciplines, such as engineering.

The nature of a CPAs litigation-related activities can vary. In addition to serving as expert witnesses, CPAs serve as arbitrators or mediators in disputes and as consultants. Some CPAs are called on to serve as receivers, both in bankruptcy matters and for other special purposes. (For example, recently I was appointed receiver for a company to ensure the payment of a judgment.)

It is important to remember that in court the individual, not his or her firm, is the testifying expert. However, the lawyer and the litigant view the firm as providing the service. If a problem arises with the service, the firm, and not just the individual, will be the subject of a complaint. So although you are the only representative of your firm in the court, your performance will reflect on your partners and staff, too.

APPLICATION OF STANDARDS
The accounting profession has four major sets of technical standards: management consulting services (MCS) standards, auditing standards, attestation standards and accounting and review services standards. Generally, litigation services engagements are subject to the MCS standards and exempt from the others. However, any standard could come into play in an engagement. (Other authoritative and nonauthoritative literature, such as that relating to tax practice, personal financial planning, quality control and peer review, does not apply to litigation services unless the issue is the quality of performance in providing one of those services.)

MCS standards . The statements on standards for consulting services (SSCS) include the following definition: “Transaction services, in which the practitioners function is to provide services related to a specific client transaction, generally with a third party. Examples of transaction services are insolvency services, valuation services, preparation of information for obtaining financing, analysis of a potential merger or acquisition, and litigation services” ( AICPA Professional Standards , CS section 100.05d).

The SSCS require compliance with the general standards of the profession contained in Rule 201 of the Code of Professional Conduct: professional competence; due professional care; planning and supervision; and sufficient relevant data (discussed below). The SSCS also require compliance with the following standards: client interest, understanding with client and communication with client. (See the sidebar for more details.)

• Serving the client interest in a litigation services engagement calls for helping the client win the case. However, as stated in the client interest standard, integrity and objectivity must be maintained in the process. Thus, while it is appropriate to present the clients position in a favorable light, the presentation cannot be misleading. But that admonition does not mean you cave in under cross-examination. The opposing lawyer will, for example, try to get you to say it is just as appropriate to use assumptions favorable to his or her position or belittle your assumptions. The client-interest standard demands that you defend positions properly taken.
• The principle in the understanding-with-client standard is as important in a litigation services assignment as in any other type of engagement, but it requires a knowledge of the litigation process. For example, rules vary from court to court on whether a written report is due and when evidentiary or demonstrative exhibits are due. There should be a clear understanding that the lawyer will provide you with the relevant dates. More important, the lawyer may want you to limit your area of investigation and testimony; you should adhere to the strategy developed by the lawyer. Limiting the area of investigation is acceptable; however, limiting the extent of investigation is not.
• The third SSCS standard, communication with client, has three critical elements.

1.    Conflicts of interest. A true conflict of interest will prevent you from maintaining the required unbiased objectivity. But some relationships may cause the lawyer not to use you, even though they do not create true conflicts. Some lawyers believe you will look biased if you have an ongoing or prior audit, review, compilation or tax relationship with any of the parties. Therefore, it is critical that you advise the lawyer of any direct or indirect relationships.

2.    Disclosure of significant reservations. In developing an expert opinion you should keep an open mind and consider all available evidential matter, negative as well as positive. If you can explain away negative information, it will strengthen your opinion. If you cant, it will create doubts about whether you can successfully defend a position under cross-examination. You must inform the lawyer if you are unsure about any aspects of your testimony so he or she can evaluate whether other evidential matter will help you or if your engagement must be terminated.

3.    Engagement findings (the opinion you express). Not only is the message important but also your ability to deliver it in a clear and convincing fashion to the jury. Even more important is your ability to stand your ground under cross-examination. Ultimately it is not only your opinion that counts but also how well you can present it.

Auditing standards. Generally accepted auditing standards consist of three general standards, three field-work standards and four reporting standards. Two of the general standardsprofessional competence and due professional careand two of the field-work standardsplanning and supervision and sufficient relevant dataare part of the Code of Professional Conduct and are discussed in that section.

CPAs providing litigation services are not exempt from GAAS. You must comply with those standards if, for example, you are giving an opinion on a financial statements conformity with generally accepted accounting principles. This service, while seldom requested in an engagement involving damage analyses, may arise in a bankruptcy matter. Although filings with a bankruptcy court do not have to be audited, a potential source for new funds presumably would make such a demand. CPAs should know the intended use of financial statements and any requests from third parties not involved in the bankruptcy process. (AICPA Consulting Services Special Report 93-1, Application of AICPA Professional Standards in the Performance of Litigation Services , appendix B, has more on bankruptcy.)

Another service under GAAS is an engagement to perform agreed-upon procedures, which requires the party requesting the service to designate the nature and extent of the procedures to be performed. The related report must state that it may not be used by anyone other than the party designating the procedures. Under such circumstances, it is a totally inappropriate form of service for a litigation engagement unless the plaintiff and defendant have jointly agreed on the procedures.

Attestation standards. According to AICPA Professional Standards , the attestation standards apply to “a written conclusion about the reliability of a written assertion that is [made by] another party” [AT section 9100.78]. This differs from the usual litigation services engagement, in which the CPA is making the assertion. Moreover, attestation standards do not apply to litigation services engagements unless the CPA is specifically engaged to perform a service in accordance with those standards. It is possible, but not likely, that an attestation engagement could arise in a litigation services setting. The CPA expert witness could be called on as someone with specialized knowledge, training and experience who could objectively present “answers.” It is up to the jury, or judge if there is no jury, to decide on the believability of those answers.

The attestation standards also provide for an agreed-upon procedures service. Here again, the service requires the parties asking for the report to designate procedures; the report is to be limited to those parties. Thus, as with an agreed-upon procedures engagement under the auditing standards, it is a totally inappropriate form of service for a litigation services engagement unless the plaintiff and defendant have jointly agreed on the procedures and, if applicable, criteria.

Accounting and review services standards (SSARS) . These are similar to the auditing standards in that the focus is on financial statements. However, SSARS contain a specific exemption for litigation services engagements (see the sidebar below for details). Thus, CPAs may compile financial statements in connection with a damage calculation or a business valuation used in litigation, without regard to the SSARS literature.

CODE OF PROFESSIONAL CONDUCT
General standards. The general standards of professional competence, due professional care, planning and supervision and sufficient relevant data apply to any professional service a CPA provides.

Professional competence. As stated in Ethics Interpretation 201-1, “Competence” ( AICPA Professional Standards , ET section 201.02),”competence relates both to knowledge of the professions standards, techniques and the technical subject matter involved, and to the capability to exercise sound judgment in applying such knowledge in the performance of professional services.” In litigation services, it is necessary to understand the trial process as well as the subject matter of the particular dispute. For example, you need to have a general understanding of the rules of evidence and how they differ for fact witnesses and expert witnesses. The same applies to the adversarial process—the discovery procedures and the order and presentation requirements for the actual trial. In terms of subject matter, there are issues such as saved expenses in a damage study or minority discounts in a business valuation. You also need to understand the principles of causation as they apply to damage studies.

Due professional care. This deals with how well you do your work. You are not infallible, but you must exercise the degree of care normally associated with an accountants work. This involves, among other things, allocating sufficient time to explore various documents and other data. If you dont have the time to make the necessary study, decline the engagement.

Planning and supervision. The testimony and cross-examination process requires a grasp of details that can be achieved only with significant involvement in case development. Usually this requires the testifying experts extensive involvement in the planning and supervision of the engagements and a flat staffing pattern.

Sufficient relevant data. In litigation it is common to have apparently inconsistent data, or no data at all, on a relevant point. Thus, assumptions will be necessary and you probably will be pressured to make assumptions favorable to your client. You must maintain your integrity and objectivity and not subordinate your judgment to the client.

Other rules of conduct. In addition to the general standards under Rule 201, other rules need to be considered, including Rule 101—Independence, Rule 102—Integrity and Objectivity, Rule 203—Accounting Principles, Rule 301—Confidential Client Information and Rule 302—Contingent Fees.

Independence; integrity and objectivity. There is a close relationship between these two rules. However, Rule 101 applies to attestation services but not to MCS. Rule 102, which requires the CPA to “be free of conflicts of interest,” applies to both.

Rule 102 also requires maintaining objectivity. But the rules recognize that you could in fact maintain objectivity but potentially lack the appearance of objectivity. Ethics Interpretation 102-2, “Conflicts of Interest,” provides that if there is an appearance of lack of objectivity, it is necessary to disclose the relevant relationship and obtain a consent to the engagement from the appropriate parties. In a litigation services engagement, the necessary consent is that of your client, not the opposing party.

The recent Interpretation 102-6, “Professional Services Involving Client Advocacy,” discusses the rules that apply to engagements in which a CPA acts as an advocate for a client. It does not apply to litigation services engagements. This position was confirmed in subsequently issued Ethics Ruling 101, “Client Advocacy and Expert Witness Services,” which states expert witness services do not constitute acting as an advocate for a client.

Accounting principles. Rule 203 applies when performing litigation services. In short, a CPA cannot say that financial information conforms to GAAP if it violates the rule. But conformity with GAAP is seldom the focus in a litigation services engagement. The focus normally is economic principles. Further, it is common in financial statements presented in litigation to include pro forma adjustments to show factors related to the litigation. As long as the CPA makes no representation that such financial statements conform to GAAP, there can be no violation of Rule 203.

Opposing counsel may ask whether your presentation conforms to GAAP. If you say no, he or she may then challenge you about why it does not conform, suggesting in the process that your presentation is wrong because of Rule 203. You should know the specifics of any nonconforming principle and be ready to explain why the principle you are using is more relevant to the issue than the GAAP standard. The fact that you believe a non-GAAP standard is more relevant is not a violation of Rule 203, no matter how much opposing counsel tries to say it is.

Confidential client information. There should be no problem if (1) the litigant who hired you (either directly or through his or her attorney) has never otherwise been a client, (2) you have never had any involvement with any transactions at issue and (3) all the information you obtain is acquired in the process of providing the litigation service. A problem can arise if you or your firm has prior knowledge of any of the issues in the case as a result of providing professional services. Such knowledge can include confidential information obtained from a third party. In such instances, you must carefully evaluate whether you have information relevant to the case that you must hold in confidence. Possession of such information would prohibit you from accepting the engagement.

Contingent fees. You cannot charge a contingent fee if you are also providing the client with a service that requires independence. Further, charging a contingent fee when your fee would be affected by the opinion you express is a conflict of interest. But some types of litigation services would not create a conflict. For example, you could provide consulting or document management services for a fee contingent on the outcome of the litigation.

CAREFUL STUDY REQUIRED
This article only briefly covers the subject of standards and ethics as they apply to litigation services, but it does make clear that many rules govern such practices. Putting them all under the umbrella of “being ethical,” the substantive decision is not made when confronted with a particular question. Rather, it is a way of life committed to long in advance.