Litigation support is advisory work with a courtroom behind it. The reports, schedules and testimony can be read by an opposing expert, a judge and a jury, and the CPA's own file can be demanded. The AICPA Statement on Standards for Forensic Services No. 1 (SSFS No. 1) governs this work for members. This article covers what the standard covers, its principal limits and how a firm should organize the engagement. For the broader discipline, see forensic accounting and the career view in forensic accountant career guide.
Scope and effective date
SSFS No. 1 applies to engagements accepted on or after January 1, 2020, with early adoption permitted. It applies to all AICPA members, AICPA member firms and employees of member firms. Before SSFS No. 1, forensic engagements fell under the Statement on Standards for Consulting Services No. 1 and the AICPA Code of Professional Conduct, and the new statement consolidated those requirements.
The statement covers two kinds of engagement:
- Litigation services. An actual or potential legal or regulatory proceeding before a trier of fact or a regulatory body, in which the member serves as an expert witness, consultant, neutral, mediator or arbitrator. The definition includes alternative dispute resolution, not only formal court cases.
- Investigation services. A service performed in response to specific concerns of wrongdoing, in which the member gathers and evaluates evidence to help stakeholders reach a conclusion.
Two limits that shape the engagement
Contingent fees. Under SSFS No. 1, a member serving as an expert witness in litigation may not provide opinions under a contingent fee arrangement, unless the AICPA Code's Contingent Fees Rule (ET 1.510.001) explicitly allows it. The restriction attaches to the expert witness role. Write the fee clause in every forensic engagement letter to remove any link between the fee and the result, and confirm the Code rule for the specific service before agreeing to anything else. Where tax matters are involved, Circular 230 section 10.27 separately limits contingent fees for matters before the IRS, and the two rules should be checked together. Circular 230 defines a contingent fee as one based in whole or in part on whether a position avoids challenge or is sustained, and it lists limited exceptions such as examinations of original returns, certain refund claims for interest and penalties and judicial proceedings.
Opining on the occurrence of fraud. SSFS No. 1 treats the conclusion that fraud occurred as a legal conclusion and prohibits the member from opining on it. The trier of fact decides. A forensic accountant may describe what the evidence shows, quantify losses, trace funds and state whether the evidence is consistent with certain elements of fraud. The report language must say what the evidence supports and stop there. See the glossary entries on fraud examination, fraud triangle and fraud tree.
Consultant or testifying expert
Role matters at the start. A consulting expert helps counsel prepare and may be protected from disclosure under the rules of the forum. A testifying expert is subject to disclosure rules, deposition and cross-examination. Switching roles midway can expose work product that was prepared on the assumption it would stay private. Confirm the role with counsel in writing before work starts, and record who engaged the firm. Where counsel engages the firm, the engagement letter should come from the attorney so that confidentiality arrangements follow the proceeding's rules.
Engagement letter elements
- Client and engaging party. The legal client, who engaged the firm and who pays.
- Role. Consulting expert, testifying expert, neutral, or investigator.
- Scope and issues. The questions to be addressed, the period, the entities and the documents.
- Fee basis. Time-based or fixed, with no link to the outcome.
- Independence and conflicts. A conflict check against all parties and counsel. See client acceptance and continuance.
- Confidentiality and work product. Who owns the file, how it is stored and what happens to drafts.
- Limitations. What the firm will not do, including legal conclusions.
- Records return and retention. Retention timing, which in litigation follows the proceeding and not only firm policy. See audit record retention.
Building the file
- Evidence log. Source, date received, who delivered it and its hash or checksum for electronic files.
- Chain of custody. For physical records and forensic images, record each transfer.
- Assumptions register. Every assumption supplied by counsel or the client, with the source, kept separate from facts the firm verified.
- Analysis workpapers. The calculation files that support every number in the report, with tick marks, as in any engagement. See audit tick marks.
- Draft control. Decide with counsel whether drafts are created, shared or destroyed under the applicable rules, and follow it.
- Reconciliation. Totals in the report tie to the workpapers and to the source documents.
Preparing for testimony
Re-read the file before deposition or trial. Know where every number came from. Do not testify beyond what the analysis supports. The same discipline on fraud conclusions applies on the stand as well as in the report. Prepare plain-language explanations for tracing methods and extrapolations, and prepare demonstrative exhibits that tie to the report.
Where a general practice firm gets into trouble
- Accepting expert witness work on a contingent basis.
- Allowing the report to say "fraud occurred."
- Mixing consulting and testifying roles for the same matter.
- Starting work before the conflict check.
- Keeping informal notes outside the file that later get requested.
FAQ
Does SSFS No. 1 apply to non-members?
By its terms it applies to AICPA members, member firms and their employees.
Can the firm work on a contingent basis?
Not as an expert witness giving opinions, unless the Contingent Fees Rule explicitly allows it. For any other forensic service, check the Code rule for that service and default to a time-based or fixed fee.
Is an internal investigation covered?
An investigation in response to concerns of wrongdoing is within the statement's investigation services definition.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- Georgia Society of CPAs, New AICPA Standards for Forensic Services: What You Need to Know: https://www.gscpa.org/content/Home/News/Professional-News/New-AICPA-Standards-for-Forensic-Services--What-You-Need-to-Know.aspx
- EisnerAmper, Forensic service engagements standards: https://eisneramper.com/insights/litigation-services/forensic-service-engagements-standards-0719
- Journal of Accountancy, AICPA forensic accounting standards (September 2019): https://www.journalofaccountancy.com/issues/2019/sep/aicpa-forensic-accounting-standards/
- Mercer Capital, AICPA issues new forensic services standard effective January 1, 2020: https://mercercapital.com/insights/posts/2020/aicpa-issues-new-forensic-services-standard-effective-january-1-2020
- IRS, Circular 230 (Treasury Department Circular No. 230), section 10.27: https://www.irs.gov/pub/irs-pdf/pcir230.pdf
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error