United States: Taking a Stand (Or Not): New Ethics Rule Could Compromise Your Expert’s Testimony

A new ethics standard for certified public accountants will likely create ripples in the legal pond, too. The standard, intended to preserve CPA independence, could preclude accountants from providing expert witness testimony and forensic services in certain circumstances.

The American Institute of Certified Public Accountants (AICPA) has announced new independence requirements which will affect the performance of expert witness services for audit clients. The restrictions took effect Feb. 28, 2007, but news of the changes may not have reached every CPA. Litigators must understand the constraints the restrictions place on the provision of forensic services to avoid undermining their CPAs’ credibility on the witness stand.

The AICPA establishes mandatory standards for CPAs. While its pronouncements do not constitute legal standards, they frequently affect the litigation arena, particularly as they relate to CPAs who provide expert testimony.

The AICPA’s Professional Ethics Executive Committee’s (PEEC’s) recent revision to Interpretation No. 101-3, Performance of Nonattest Services, will influence how CPAs interact with attorneys regarding expert testimony, investigatory services, and dispute resolution.

The standard is intended to preserve CPA independence when performing auditing services — or other "attest" services — for a client. The concern is that the performance of certain nonattest services would impair a CPA’s independence (and the independence of the firm) when conducting attest services.

Thus, the standard provides that performing specific forensic services can impair a CPA’s independence, so that the CPA cannot then perform an audit or provide other attest services.

This may seem irrelevant for litigation purposes, but that is not the case. An opposing attorney could easily attack a CPA’s expert witness testimony by questioning his or her independence or adherence to ethical standards.

A CPA expert may also need to be prepared to explain the significance of the Feb. 28 effective date—that is, why the CPA appeared independent prior to that date.

The PEEC standard specifically addresses forensic accounting services, among other types of nonattest services. Forensic services consist of litigation and investigative services, as well as services as a neutral.

Litigation services. Litigation services include acting as an expert to provide assistance for actual or potential legal or regulatory proceedings before a trier of fact. The standard explains that expert witness services create the appearance of advocacy on behalf of a client. Accordingly, where a CPA agrees to provide expert witness testimony for a client, his or her independence for attest services is deemed impaired.

The standard recognizes two potential exceptions. When the CPA is providing expert witness testimony for a large group of plaintiffs or defendants that includes one or more of the CPA’s attest clients, independence is not impaired if:

1. The CPA’s attest clients represent less than 20 percent of a) the group, b) the group’s voting interests, and c) the claim;

2. No attest client within the group is designated as the lead plaintiff or defendant; and

3. No attest client holds sole decision-making power to select or approve the expert witness.

Independence also is not impaired if, while testifying as a fact witness, a CPA is solicited for opinions pertaining to matters within his or her expertise. Therefore, where a CPA who audited a client is subpoenaed as a fact witness, the CPA could testify without compromising independence.

Nonetheless, attorneys should expect CPAs to be on guard for permissible engagements that morph into potentially unacceptable engagements. In such a case, engagement agreements may require modification to limit the CPA to fact testimony. A CPA may even conclude that termination of the engagement is necessary. Attorneys retaining CPAs may already find negotiation of engagement agreements time consuming. Adding more limiting language that may be subject to discovery will only increase the burden.

Litigation consulting services, on the other hand, will not impair independence. A CPA can provide advice about the facts, issues, and strategy of a matter, as long as he or she complies with the general requirements discussed below.

Neutral Services. CPAs are also retained at times as a trier of fact, special master, court-appointed expert, or arbitrator in matters involving a client. An auditor, for example, could be called in to serve as a neutral in settling a client’s disputes related to purchase price or the payment of sales-based royalties.

The standard states that these services create the appearance the CPA is not independent. Independence would not be impaired, though, if the CPA does not make any decisions on behalf of the parties but instead acts as a facilitator for the parties to reach their own agreement.

Investigative Services. The standard defines investigative services as including all forensic services not involving actual or threatened litigation. CPAs can deliver such services for attest clients without impairing their independence, again assuming compliance with the general requirements below.

Attest clients can turn to their auditors to investigate employee fraud or anti-money laundering matters without endangering independence. But, if the investigation leads to litigation, the auditor/investigator’s testimony is limited to facts about the investigation and the related findings.

The recent revisions left intact the general requirements for performing nonattest services for attest clients:

1. The CPA should not perform management functions or make management decisions for the attest client.
2. The client must agree to perform the following functions in connection with the engagement to perform nonattest services:

1. Make all management decisions and perform all management functions;
2. Designate an individual who possesses suitable skill, knowledge, and experience, preferably within senior management, to oversee the services;
3. Evaluate the adequacy and results of the services performed;
4. Accept responsibility for the results of the services; and
5. Establish and maintain internal controls, including monitoring ongoing activities.

Attorneys also must bear in mind the prohibitions the Sarbanes-Oxley Act imposes on CPAs. Section 201 makes it unlawful for a registered public accounting firm (and any associated person) that performs any audit for a public company to provide that company with specific nonaudit services, including legal services and expert services unrelated to the audit.

Attorneys may find it worthwhile to review the circumstances surrounding their CPA experts, both going forward and in existing engagements. While a CPA’s violation of the standard will not render his or her testimony inadmissible, it can make the expert vulnerable to attack on ethics and independence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.