Financial experts may be subject to standards of professional practice from a number of sources when they measure lost profits damages and give related expert testimony. The sources can include governmental regulators as well as professional membership organizations and societies. In addition, a technical community may establish professional standards of practice in other ways.
In a chapter from The Comprehensive Guide to Economic Damages, 6th edition, Dr. Michael A. Crain, CPA/ABV, CFA, CFE (Florida Atlantic University), who is both an academic and practitioner, reviews some of the standards commonly associated with financial professionals and the following is an excerpt from that chapter.
- Certified Public Accountants
Accountants are one group of financial experts whom parties frequently retain in business litigation to measure lost profits damages. Many of these accountants are licensed as a certified public accountant (CPA). Since state governments license CPAs in the U.S., the rules and regulations of a government entity or authority (usually a state’s board of accountancy) will regulate the professional conduct of a CPA in public practice. In addition, if a CPA has joined a professional member organization such as the American Institute of Certified Public Accountants (AICPA) or a state CPA society, he or she voluntarily submits to that organization’s ethical rules and standards of professional practice. Most of the state boards of accountancy have adopted the majority of concepts in the AICPA professional standards into their rules and regulations.
The AICPA has issued a professional standard of practice, effective Jan. 1, 2020, for its members providing services to a client as part of litigation or investigation engagements. The standard, Statement on Standards for Forensic Services (SSFS No. 1), does not change the principles required of AICPA members before issuance when providing such services. Effectively, SSFS No. 1 puts the relevant standards in one place and clarifies some topics. SSFS No. 1 requires the accountant performing his or her work to:
- Have professional competence;
- Exercise due professional care;
- Adequately plan and supervise the services;
- Obtain sufficient relevant data for the conclusions;
- Serve the client interest by seeking to accomplish the engagement objectives while maintaining integrity and objectivity;
- Establish an understanding with the client on matters such as the scope of work; and
- Communicate with the client on findings, reservations, and conflicts of interest.
Prior to SSFS No. 1, the professional standard for AICPA members hired by clients for lost profits damages in litigation was AICPA’s Statement on Standards for Consulting Services, No. 1 (SSCS No. 1), which remains in effect for other kinds of consulting services AICPA members provide. SSFS No. 1, the current standard, states that, when AICPA members are hired for forensic services, SSCS No. 1 does not apply. Prior to the current standard, SSCS No.1 specified requirements for work very similar to the SSFS No. 1 requirements listed above.
In addition to SSFS No. 1 and SSCS No. 1, CPAs generally are also expected to follow the relevant parts of the AICPA Code of Professional Conduct and any other applicable AICPA standards if the AICPA has issued technical standards for a specific area. For instance, the AICPA has issued technical standards for performing business valuations. If hired for forensic services and a valuation is performed as part of the engagement, both SSFS No. 1 and the AICPA valuation standard apply to the person. AICPA has not issued any specific technical standards for developing lost profits damages measurements. The portions of the AICPA Code of Professional Conduct that could be relevant to CPAs performing lost profits damages measurements (and other forensic services) are the following:
- Rule 102, Integrity and Objectivity;
- General Standards;
- Compliance With Standards;
- Acts Discreditable;
- Contingent Fees; and
- Confidential Client Information.
In addition, if a CPA is performing lost profits damages measurements or giving expert testimony for an existing attest client, the AICPA Code of Professional Conduct discusses whether such services and activities of a CPA will impair his or her independence, such that it might prevent him or her from providing attest services. (Forensic accounting services, which include litigation services, are not attest services.) “Independence” has a specific meaning for the accounting profession and is required for a CPA to provide attest services, such as auditing and reviewing financial statements. As a term of art in the accounting profession, independence is not required for nonattest services. Instead, a CPA is required to have integrity and objectivity when providing nonattest services.
- Economists Other Financial Experts
Unlike their oversight of CPAs, government regulators do not license and oversee economists and other financial experts if these professionals measure lost profits damages or provide related expert testimony. To the author’s knowledge, no federal or state regulators issue rules and regulations governing the conduct of economists and financial experts (who are not CPAs) on lost profits damages measurements. However, like CPAs, if these individuals belong to a professional organization that requires its members to follow ethical rules and other standards, then they have obliged themselves to follow those guidelines.
For instance, the National Association of Forensic Economics, a member organization consisting primarily of economists, has a Statement of Ethical Principles and Principles of Professional Practice. That document covers its members when providing an expert opinion. Section 3 of the document states:
Practitioners of forensic economics should employ generally accepted and/or theoretically sound economic methodologies based on reliable economic data. Practitioners of forensic economics should attempt to provide accurate, fair and reasonable expert opinions, recognizing that it is not the responsibility of the practitioner to verify the accuracy or completeness of the case-specific information that has been provided.
Practitioners of forensic economics should provide sufficient detail to allow replication of all numerical calculations, with reasonable effort, by other competent forensic economics experts, and be prepared to provide sufficient disclosure of sources of information and assumptions underpinning their opinions.
While it is recognized that practitioners of forensic economics may be given a different assignment when engaged on behalf of the plaintiff than when engaged on behalf of the defense, for any given assignment, the basic assumptions, sources, and methods should not change regardless of the party who engages the expert to perform the assignment. There should be no change in methodology for purposes of favoring any party’s claim. This requirement of consistency is not meant to preclude methodological changes as new knowledge evolves, nor is it meant to preclude performing requested calculations based upon a hypothetical—as long as its hypothetical nature is clearly disclosed.
Financial experts may also recognize the methods that their applicable professional literature describes as standards of practice. However, one should consider the quality of the journal and evaluate whether an article represents only one person’s opinion or a practice that a panel of experts has peer-reviewed.
A trier of fact may judge the opinions of a testifying expert and the credibility of the individual based on whether the work that went into the expert’s opinions met the professional standards of practice in the relevant technical community. These standards may be on technical matters or rules for ethical conduct. Further, professional organizations and associations may establish standards of practice. These groups might be government regulators or industry groups. In addition, standards of practice might arise from practices described in a profession’s literature. Beyond professional standards of practice in a technical community, judicial rules may also apply to the opinions of experts and their related disclosures.
Be sure to check out BVR’s Comprehensive Guide to Economic Damages, 6th edition, for more about profession standards and economic damages as they relate to the business valuation. Preview the table of contents and look inside to learn more about this invaluable resource for every attorney and business valuation professional to stay ahead of the game.
More learningWant to dive deeper into economic damages? Don’t miss BVR’s upcoming National Economic Damages Virtual Conference on May 26-27. Drawing directly from the expertise of six editions of The Comprehensive Guide to Economic Damages, BVR is excited to gather the authoritative voices behind the renowned publication. Increase your knowledge base and earn CPE/CLE credits at this one-of-a-kind event that brings together leading attorneys and expert witnesses that prepare and litigate damages cases.