Forensic Accounting — Fraud Investigations FVS (Formerly BVFLS) Practice Aid 07-1

Cases involving management fraud, money laundering, tax fraud, bankruptcy fraud, secu­rities fraud, and other types of fraud continue to be prevalent.  This Practice Aid discusses the CPA’s responsibilities, opportunities, and assignments in fraud-related matters in the context of litigation services.

Helpful appendices include sample paragraphs describing scope of work for engagement  letters, a glossary of legal terms, and selected indicia of fraud.

INTRODUCTION

.01 Litigation and dispute resolution services are provided by a CPA using accounting and consulting skills to assist a client in a matter that involves a pending or potential legal or regu­latory proceeding, in many instances, before a “trier of fact” (for example, a judge, jury, arbi­trator, mediator, or special master) in connection with the resolution of a dispute between two or more parties.1 Litigation services, a type of consulting service, are provided by a CPA act­ing only as a consultant, usually to an attorney, or as an expert witness. The services provided may include fact finding (such as assistance in the discovery and analysis of data), damage calculations, document management, preparation of demonstrative evidence, and expert tes­timony. Fraud investigation is one of the many services considered litigation services.2 Litiga­tion services are classified as transaction services in the Statement on Standards for Consult­ing Services (SSCS) No. 1, Consulting Services: Definitions and Standards (AICPA, Profes­sional Standards, CS section 100),3 and are subject to the SSCS and the professional stan­dards embodied in the AICPA Code of Professional Conduct.

SCOPE OF THIS PRACTICE AID

.02 Cases involving management fraud, money laundering, tax fraud, bankruptcy fraud, secu¬rities fraud, and other types of fraud continue to be prevalent and are increasing in frequency. Fraud issues surface in many engagement circumstances that involve the skills of the CPA, including attest, tax, and general consulting services. This Practice Aid discusses the CPA’s responsibilities, opportunities, and assignments in fraud-related matters only in the context of litigation services and provides nonauthoritative guidance for the CPA providing such ser¬vices. This Practice Aid does not set standards for the performance of such engagements or other litigation services.

A key difference between litigation services engagements and other consulting services engagements is that litigation services involve an actual or potential dispute resolution

1 The practice discipline includes actual or potential disputes that may or may not proceed to formal litigation. For brevity’s sake, this Practice Aid uses the term litigation services when, unless otherwise indicated, it means litiga­tion and dispute resolution services. This Practice Aid may benefit CPAs as well as non-CPAs employed by mem­ber firms. Therefore, the provider of these services is referred to as the CPA, although other professionals also pro­vide such services.

2 Litigation services and applicable professional standards are discussed in Consulting Services Special Report 03-1,

Litigation Services and Applicable Professional Standards (New York: AICPA, 2003)

3 Statement on Standards for Consulting Services (SSCS) No. 1 was effective January 1, 1992.

• Assessing the risk of fraud and illegal acts
• Evaluating the adequacy of internal control systems
• Substantive testing of transactions during an attest or a general consulting engagement
• Designing and implementing internal control procedures
• Proactive fraud auditing when fraud is not suspected
• Preparing company codes of business ethics and conduct
• Consulting about employee bonding
• Developing corporate compliance programs

.04 The services listed above are not addressed in this Practice Aid. In practice, a CPA may perform many or all of the above-mentioned activities when providing either litigation or nonlitigation services that involve concerns about fraud.

.05 A CPA who is providing nonlitigation services may encounter signs of actual or potential fraud that might be considered during the nonlitigation services engagement or that might be addressed specifically in a separate engagement. If an attest team detects errors and irregulari­ties that suggest fraud, the attest engagement team must comply with the applicable profes­sional standards. However, the attest team should report their concerns to management or other company representatives who might initiate a fraud investigation using appropriate counsel, a CPA, or a forensic specialist. Counsel, with the CPA or forensic specialist’s assis­tance, would conduct the fraud investigation and communicate the findings to management. Management could then provide the findings to the attest team, who would evaluate the find­ings and proceed as appropriate. This Practice Aid discusses many fraud investigation as­signments and approaches but does not suggest that all such services should be included in each CPA’s scope of practice.