What Is the Statement on Standards for Forensic Services?

The American Institute of Certified Public Accountants (AICPA) issued the Statement on Standards for Forensic Services No. 1 (SSFS No. 1) to provide authoritative guidance for members performing forensic accounting services. This standard was developed to improve the consistency and quality of practice among practitioners. Before its issuance, forensic engagements were covered under broader consulting standards, but SSFS No. 1 consolidated relevant guidance into a single, enforceable framework.

The standard aims to protect the public interest by clarifying the responsibilities of Certified Public Accountants (CPAs) when engaged in forensic matters. Its focus is on the purpose of the service—whether for litigation or investigation.

Scope of Applicability

The applicability of SSFS No. 1 is determined by a two-pronged test based on the engagement’s purpose. The standard applies to AICPA members when a service is provided for either litigation or investigation.

The first prong, litigation, encompasses services provided for an actual or potential legal or regulatory proceeding. This includes work as an expert witness, consultant, or a neutral party like a mediator or arbitrator. The term “litigation” broadly includes formal court proceedings and all forms of alternative dispute resolution. A common example is a CPA calculating economic damages from a contract breach for a civil lawsuit.

The second prong, investigation, involves engagements responding to specific concerns of wrongdoing. The CPA is engaged to perform procedures to collect and analyze evidence to help stakeholders reach a conclusion on the merits of the concerns. An example is an internal investigation into suspected employee embezzlement.

Certain services are excluded from the scope of SSFS No. 1. The standard does not apply to traditional financial statement audits, tax preparation, or valuation engagements, unless they are performed in the context of a dispute. For instance, a valuation for a shareholder dispute would fall under the standard, but one for estate tax purposes would not.

Core Principles of Engagement

SSFS No. 1 outlines foundational principles that govern the conduct of all forensic engagements. Practitioners must adhere to the following:

• Professional Competence and Due Professional Care: Practitioners must possess the specialized knowledge required for forensic accounting and apply their skills with professional diligence.
• Adequate Planning and Supervision: Every engagement must be sufficiently planned to meet its objectives, and any team members involved must be properly supervised.
• Sufficient Relevant Data: The member must gather and evaluate appropriate evidence to provide a reasonable basis for any conclusions or recommendations communicated.
• Objectivity and Integrity: Members are required to remain impartial, intellectually honest, and free of conflicts of interest, regardless of which party retained them.
• Client Understanding: A clear understanding must be established with the client, often through an engagement letter, outlining the responsibilities of all parties, and the nature and scope of the services.

Differentiating Litigation and Investigation Engagements

While SSFS No. 1 covers both litigation and investigation, their practical application differs based on the intended use of the CPA’s work and their role.

In a litigation engagement, the work is prepared for a formal legal or regulatory setting. The practitioner often serves as an expert witness, providing an opinion to assist a judge, jury, or arbitrator. The work product, whether a written report or oral testimony, is subject to the rules of evidence and the scrutiny of the legal process.

Conversely, an investigation is a fact-finding mission to determine the merits of a specific concern about wrongdoing, such as fraud. The work is often used internally by the client, for example, by management or a board of directors, to make decisions about corrective actions.

An investigation may initially be for internal purposes, but its findings can lead to a legal proceeding, transitioning it into a litigation engagement. This potential requires the CPA to maintain rigor and documentation that could withstand future legal scrutiny.

Communication and Reporting Requirements

SSFS No. 1 establishes specific rules for how a CPA communicates the results of a forensic engagement, applying to both oral and written reports. Any formal report must identify the client, describe the nature of the engagement, and clearly state the scope of services performed and any limitations.

The report must also detail the practitioner’s findings, including a description of the procedures performed and the evidence obtained. The standard requires the CPA to state any significant assumptions or reservations that might affect the conclusions.

A notable restriction is that a member is prohibited from opining on the ultimate conclusion of whether fraud has occurred, as that determination is left to the trier of fact. The CPA can, however, state whether evidence is consistent with a fraud scheme. When engaged as an expert witness, a member is also prohibited from working under a contingent fee arrangement.