February 27, 2019

Ms. Barbara Andrews
American Institute of Certified Public Accountants
1211 Avenue of the Americas
New York, NY 10036-8775

RE: Proposed Statement on Standards for Forensic Services

Dear Ms. Andrews
We appreciate the opportunity to comment on the Proposed Statement on Standards for Forensic Services (the proposed standard). We note the overall objectives of providing more tailored authoritative guidance to members that perform forensic services, enhancing the overall quality of such services, and serving the public interest. While we agree with these objectives, we believe additional clarity is needed to achieve them.
As currently drafted, it is unclear whether the proposed standard is intended to be executed differently than Statements on Standards for Consulting Services CS section 100, Consulting Services: Definitions and Standards, because it does not contain much guidance specific to forensic services. If a new standard will be issued, we prefer the approach taken in Statements on Standards for Valuation Services VS section 100, Valuation of a Business, Business Ownership Interest, Security, or Intangible Assets. VS section 100 explains that CS section 100 applies to a valuation services engagement and then provides more tailored guidance to address valuation services engagements specifically.
Our more significant concerns and suggestions on the proposed standard are set out below.
Applicability of the proposed standard
We perform forensic services today under CS section 100, but there is inherent variability in the consulting and forensic service engagements we perform. In practice, engagements initially intended for one purpose often evolve into a forensic services engagement, as defined in the proposed standard. While we note many aspects of the proposed standard are based on CS section 100, we believe practitioners may find it difficult to determine whether to apply the proposed standard or CS section 100 without further clarification. In our view, it may be more practical for the proposed standard to be premised on the assumption that CS section 100 always applies in a forensic service engagement. This is the approach taken in VS section 100. We believe it would be helpful for the proposed standard to highlight that a number of professional standards may apply to a single forensic engagement, e.g., the proposed standard, CS section 100, and, in some engagements, VS section 100.
We believe the Forensic and Valuation Services (FVS) Executive Committee could then provide additional guidance on the various types of engagements to which the proposed standard might apply. We ask the AICPA to keep in mind, however, that engagements may begin under one set of standards, and evolve into a forensics engagement. For example:
  • Consulting engagements related to finalizing working capital adjustments after an acquisition may move to mediation, arbitration, or litigation.
  • Our findings in an outsourced internal audit arrangement may lead to additional work of an investigatory nature.
  • Litigation may be initiated by one party during the course of an engagement in which we were initially asked to assess royalties or licensing fees to be paid based on a contract.
Other areas where additional guidance could be helpful
Because the AICPA intends the proposed standard to provide more tailored guidance than CS 100, it would be helpful for the proposed standard to include guidance in relation to (1) establishing an understanding with the client, (2) considering the nature and purpose of the engagement, and (3) determining whether the practitioner can reasonably expect to complete the engagement with professional competence. This would be consistent with the approach in VS section 100. Doing so would assist in  setting an appropriate foundation for the engagement and could identify specific issues that may arise in conducting forensic services engagements. This foundation, for example, would provide context for the requirement in paragraph .02 of the proposed standard for members to “modify their understanding” with the client if an engagement converts to a forensic services engagement. Further clarity in the proposed standard would be helpful to address whether the practitioner would be expected to issue an updated engagement letter (if one had been initially obtained) and, if so, how the engagement letter would refer to the standards that are applicable to the engagement.
Terminology implications
Expert witness services appear to be contemplated in paragraph .07 of the proposed standard, but in the broader context of an “expert opinion.” It is unclear whether this broader category was introduced solely to accommodate both expert witness testimony and written reports from experts or whether a broader inclusion was intended. The AICPA Code of Professional Conduct (AICPA Code) and its interpretations are focused specifically on expert witness services and do not address other engagements in which a client    may have retained a member based upon their being an “expert” in the subject matter. Accordingly, coordination with the AICPA Professional Ethics Executive Committee (PEEC) may be necessary in finalizing the standard.
Contingent fee arrangements and conflicts of interest
Paragraph .07 of the proposed standard addresses a prohibition on contingent fee arrangements for expert opinions. We suggest this paragraph be revised to focus instead on reminding members of their obligation to comply (as applicable) with the “Contingent Fees Rule” and its interpretations when performing litigation services and to provide a cross reference to ET section 1.510 of the AICPA Code.
Should the FVS Executive Committee believe there are problems in practice related to contingent fee arrangements for expert opinions or other forensic services engagements that need to be specifically addressed, we suggest engagement with the PEEC to determine whether an interpretation of the AICPA Code or additional guidance in the proposed standard may be necessary. In particular, the PEEC and the FVS Executive Committee could acknowledge how consulting services that may be performed on a contingent fee basis could evolve to forensic services performed in accordance with the proposed standard and provide guidance on what the practitioner is expected to consider in these circumstances when evaluating conflicts of interests and whether being engaged on a contingent fee basis remains appropriate. For example, we may be engaged to perform a royalty assessment engagement under a contingent fee arrangement. Our findings may indicate we are due a significant amount if the client is successful in negotiating a resolution based on our findings. In light of paragraph .07 of the proposed standard, a question arises whether we would be permitted to testify as a fact witness regarding the work we  performed if the parties went to court. In this example, we were engaged based on our expertise and developed opinions or findings in performing our work. While the initial intent was not to be engaged to provide expert witness services, we could be viewed as providing an expert opinion even if testifying solely as a fact witness. It is unclear if the AICPA believes it would be acceptable to provide that testimony and remain on a contingent fee basis. Alternatively, if the member and the client reached an agreement on fees earned in connection with developing the findings, and then the testimony phase was billed at an agreed hourly rate, we are unclear if this would alleviate the concern raised in the proposed standard and the AICPA Code.
Another example arises when the member assists clients with closing balance sheet true-ups in the finalization of an acquisition on a contingent fee basis. Those situations could easily move to arbitration, with the member attending related meetings or hearings. While not providing live testimony under oath or via an expert report, the member could be asked to explain the client’s position or accounting views during meetings or hearings with the arbitrator. It is unclear whether this would be permitted on a contingent fee basis under the proposed standard.
Similarly, it would be worthwhile for the PEEC and the FVS Executive Committee to consider providing more guidance specific to forensic services to address what might be expected in terms of communication with the client in relation to conflicts of interests and significant reservations concerning the scope or benefits of the engagement. In our experience, discussions with the client about potential conflicts of interest and any reservations about the scope or benefits of the engagement are best addressed by the member when considering whether to accept or continue the engagement and in agreeing to its terms.
Effective date
We do not support the proposed effective date for engagements accepted on or after May 1, 2019. This timeline does not adequately contemplate the potential need for changes to tools and guidance to support forensic services engagements, particularly in organizations that perform a significant number of such engagements each year.
*   *   *   *   *
We appreciate the opportunity to express our views and would be pleased to discuss our comments or answer any questions you may have. Please contact Kevin Kreb at (312) 298-2587 regarding our submission.
Sincerely,
PricewaterhouseCoopers LLP
______________________________
PricewaterhouseCoopers LLP, One North Wacker Drive,Chicago, IL, 60606
T: (312) 298 2587, www.pwc.com/us
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