IMGCAP(1)]Forensic accountants must perform their services with the utmost professionalism, whether they have been hired by a trustee to assist in the preservation of the remaining assets of a bankruptcy estate, or by a receiver to investigate potential financial malfeasance on behalf of a debtor company.
Forensic accountants must be beyond reproach related to their objectivity, integrity and independence. Recent national and local headlines have highlighted some of the most egregious frauds in the history of the U.S. relating to fiduciaries, including the Madoff matter, the Ponzi scheme of Scott Rothstein, as well as the misappropriation of funds by once heralded South Florida receivers Lewis B. Freeman and trustee Marika Tolz.
These scandals have led many to communicate a sense of ethical anomie for fiduciaries (i.e., trustees or receivers) in the performance of their duties, which in part, has carried over to some of the professionals that assist these fiduciaries, including forensic accountants.
Here are some best practices for maintaining the tenets of objectivity, integrity and independence in the performance of forensic accounting services:
1. Integrity requires an accountant to be, among other things, honest and candid within the constraints of client confidentiality. Service and the public trust should not be subordinated to personally gain an advantage. Integrity can accommodate the inadvertent error and the honest difference of opinion; it cannot accommodate deceit or subordination of principle.
2. Objectivity is a state of mind, a quality that lends value to an accountant’s services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest. Independence precludes relationships that may appear to impair a member's objectivity in rendering attestation services.
3. Independence has two definitions, according to the AICPA:
a. Independence of mind - the state of mind that permits the performance of an attest or non-attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism, and;
b. Independence in appearance - the avoidance of circumstances that would cause a reasonable and informed third party, having knowledge of all relevant information, including the safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or a member of an attest or non-attest engagement team had been compromised.
In practice, the three principles above are often interrelated. Maintaining objectivity implies the integrity to determine whether or not you are independent or whether a conflict of interest might exist.
The criterion for evaluating whether a conflict of interest is involved in performing a forensic accounting service engagement is the ability of the accountant to maintain integrity and objectivity and is further described in the AICPA Statement on Standards for Consulting Services (SSCS) No. 1, Consulting Services: Definitions and Standards (AICPA, Professional Standards, vol. 2, CS sec. 100).
A conflict of interest is based in fact, rather than appearance; however, all forensic accountants should be mindful of and deal with appearances of conflicts before accepting and during the performance of the engagement.
A conflict of interest can impair a forensic accountant’s ability to objectively evaluate and present an issue for a client because of a current, prior, or possible future relationship with other parties, including those who may be involved in the engagement.
According to AICPA Practice Aid 08-1, Independence and Integrity and Objectivity in Performing Forensic and Valuation Services, before accepting a forensic accounting engagement, one should carefully evaluate their relationships, if any, with all parties to the action to identify potential actual and perceived conflicts of interest. These parties include named and potential adverse parties, and counsel for the parties on the opposing side.
Some examples of conflicts of interest and some best practices on how to avoid them include:
1. Personal Relationships – If a principal of the forensic accounting firm or any of the members of the team performing forensic accounting services has a personal relationship with the debtor or receivership entity, its affiliate, or any of the debtor’s principles, a real or perceived conflict might exist.
2. Financial or Prior Professional Relationship with a Debtor or Receivership Entity - If the forensic accountant (or the accountant’s firm) performs other attest or non-attest services for the debtor or receivership entity, it might create either a real or perceived conflict.
3. Purchase of the Assets of an Insolvent Company or Receivership Entity – Part of any bankruptcy or receivership can involve the liquidation or sale of assets. Forensic accountants working for trustees or receivers should ensure that no member of the accounting firm purchases any of these assets. Failure to do so may result in allegations of self-dealing, especially when these assets are purchased at substantially below perceived market value.
4. Obtaining Insolvency/Receivership Work – It is axiomatic that a forensic accountant should not accept any engagement in which the appointment was obtained through any compensation directed back to the appointer. Beyond direct compensation, one should also be concerned about the appearance of certain gifts or other non-financial benefits such as awards or benefits to related third parties.
5. Incentives – Incentives can pose a risk to a forensic accountant’s objectivity on an engagement. A forensic accountant should rarely if ever take on an engagement where the compensation to the accountant is based on certain obtained results. Taking a case on contingency can create a real or perceived issue with a forensic accountant’s objectivity and should be avoided.
During the course of a litigation services engagement, there is always the potential for a non-opposing party to become an opposing party. Therefore, continuing sensitivity to newly arising conflicts is necessary, particularly in engagements that are active for long periods of time or involve numerous parties.
The nature and complexity of forensic accounting engagements make it imperative that potential conflicts be identified early, preferably before the accountant accepts the engagement. The forensic accountant should discuss situations that give rise to any questions of conflicts with the trustee and/or receiver, as well as counsel for fiduciaries, to evaluate relevant issues before forensic accounting services are provided.
Richard Fechter, CAMS, Esq., is an associate director in the Forensic and Business Valuation Practice of Berkowitz Dick Pollack & Brant. As an attorney, Fechter’s broad experience includes financial investigations, damage claims, lost profits analysis, fraud investigations and forensic issues relating to bankruptcy matters. For more information, call (305) 960-9075, email
