Skills used in litigation services.

CPAs need to develop special expertise to succeed in a challenging niche.

A CPA providing litigation services contributes professional assistance to lawyers in the litigation process. These services may include damage computations, financial analysis and expert testimony. Providing such services can be rewarding, but it is also challenging and demanding: The practitioner must be able to communicate complex ideas convincingly in simple terms, possess well-rounded technical skills and function in a pressure-filled environment. CPAs must not only possess skills unique to litigation services but also be able to testify convincingly--and the lawyers who hire CPAs must be comfortable with the CPA's skills. CPAs may already possess many of the relevant skills and can develop other skills from a variety of sources. This article discusses training in a variety of fields and how expertise in each of these fields makes the CPA more proficient and marketable in this niche.

FUNDAMENTAL EDUCATION

Much of the knowledge used in litigation services is available from undergraduate and graduate courses in accounting. Continuing professional education and work experience also are good sources. Traditional accounting education that is most relevant to litigation services includes the following items. (They generally are included in accounting programs. However, schools rarely teach the application of these areas to litigation services, so further education may be required.)

Financial and investigative accounting. As an expert witness, a CPA may have to analyze and interpret financial statements and information. Accordingly, the practitioner should have sufficient knowledge in financial accounting. Some examples:

* When a CPA performs a business valuation, he or she often analyzes and adjusts the balance sheet and income statement to reflect economic factors. If the accountant was retained to search for fraudulent transactions, knowledge of the relationships between general ledger accounts might narrow the CPA's search.

* Some assignments require the CPA to provide forensic or investigative accounting services. A bankruptcy case may require a search for preferential transfers or fraudulent conveyances. A search for perquisites paid by a closely held company may be necessary in a divorce case to determine the real income of the parties.

* Procedures used in fraud engagements are similar to investigative skills employed by auditors.

* Sampling techniques are used in some cases to develop costs for damage computations.

Cost accounting. The litigation services practitioner preparing a damage computation or lost-profits analysis often applies cost accounting theories. For such engagements, variable costs, as opposed to fixed costs, are frequently deducted from lost revenues to arrive at lost profits. A CPA should have a knowledge of cost accounting when the litigation involves a company in an industry that uses it, such as manufacturing, construction or defense contracting.

Taxation. In marital dissolutions, CPAs may be asked about the tax effects of alimony, child support, property allocation and distributions from pension plans. Bankruptcies involve complex tax issues, such as the forgiveness of debt. Also, a portions of certain types of court awards are nontaxable under some circumstances.

OTHER TRADITIONAL EDUCATION AREAS

These areas are not necessarily part of an accounting course of study, but many CPAs may already be familiar with these subjects from undergraduate or graduate work.

Economics. Business appraisals require the consideration of micro- and macroeconomic principles, such as the nature of the economy and the competition affecting a specific company. Lost-profit computations usually require the determination of what profits would have been if a specific event had not occurred. Consequently, the practitioner may need to consider economic trends that occurred before and during the damage period.

Marketing. Lost-profits or business-damage cases sometimes require an understanding of marketing. For example, the practitioner may estimate what gross sales would have been except for a certain event. This may require a knowledge of market stratification and other marketing concepts, such as product pricing and distribution.

Finance. Finance theory is a hallmark of certain assignments. In engagements that require present value computations, the CPA must determine the appropriate discount rate. A CPA acting as a business appraiser frequently evaluates the rate of return an investor would require for a specific company in order to determine a capitalization or discount rate.

Statistics and quantitative techniques. Quantitative methodology could be used, for example, in a business-damage case when linear regression can help determine future sales and cost allocation. Other engagements, such as those involving securities law violations, might rely on statistical analysis to correlate securities price changes with alleged wrongful events.

Information technology. CPAs should understand spreadsheets, databases and graphics software, because the computer is useful in accumulating, analyzing and presenting a wide range of information.

Business law. Although the CPA is not expected to render legal opinions, he or she should have a basic understanding of some legal areas, such as contract law. As a practical matter, an attorney would prefer a CPA who understands the legal concepts in the subject under litigation.

LITIGATION SERVICES SKILLS

What happens in a courtroom? How does a litigation team prepare for a courtroom appearance?

Before judge and jury. A general knowledge of the rules of evidence and of civil procedure may be helpful. For example, knowledge of the discovery process will help the CPA understand the options available in obtaining relevant information. Also, a CPA should understand the role an expert witness plays in both direct and cross examination. (However, the attorney should provide the CPA with a particular case's specific legal requirements.)

Depositions and courtroom testimony. If the CPA is to be effective as an expert witness, he or she should possess good communication skills and be able to think logically while under pressure. CPAs need to master public speaking skills. Since CPAs may need to testify about complex financial information, they may need to work with charts and graphs. Although CPAs are trained to present financial data in financial statements, the average juror may not comprehend this type of presentation. Accordingly, complicated information should be turned into an easy-to-understand format; in many instances, simple graphics can communicate the desired point.

Research techniques. CPAs should be familiar with electronic databases and other sources of financial and economic industry data. Although information may be available, collecting it can be expensive and time-consuming. The CPA should have a general understanding of the sources and limitations of researched data.

Damage theory and analysis. The CPA frequently is called on to calculate damages in a variety of situations. It is helpful to know damage theories, any calculation limitations, the proper way to gather information (such as financial and nonfinancial data and company-specific, industry and economic information) and the actual calculation methods used and when they apply.

Specific technical knowledge. Attorneys may select CPAs based on their knowledge of areas such as antitrust, bankruptcy, business appraisals, construction claims, intellectual property, insurance business interruption claims, family law and securities law violations.

Professional standards. The CPA should be well-versed in the American Institute of CPAs Code of Professional Conduct and the AICPA Statement on Standards for Consulting Services no. 1, Consulting Services: Definitions and Standards. Although the entire code is applicable for all litigation engagements, Rules 102-Integrity and Objectivity, 201-General Standards and 301-Confidential Client Information are especially important. Additionally, practice aids issued by the AICPA management consulting services division may provide nonauthoritative guidance. Special Report 93-1, Application of AICPA Professional Standards in the Performance of Litigation Services, and Special Report 93-2, Conflicts of Interest in Litigation Services Engagements, also are useful materials.

PUTTING IT ALL TOGETHER

The litigation services practitioner has to use knowledge beyond that obtained in a CPA's traditional accounting education. CPAs should consult the AICPA, state CPA societies, other professional organizations, industry associations, universities, private CPE vendors, books, periodicals and their firms' in-house courses. The new skills, added to those traditionally mastered by the practitioner, make a CPA highly marketable to lawyers in need of expert witnesses.

EXECUTIVE SUMMARY

* CPAs NEED TO DEVELOP specific skills to enter the litigation services niche. They must be able to present the technical aspects of a financial analysis clearly and convincingly to lawyers and juries.

* SOURCES OF A CPA's EDUCATION include undergraduate and graduate courses in accounting, finance and economics; continuing professional education and work experience also are good sources.

* FUNDAMENTAL EDUCATION INCLUDES financial and investigative accounting, cost accounting and taxation.

* OTHER TRADITIONAL AREAS of education include economics, marketing, finance, statistics and quantitative techniques, information technology and business law.

* A PRACTITIONER NEEDS TO DEVELOP specialized skills in the litigation process and should be familiar with depositions and courtroom testimony, research techniques, damages and analysis, technical facts in specific areas and American Institute of CPAs technical standards (such as auditing standards and statements of position).

MORTON M. COHEN, CPA, is a partner of Cohen & Muckler, Brentwood, New York. MICHAEL A. CRAIN, CPA, is a shareholder of Peed, Koross, Finkelstrin & Crain, P.A., in Fort Lauderdale, Florida. ARTHUR SANDERS, CPA, is president of Israeloff, Trattner & Co., P.C., Valley Stream, New York. All three are or have been members of the American Institute of CPAs litigation and dispute resolution services subcommittee.

Where to Get Education

There is no prescribed curriculum for litigation services. However, education is available from universities, continuing professional education providers and various professional societies.

The following are some possible sources of education and training.

Economics, Finance, Statistics and Quantitative Techniques

* Undergraduate and graduate colleges

* Online college courses, such as those offered by the University of Phoenix (http://www.uophx.edu/)

Litigation Services and Testifying

* American Institute of CPAs (800-862-4272, menu #1)

* Various state CPA societies

* American Board of Forensic Examiners (417-863-8930)

* Association of Certified Fraud Examiners (512-478-9070)

* The CPE Institute (504-769-8242)

* Nichols Education Corporation (419-874-2749)

* Practitioners Publishing Company (212-971-5183)

Divorce

* American Institute of CPAs (800-862-4272, menu #1)

* Various state CPA societies

* Nichols Education Corporation (419-874-2749)

* Practitioners Publishing Company (212-971-5183)

Fraud Investigation Techniques

* American Institute of CPAs (800-862-4272, menu #1)

* Association of Certified Fraud Examiners (512-478-9070)

* Nichols Education Corporation (419-874-2749)

* Marshall B. Romney & Associates (801-491-9180)

* Professional Development Institute (817-565-2483)

Business Valuation

* American Institute of CPAs (800-862-4272, menu #1)

* Various state CPA societies

* American Society of Appraisers (703-478-2228)

* Institute of Business Appraisers (561-732-3202)

* International Business Brokers Association (703-437-4377)

* National Association of Certified Valuation Analysts (801-486-0600)

Bankruptcy

* Association of Certified Fraud Examiners (512-478-9070)

* Association of Insolvency Accountants (818-889-8317)

* Nichols Education Corporation (419-874-2749)

* Practising Law Institute (212-824-5700)

Intellectual Property

* Licensing Executive Society (703-836-3106)

* Practising Law Institute (212-824-5700)

Alternative Dispute Resolution:

Arbitration, Mediation

* American Arbitration Association (312-616-6560)

* Practising Law Institute (212-824-5700)

* Society of Professionals in Dispute Resolution (202-783-7277)

* Various bar associations and law schools