Ethics On The Front Lines
I want to share three quick stories where ethical considerations were considered when accepting or continuing engagements.
Case #1: A Partnership Dispute, or, The Devil and Larry Goldsmith
The Forensic Accounting portion of my business was uncharacteristically slow. Cases had been settled, and depositions and trials were delayed for months.
Then the devil presented me with the opportunity of a large new case which involved disputing business partners. The engagement required an analysis of expenditures, bank accounts, and the use of business proceeds. Reading the complaint, I was mystified how the basic facts of the case could be presented so differently by the two parties.
During the interview process for the engagement, as I sat with the referring attorneys and listened as they explained to me their visions of the case, my mental calculator was adding up the staff hours that would be required from my firm. My hands were sweating with excitement.
The more I looked into the matter, the more I became concerned. The accounting records and general bookkeeping was weak. The prospective client took sizable amounts of cash from the company, allegedly to pay sub contractors. No Form 1099’s were issued and only some of the contractors would be willing to sign affidavits that they received the cash. It was explained to me that the company saved money by hiring contractors at a discount by paying cash. The prospective client asked me if I could simply accept his affidavit that the cash was properly spent for business purposes – even though this could not and would not be verified by anyone. Did I mention that the accounting records and the bookkeeping were weak?
Though I suggested alternative techniques where I could quantify the non-verified cash, it seemed that the prospective client only wanted me to investigate the egregious acts of his former partner. The whole thing seemed fraught with potential problems.
I was left with the question: should I accept this proposed engagement? If I answered entirely based on the size and cost of the engagement the answer would likely be yes. But I was concerned about possible ethical issues which seemed very likely to arise. The American Institute of Certified Public Accountants (AICPA) has published various professional standards to provide guidance in cases such as the one that confronted me.
The professional standards say:
Rule 102 of the AICPA professional standards.
In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
This is further discussed in the Litigation Services and Applicable Professional Standards publication 03-1 by the AICPA; “The expert does not serve as an advocate for the client’s position and, therefore should not subordinate his or her judgment to the client. The expert’s function is to assist the trier of fact in understanding complex or unfamiliar concepts after having applied reliable principles and methods to sufficient relevant data.”
Rule 201, General Standards, of the AICPA Code of Professional Conduct requires that engagements be conducted with “Due Professional Care” using “Sufficient Relevant Data.” According to AICPA Publication 03-1, “Due care requires diligence and critical analysis of all work performed.” Furthermore, the AICPA requires that the practitioner “Obtain relevant data that is sufficient to provide a reasonable basis for conclusions or recommendations for any professional services performed.”
“The practitioner should consider analyzing key assumptions to determine whether they are reasonable. In several recent cases, experts had their testimony excluded because their opinions were based on assumptions that were deemed not reasonable.”
And finally, Rule 501-01, Acts Discreditable of the AICPA Code of Professional Conduct, states that a, “Member shall not commit an act discreditable to the profession.” Rule 501-04 states that a member shall be considered to have committed an act discreditable to the profession when, by virtue of his or her negligence the member, “Signs, or permits or directs another to sign, a document containing materially false and misleading information.”
Do I accept an engagement with my hands tied? Do I accept an engagement where my objectivity is being compromised? You’ll find my decision at the end of this article.
What to Do When Independence is Compromised?
An attorney referred me to provide financial forensic analysis to a woman going through a divorce. In discussions with her I quickly realized that, not only did I know her husband personally, but I had invested in some of her husband’s projects. The wife was impressed with my knowledge of her husband’s complex business structure and sources of revenue. And she was eager for my help. Though I had not been an investor in any of the husband’s projects/deals in the last ten years, I felt that questions concerning personal and professional integrity, independence and objectivity were sure to come up.
Again, I turned to the AICPA for guidance. The AICPA requires objectively rather than independence as a standard. Objectivity is a soul searching determination. Independence is fact driven.
I called the husband. I laid my cards on the table and told him that his soon to be ex-wife wanted to hire me to investigate his finances. Then I asked him if he found there to be a conflict.
The husband emailed me, his attorneys and her attorneys. In the email he stated that he and I (the two of us) had a previous business relationship; he welcomed my retention by his wife, but wanted his wife to be comfortable that we had a past financial relationship.
The husband told me that my professionalism and my fairness were comforting to him. He had heard stories of experts who performed needless analysis to increase fees and experts who would be an obstacle to any settlement.
During the engagement, we cut the husband no slack; we verified all business and personal assets including sources of income. My past relationship with the husband allowed my firm’s team to ask the right questions and know where to look for future income sources. This experience and knowledge saved the parties money, and gave the wife comfort that there was complete disclosure.
Case #3: An Unexpected Meeting…
I arrived at the charitable golf outing dressed in the height of sporting fashion, wearing my pink plaid golf shorts, my white gym shoe golf shoes and my pink polo golf shirt. To my surprise, the gentleman I was paired with had the same name as the attorney I was retained to testify against in an upcoming malfeasance case.
Maybe it was a coincidence, I thought. People often do have the same names.
I returned to the golf cart after practicing my putting and shanking some drives off the practice tee. In the cart sat a disheveled man in his sixties who was lifting his glasses past his nose to read his cell phone.
After the introductions, handshake and chit chat, I realized that the man next to me, who looked like Mr. Magoo, was the subject of the malfeasance and he was the individual whom I would be testifying against.
I initially wondered if our golf game was an ethical violation. And my next thought was, did he know who I was and would he kill me?
The fact is, there was no violation of ethics in playing golf with the gentleman. We did not discuss his case and there was no disclosure on either part of our professional situations.
I was fortunate; he did not have a clue who I was. In fact three months later when I deposed him, Mr. Magoo failed to remember that we had ever previously met.
So… did I accept the engagement in Case #1…?
One engagement can make or break a career. The grim thought of handcuffs being placed on me and seeing my career in tatters was all I needed to make my decision to walk away. This was one of those gut wrenching times when you just need to bite the bullet and say No.
I believe that our professional standards, were created to be a guide. Sometimes our soul searching will provide the needed guidance. Sometimes the engagement that we turn down is a blessing.
Questions or comments? E-mail me at *protected email* if you have any questions about this posting or if I may be of assistance in any way.
Larry Goldsmith is an experienced Financial Forensic expert and CPA who investigates and verifies financial income and assets in matrimonial matters. CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies.