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CFF: Financial Forensics: Standards, Evidence, and Damages

CFF · Work through your exam, one topic at a time.

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Financial Forensics: Standards, Evidence, and Damages

This domain tests how you apply accounting, finance, and economics inside a legal dispute. CFF candidates must separate forensic services from attestation, follow AICPA forensic standards, build evidence that survives challenge, and quantify damages with a defensible method. Questions often turn on engagement boundaries, expert-report content, and incremental-cost reasoning rather than memorized formulas.

Standards and engagement boundaries

  • AICPA Statement on Standards for Forensic Services (SSFS) No. 1 governs forensic services. It covers litigation services (expert testimony, damages, valuation) and investigation services (fraud or misconduct inquiries).
  • A forensic engagement is not an audit, review, or compilation; no assurance is expressed. The engagement letter should define scope, limitations, fees, and intended use.
  • Objectivity is central. Contingent fees for expert testimony are generally prohibited because they create an incentive to advocate.
  • Engagement through counsel can help preserve attorney-client privilege and work-product protection, but privilege is not automatic.

Evidence and testimony

  • Federal Rule of Evidence 702 and Daubert require reliable, relevant expert testimony; courts consider testability, error rate, peer review, and general acceptance.
  • An FRCP 26(a)(2)(B) report must state opinions, bases, facts/data considered, exhibits, qualifications, publications, compensation, and prior testimony.
  • Preserve electronic and paper evidence with forensic images, hash values, chain-of-custody logs, and metadata.

Damages

  • Use a but-for scenario, reasonable certainty, foreseeability, mitigation, present value, and tax effects.
  • Lost profits are incremental: lost contribution margin minus mitigation, plus avoidable/unavoidable cost adjustments. Do not start with GAAP net income.

Worked example

A retailer loses warehouse access for one quarter. Pre-fire quarterly revenue was $3.0M and contribution margin 35%, so normal contribution is $1.05M. Sales fall to zero, but a competitor fulfills $0.4M of orders at the same 35% margin, recovering $0.14M. Extra freight costs $0.1M. Lost contribution = $1.05M − $0.14M = $0.91M; less $0.1M extra cost = $0.81M before present-value and tax adjustments. Fixed costs are excluded because they continued.

Traps

  • Presenting a calculation as an audit opinion or “assurance.”
  • Using net income rather than incremental cash flow.
  • Ignoring mitigation or double-counting saved costs.
  • Accepting a contingent fee for testimony.
  • Failing to disclose prior testimony or to preserve metadata.