Why does it matter whether the company or its lawyers retain the forensic accountant?
Because there is no confidential accountant-client privilege under federal law, so who signs the engagement letter is close to deciding whether the investigation file is discoverable. The Supreme Court put it carefully but unambiguously in Couch v. United States, 409 U.S. 322, 335 (1973): “Although not in itself controlling, we note that no confidential accountant-client privilege exists under federal law, and no state-created privilege has been recognized in federal cases.” A number of states have enacted accountant-client privilege statutes, and Federal Rule of Evidence 501 does leave state law governing privilege in a civil case “regarding a claim or defense for which state law supplies the rule of decision” — but in a federal criminal matter, or on a federal-question claim, Couch’s second clause is the answer.
The one narrow federal protection in the neighbourhood, 26 U.S.C. § 7525, is not a substitute for an accountant-client privilege. It extends the same common law protections of confidentiality that apply to attorney communications about tax advice to a “federally authorized tax practitioner”, but may be asserted only in a noncriminal tax matter before the Internal Revenue Service or a noncriminal tax proceeding in federal court brought by or against the United States, and it does not reach written communications made in connection with promoting participation in a tax shelter. It is a tax-advice privilege. It does not cover a fraud examination.
Timing is the part companies get wrong, because occupational fraud usually arrives as an allegation rather than a finding. In the ACFE’s Occupational Fraud 2026: A Report to the Nations, tips were the source of initial detection in 43% of cases, internal audit in 15%, and external audit in just 2%. The instinct on receiving a tip is to have the finance team quietly look into it over a weekend, and that weekend’s work is precisely the work that is hardest to protect afterward.
What does a Kovel arrangement actually protect?
A Kovel arrangement protects communications made in confidence to help the lawyer give legal advice, and nothing more than that. In United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the Second Circuit reasoned by analogy to an interpreter — an accountant engaged by the lawyer so the client’s account can be rendered into something the lawyer can act on — and held that “what is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer.”
The same Kovel opinion states the limit in the same breath: “If what is sought is not legal advice but only accounting service … or if the advice sought is the accountant’s rather than the lawyer’s, no privilege exists.” A company that routes an engagement through counsel as a mail drop, so that the forensic accountant performs the same accounting work it would have performed anyway, has bought paperwork rather than protection.
Three further limits belong in the conversation before anyone relies on a Kovel arrangement. Privilege covers communications, not facts — “The privilege only protects disclosure of communications; it does not protect disclosure of the underlying facts by those who communicated with the attorney”, Upjohn Co. v. United States, 449 U.S. 383, 395 (1981). Pre-existing business records do not become privileged by being handed to a lawyer: documents obtainable from the client by court process may be obtained from the attorney by the same process once transferred, Fisher v. United States, 425 U.S. 391, 403-404 (1976). And the arrangement runs forward — it protects work done to assist counsel in giving legal advice, and does not reach back over an investigation the company already ran in-house.
Who should retain the forensic accountant when the allegation involves senior management?
The audit committee, or a special committee of the board, which engages independent outside counsel, which in turn engages the forensic accountant — at the company’s expense but not at management’s direction. Management cannot credibly retain the people examining management, and the independence requirements run to the board, to management and to any individual who is a potential subject of the investigation.
The company’s regular outside counsel is frequently disqualified by the same logic, because its working relationship is with the management team whose conduct is in question. That two-step chain also settles a question that otherwise gets answered by habit: who the forensic accountant’s client is. In a committee-led investigation the forensic accountant reports to counsel rather than to the finance function whose records are being examined. A 2022 Holland & Knight practice note on retaining and working with forensic accountants in internal investigations is direct about the reporting discipline that follows — “It is generally best to provide interim reports orally”, and before any written report is prepared, counsel and the client “should thoroughly assess the purpose, findings, recommendations, and necessity” of one. Whether a written report exists at all is a decision, not a default.
Can our own audit firm run the investigation instead?
For an SEC registrant, generally not, and the obstacle is a rule rather than a preference. 17 CFR 210.2-01(c)(4)(x) lists “expert services unrelated to the audit” among the non-audit services that impair independence, defined as “providing an expert opinion or other expert service for an audit client, or an audit client’s legal representative, for the purpose of advocating an audit client’s interests in litigation or in a regulatory or administrative proceeding or investigation.”
The carve-out is narrow and worth stating precisely, because it is the thing the audit firm can still do. Independence is not impaired where the accountant “provides factual accounts, including in testimony, of work performed or explains the positions taken or conclusions reached during the performance of any service provided by the accountant for the audit client.” The auditor may give a factual account of its own audit. It may not be the company’s advocacy expert.
A second obstacle is practical rather than regulatory. The audit firm examined the records now in dispute and signed an opinion on them, so its own work is part of the history a later factfinder will look at. A company that wants an account of what its records show is usually better served by someone with no prior position in the same file.
What is the difference between hiring a consulting expert and a testifying expert?
The difference is discovery exposure, and it is a second decision, separate from who signs the engagement letter. Under Federal Rule of Civil Procedure 26(b)(4)(D), a party ordinarily may not discover facts known or opinions held by an expert retained in anticipation of litigation “and who is not expected to be called as a witness at trial”, except as provided in Rule 35(b) or on a showing of exceptional circumstances under which it is impracticable to obtain facts or opinions on the same subject by other means.
A testifying forensic accountant lives under the opposite regime. Rule 26(a)(2)(B) requires a written report prepared and signed by the witness. Rule 26(b)(4)(B) protects drafts of that report and Rule 26(b)(4)(C) protects most attorney-expert communications, but that protection expressly does not cover communications identifying facts or data the party’s attorney provided and the expert considered, or assumptions the attorney provided and the expert relied on. What the expert was handed, and what they were told to assume, is discoverable.
Because Rule 26(b)(4)(D) applies by its terms only to an expert who is not expected to be called at trial, moving a consulting forensic accountant into a testifying role removes the shelter that rule provided, and how much of the earlier consulting work comes with it becomes a fight. That is why the two roles are often filled by two people or two teams. A 2022 Holland & Knight practice note on retaining and working with forensic accountants in internal investigations is blunt about the second half of the problem: where accountants are engaged to act as expert witnesses “their role must be much more arm’s length and independent” than that of a privileged consultant, and counsel should “refrain from suggesting a certain view of materials or otherwise influencing the forensic accountants to reach a certain conclusion.”
When is it right for the company to hire the forensic accountant directly?
When the work is not being done to obtain legal advice, or when the output has to be handed over regardless. A fidelity bond or employee-dishonesty claim is the clearest case: the insured must produce a proof of loss, the insurer’s own forensic accountant will test it, and building that submission behind privilege protects nothing that was ever going to stay private. The same holds for control remediation, for work commissioned so the external auditor can complete its own procedures, and for a reconciliation exercise nobody expects to end in a claim.
Two cautions belong with any decision to retain directly. Privilege is far easier to keep than to recover, so a matter that looks like a bookkeeping question on Monday and a claim on Thursday is better started under counsel. And the forensic accountant’s own standard does not turn on who signed: AICPA Statement on Standards for Forensic Services No. 1 makes its applicability turn on “the purpose for which the member was engaged (for example, litigation or investigation) as opposed to the skill set employed or services provided” (¶3), and where an engagement begun under another set of standards has become a litigation or investigation engagement, the member “should modify his or her understanding with the client” (¶4).
Whoever signs, three things belong in the understanding at the outset. SSFS No. 1 ¶8 requires a written or oral understanding about the responsibilities of the parties and the nature, scope and limitations of the services to be performed — oral satisfies the standard, which surprises most buyers, while written is what makes the scope defensible two years later. ¶9 bars an AICPA member engaged as an expert witness in a litigation engagement from providing opinions pursuant to a contingent fee arrangement unless the “Contingent Fees” rule (ET sec. 1.510) explicitly allows it. ¶2 provides that a member engaged as an expert witness by one party in a litigation engagement to provide expert opinions may not perform that work under the agreed-upon-procedures standard, AT-C section 215. Scope also decides whether one engagement covers both the reconstruction of the records and the measurement of a loss — often the same firm, and sometimes the same person, does both, since the AICPA’s Certified in Financial Forensics body of knowledge lists economic damage calculations among its specialized areas and NACVA’s MAFF lists Commercial Damages and Lost Profits among its specialty areas alongside Forensic Accounting and Fraud Risk Management. They remain different questions, and what a loss is worth is covered by the Economic Damages Institute.