1. Forensic and Investigative Accounting
Chapter 8
Litigation Services Provided by Accountants
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2. Litigation in the United States
The U.S. tort system cost $248.1 billion in 2009, which was about $808 per U.S. citizen ($12 in 1950).
Medical malpractice costs totaled nearly $30.4 billion in 2007, or about $101 per person (compared to $5 per person in 1975).
Some of these costs are expert witnessing fees.
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3. Litigation in the United States
The five major phases of litigation are:
Pleadings.
Discovery.
Pre-trial conferences.
Trial.
Outcome.
Possible appeal.
Much of the work for forensic accountants occurs in the discovery stage.
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4. Forensic and Investigative Accounting
Methods of Discovery
Interrogatories.
Depositions.
Admissions of facts.
Request for production.
Subpoenaing.
Ask to examine documents for authenticity.
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5. Forensic and Investigative Accounting
Forensic Report
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6. Forensic and Investigative Accounting
Civil Procedure
Body of rules and practices by which justice is handed out by the legal system.
Federal Rules of Civil Procedure (FRCP): governs U.S. district courts.*
Federal Rules of Criminal Procedure.
Federal Rules of Evidence.
* Find at
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7. Types of Litigation Services Provided by Accountants
Consultant
Expert witness
Court-appointed experts and special masters
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8. Standards of Conduct for Performing Litigation Services
Knowledge, skills, experience, training, and education.
Professional codes of conduct.
Conflicts of interest.
Written agreement to perform litigation services.
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9. Expert vs. Lay Witnesses
A lay (or fact) witness testifies as to facts.
An expert witness is an individual who, because of specialized training or experience, is allowed to testify in court to help the judge or jurors understand complicated and technical subjects.
Summary Witness.
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10. Qualifying as an Expert Witness
Under the Frye standard, the test for admitting expert testimony is:
Whether the expert’s testimony will assist the trier of fact in understanding the evidence or in determining a fact in issue.
Whether the theories and/or techniques relied upon by the expert are generally accepted by the relevant professional community.
Whether the particular expert is qualified to present expert testimony on the subject at issue.
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11. Qualifying as an Expert Witness
Under the Federal Rules of Evidence, a judge will permit an accountant to testify as an expert witness only if the judge decides that:
The accountant’s testimony will help the jurors or judge understand the evidence or determine a fact in issue.
The accountant is qualified as an expert by knowledge, skill, experience, training, or education.
The accountant can show that his or her testimony (a) will be based on sufficient facts or data and (b) will be the product of reliable principles and methods that have been applied reliably to the facts of the case.
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12. Qualifying as an Expert Witness
In Daubert v. Merrill Dow Pharmaceuticals, Inc., the U.S. Supreme Court established the rule for federal courts that trial judges have a special responsibility to ensure that scientific testimony is not only relevant, but also reliable.
In Kumho Tire Company, Ltd. v. Carmichael, the Supreme Court decided that a judge’s “gatekeeping” obligation applies not only to scientific testimony but to all expert testimony.
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13. Qualifying as an Expert Witness
In Daubert, the U.S. Supreme Court suggested that judges consider the following factors:
Whether the theory or technique in question can be (and has been) tested.
Whether the theory or technique in question has been subjected to peer review and publication.
The theory or technique’s known or potential error rate.
Whether the theory or technique has attracted widespread acceptance within the relevant community.
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14. Qualifying as an Expert Witness
Figlewicz and Sprohge in their article, “The CPA’s Expert Witness Role in Litigation Services: A Maze of Legal and Accounting Standards,” offer ten guidelines to help avoid legal challenges:
Know the relevant professional standards.
Apply the relevant professional standards.
Know the relevant professional literature.
Know the relevant professional organizations.
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15. Qualifying as an Expert Witness
Use generally accepted analytical methods.
Use multiple analytical methods.
Synthesize the conclusions of the multiple analytical methods.
Disclose all significant analytical assumptions and variables.
Subject the analysis to peer review.
Test the analysis—and the conclusions—for reasonableness.
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16. Preparing to Testify as an Expert Witness
Maintaining independence from the client.
Evidence upon which experts may rely.
Use of confidential client information.
Expert reports.
Working papers.
Evaluation of other experts.
Exhibits and other demonstrative evidence.
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17. Testifying at a Deposition
Expert witnesses can expect to be asked about the following at a deposition:
The scope of their assignment.
Their current employment (job title, duties).
Their educational background.
Licenses.
Work experience.
Memberships in professional organizations.
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18. Testifying at a Deposition
Publication and lectures.
Fields in which they are qualified as an expert.
Other work they have performed as an expert or other litigation consultant.
What compensation they are receiving (and what percentage of their compensation is derived from testifying as an expert witness).
What opinions they have formed.
The bases for their opinions.
Almost anything.
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19. Cross Examination Tactics
Do not speak to people outside courtroom while waiting and during breaks.
Turn off your cell phone or pager before entering the court.
Do not wear emblems.
Avoid humor, but laugh at judge’s humor.
Keep your hands on top of the table, not hidden.
Be sure your attorney questions you in detail about your qualifications in order to impress the judge/jurors. Do not allow the other side to stipulate you as an expert.
Dress neatly and conservatively.
Arrive on time at the court house (have multiple reminders).
When taking the oath as a witness, say loudly, “I do.”
Be sincere and respectful.
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20. Cross Examination Tactics
Talk directly to the jurors (or judge if no jurors). Look them in the eyes. Make contact with each of the jurors.
Explain number carefully, possibly using analogies with tax returns and checkbook.
Pausing does not harm you.
Use first person, active person: I reviewed these records, and I found….
Tell stories about people.
Be careful when shown passages from textbooks, etc.
Jurors have nothing to do for long periods. They are always watching. Be careful every place in the court house, even while driving to the court house.
When you are in trouble in the court room, do not lean back. Instead lean forward.
When you are finished, do not leave the courtroom until there is break.
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21. Forensic and Investigative Accounting
Testifying at Trial
According to Bursztajn and Brodsky in their article, “Ethical and Effective Testimony During Direct Examination and Cross-Examination Post-Daubert,” the following should be the primary goals of an expert witness:
To communicate the truth to the jury in an ethical, objective, and effective way.
To maintain your autonomy, authenticity, and integrity.
To uphold the values of your profession.
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22. Forensic and Investigative Accounting
Testifying at Trial
To interact with attorneys and with the judge and jury in an atmosphere of mutual respect.
To engage in an ongoing dialogue with your attorney so that, together, you can educate as well as learn from the judge and jury as to what questions each may have.
To speak directly to the issues.
To make complex matters understandable without oversimplifying.
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23. Liability of Expert Witnesses
Witness immunity
Threat of lawsuit
Claims of negligence
Bases for liability
Breach of contract
Negligence
Criminal process
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24. Forensic and Investigative Accounting
Daubert
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25. Searchable Databases of Daubert Decisions
“Daubert on the Web”
Online free tracking service.
In July 2013, 87 cases were under the field “Accountants and Economists” with an admissibility rate of .598.
There are a total of 25 fields with various “admissibility rate,” such as
Appraisers
Computer experts,
Criminologists,
Marketing experts,
Polygraphers,
Statisticians,
In Louisiana, there have been at least 33 Daubert challenges with a 60% admission rate.
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26. Forensic and Investigative Accounting
Written Reports
An expert should never draft a written report of any kind unless he or she has been expressly directed to do so by hiring counsel.
Federal Rules of Civil Procedure 26(a)(2)(B) requires a written report.
Keep a diary of interview dates, etc.
Do not destroy interview notes.
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27. Written Report Contents (FRCP 26(a)(2)(B))
All opinions to be expressed and the bases for them.
Data or other information considered in forming the opinions.
Any exhibits to be used as a summary of or support for opinions.
Witness qualifications, including a list of all publications authored within the last 10 years.
Witness compensation.
List of other disputes in which the witness has testified at deposition or trial during the last 4 years.
Signature of the expert testifying.
Note: Federal Rule of Civil Procedure 27(e)(1) indicates that an expert must update a written report or disposition.
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28. Types of Expert Reports
Fact-oriented report – gathers and evaluates facts and uses them to prepare a report. Check and re-check the numbers and the facts.
Opinion report (e.g., valuation report) – more subjective and rely more on the professional judgment of the expert.
Combination of above types.
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29. Trends and Outcomes of Daubert and Frye Challenges
Number of challenges to financial expert witnesses fell in 2010, but the success rates increased to their highest level since 2005.
Five federal circuits adjudicate the majority of all Daubert challenges to financial expert witnesses.
Plaintiff financial expert witnesses are challenged more frequently, consistently two to three times as often as defense experts, but their exclusion rates have been lower than defense experts in five of the last six years.
Economists, accountants, and appraisers are the more frequently challenged financial expert witnesses but also the ones more likely to survive the challenge.
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30. Trends and Outcomes of Daubert and Frye Challenges
Case type affects the frequency and outcome of Daubert challenges to financial expert witnesses.
For the 11th consecutive year, lack of reliability is the top reason financial experts are included.
Exclusions more commonly result from the misuse of accepted methodologies than from the introduction of unusual or untested analytical methods.
Source: PricewaterhouseCoopers, Daubert Challenges to Financial Experts: An 11-year Study of Trends and Outcomes, 2011, p.6.
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