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Consulting / Litigation Issues

So You Want to Be an Expert Witness

Hone your skills to increase your success on the witness stand.

By D. Larry Crumbley and Keith A. Russell
October 2004
EXECUTIVE SUMMARY
THE RANGE OF ACCOUNTING ISSUES involved in court disputes today covers so many aspects of finance that CPAs of all types may be qualified to offer expert witness services in one or more areas.

CPA LITIGATION SERVICES ENCOMPASS several roles: expert witness (who renders an opinion before a trier of fact); consultant (a nontestifying adviser); and other (a trier of fact, special master, court-appointed expert, referee, arbitrator or mediator). CPAs who serve in those capacities need to understand and adhere to applicable standards, rules and laws.

BEING ABLE TO DEAL WITH THE UNEXPECTED is a key part of performing well as an expert witness. Opposing counsel usually will try to build a case around its own experts rather than attack a witness who is poised and objective.

FEES VARY WIDELY DEPENDING ON the complexity and needs of the client’s case. Before accepting an assignment a CPA should get a signed engagement letter that outlines the scope of the job. Its fee schedule should allow for the possibility that the workload may be altered as a result of a change of direction the case may take or that a case could settle out of court.

ATTORNEYS WILL ASK AN EXPERT WITNESS t o disclose any information of a personal nature that could diminish their effectiveness. Forewarn them about anything that has the potential to damage the case.

FOR ACCOUNTANTS WILLING TO ENDURE having their professional life scrutinized in the public arena of a courtroom, service as an expert witness or litigation consultant is both a challenge and a source of great satisfaction.

D. LARRY CRUMBLEY, CPA, is the editor of the Journal of Forensic Accounting, KPMG Endowed Professor at Louisiana State University, Baton Rouge, and a contributor to the U.S. Master Auditing Guide. His e-mail address is dcrumbl@lsu.edu . KEITH A. RUSSELL, CMA, PhD, is a tenured professor and dean of the school of business & administration at St. Mary’s University, San Antonio, Texas. He is a contributor to many professional publications and is active in the Institute of Management Accountants. His e-mail address is c731bua@semo.edu .

eing able to deal with the unexpected is a key part of performing well as an expert witness and a challenge that some CPAs find exhilarating. Increasingly, forensic accountants are being called as expert witnesses to help sort out the labyrinthine financial aspects of litigation involving complex issues and large sums of money. In open court these advisers submit to scrutiny from a judge, the jury, attorneys, court personnel and trial spectators. CPAs who keep their cool and convey concise, cogent information—whether in depositions or under an opposing attorney’s attempts to discredit their testimonies—can have a pivotal impact on a conflict’s resolution as well as the satisfaction of helping a client win (see “ Basic Legal Concepts ”). Here are some suggestions on how to increase your positive impact on behalf of your client.

PREPAREDNESS IS THE KEY
Juries, judges and arbitration panels charged with resolving disputes with financial aspects often know little about financial statement analyses, audits, tax, budgeting or malpractice calculation of lost profits and damages. To help triers of fact understand the impact of different types of financial transactions or attach a measurable value to a plaintiff’s injury CPAs often are called on to serve as expert witnesses. If you want to develop a niche in such litigation services or just learn to feel more comfortable on the stand, here are some tips to get you started.

Come to Order

“Most people didn’t realize that trials
were often won before anyone
stepped foot inside a courtroom.”

Source: Last Man Standing by David Baldacci,
Simon & Schuster, London, 1997.

Review your qualifications. Do you have the academic training, career prominence (published articles), professional certifications, requisite knowledge and experience in a specific area to be a successful expert witness? Enumerate your competencies (see “ Give Your Skills a CAT Scan, JofA , Jul.04, page 34). People skills are particularly important in interactions with all parties to a trial.

Get your credentials in order. Federal rule of civil procedure 26(a)(2) mandates experts disclose their identity, the issues their opinions will address, their professional qualifications (including what they’ve published in the past 10 years and all cases in which they provided expert testimony in the previous four years) and who is paying them. There are many resources for expert witness training (see Resources box).

Be realistic about whether you’re the right expert for the job. A self-serving view of your abilities won’t help you deal with the opposing attorney if you are not truly well-versed in the area in which you give testimony (see Daubert Challenges ”). If you’re offered an engagement in an area that’s not your strong suit, recommend an expert whose qualifications are a better match (see exhibit ).

Daubert Challenges
A
lthough expert witnesses aren’t required to testify from personal knowledge, they must be qualified to give opinions, the Supreme Court has said. As a result there has been a series of precedent-setting Supreme Court cases involving expert witnessing, starting with Daubert v. Merrill Dow Pharmaceuticals, Inc. Because of Daubert , a court must now, in substance, make a preliminary finding regarding whether the reasoning and methodology employed by an expert is scientifically valid and whether it can be applied to the facts of the particular dispute (see “ Expert Testimony After Daubert…, JofA , Jul.01, page 59).

The Kumho Tire Co. v. Carmichael decision extended the Daubert concept to all expert testimony, regardless of the subject matter. CPAs who testify as expert witnesses must describe what CPA certification requires and why they should be considered experts in a particular case. Experts must state what methodology they’ve used, whether it is reliable and why. Experts should put the evidence in the trial record in every case.

Daubert has had substantive impact on the admissibility of expert testimony; there now is heightened scrutiny of both the methods used and the factual support for the conclusions expert witnesses present. A motion in limine (a pretrial request to the court to prevent an opposing party from introducing inadmissible evidence) under federal rule of evidence 104 may be used to exclude an expert witness’s report and/or testimony.

The five factors that determine Daubert acceptability for expert testimony are

Whether the theory or technique used by the accounting expert can be or has been tested.
Whether the theory or technique has been subjected to peer review and publication.
The known or potential rate of error of the method used.
The degree to which the method or conclusion has been accepted within the relevant community.
Whether the theory existed before litigation began.

Courts, in general, will not exclude testimony on the basis of one factor alone.

Prepare in depth. Once you’ve been retained, do your homework. Be professional, complete and creative. Learn all pertinent aspects of the dispute as well as protocol and procedures for the witness stand. Analyze the background of the issues and review related depositions, materials attorneys furnish and any additional materials they deem relevant. Work closely with counsel to review the rules of the particular jurisdiction in which the case is pending. Both statute law and case law may be relevant. Certain states may require a CPA who isn’t licensed with that state to register prior to giving testimony.

Note: Based upon the successful deposition of an expert, cases often settle without going to court.

Don’t let your attorney mold your conclusions. If you reach a point where you are uncomfortable or cannot testify to something the attorney wishes you to, say so—vigorously if necessary. Suggest another approach that can be independently supported.

Talk to yourself. Because the judge and jury likely do not have working knowledge of accounting technicalities, practice how you will express information in a clear and simple way. Tape-record your explanation of important points, then play it back. If you were a layman, would you understand what you just heard? If not, edit your approach; using the same section of tape, rerecord until your explanation sounds comfortable and clear. If possible, role-play with a colleague who takes the part of an attorney asking you likely questions.

The Application of Professional Standards
Use the decision tree below to determine which professional standards apply in a litigation services engagement. (Acronyms in boxes stand for statements on standards for consulting services, accounting and review services, attestation engagements and auditing standards.)

*For definition and explanation of litigation services, refer to Interpretation no. 3, “Applicability of Attestation Standards to Litigation Services,” of Statement on Standards for Attestation Engagements (SSAE) no. 10, Attestation Standards: Revision and Recodification (AICPA, Professional Standards, vol. 1, AT secs. 9101.34–.39).

THE EXPERT’S DAY IN COURT
Above all be careful, precise and truthful in your deposition and on the stand. Opposing counsel will pounce on extremely small mistakes or omissions to embarrass you or get your testimony excluded (see “ As a Matter of Fact ”). Your job is to be an advocate for a position and to provide concise, objective testimony.

Use visual aids. Simplify the presentation of sophisticated accounting matters by using PowerPoint charts, graphs or related illustrations (see “ An Expert Witness Can Make or Break a Case, JofA , Aug.01, page 37). Written notes may help you focus, but they give opposing counsel something to attack.

Don’t answer an ambiguous question. If you are unable to respond to a question, say so and request clarification.

Maintain your composure. Opposing counsel will attempt to discredit you and destroy your self-confidence if your testimony could have a detrimental impact on their client’s case. In fact, the better the job you do as an expert witness, the more intense their attack on you will be. There’s no cause for concern. Cross-examination by opposing counsel is an inherent part of the legal process. If confrontation exceeds the bounds of accepted norms, your attorney or the judge will intercede. Breathe deeply whenever you feel yourself losing your temper.

Be patient. There will be many delays, motions, recesses and attorney sidebars that can cause frustration. Don’t let them affect you. On the witness stand, you must maintain a calm, cool demeanor in what will sometimes appear to be a chaotic, turbulent scene. Your client, the judge and the jury will expect you to be professional at all times.

Maintain a sense of humor. Well-timed humor is fine in the right circumstances and helps an expert witness appear natural and spontaneous. However, make sure a joke is not cruel, and don’t force one. That’s worse than no levity at all.

Know your limitations. Do not try to bluff when you don’t know an answer. Effective expert witnesses claim expertise only in those areas where they’re justified in doing so. Remember, the other side has access to its own accounting experts who can validate or refute your testimony. Usually opposing counsel will try to build a case around its own experts rather than attack a witness who is poised and objective.

Don’t become argumentative or defensive. Avoid displays of negative behavior—even though it may be hard not to show “sore loser” feelings if opposing counsel appears to have gained the upper hand during the ups and downs of testimony. Don’t worry; your attorney has the option of “redirect” testimony to reexamine certain points if necessary. If you concentrate on your area of expertise and at all times exhibit a composed demeanor, opposing counsel’s attempts to damage you and your testimony likely will work against their position.

Do not forget who is deciding the case. Direct your replies to the judge and jury. You are speaking to people who will base their understanding and acceptance of your testimony on your professionalism. If the testimony’s full positive benefit is to have an impact on the court’s decisions, they must trust you.

In a jury trial in particular, much of what you say will be accepted or rejected according to whether you speak clearly, project self-confidence and communicate your strong sense of ethics, positive attitude and enthusiasm. These factors may have a greater influence on the outcome than the actual testimony.

RESOURCES
AICPA Resources
Authoritative literature available to Institute members includes the AICPA Code of Professional Conduct and the following:
Publications and practice aids

AICPA Statement on Standards for Consulting Services no. 1, Consulting Services: Definitions and Standards, standalone publication (# 055015JA).

Alternative Dispute Resolution Services— Consulting Services Practice Aid 99-1 (# 055294JA).

Communicating in Litigation Services: Reports, A Nonauthoritative Guide— Consulting Services Practice Aid 96-3 (# 055000JA).

Engagement Letters for Litigation Services— Business Valuation and Forensic and Litigation Services Practice Aid 04-1 (# 055298JA). This guidance supersedes Consulting Services Practice Aid 95-2, C ommunicating Understandings in Litigation Services: Engagement Letters.

Litigation Services & Applicable Professional Standards —Consulting Services Special Report 03-01 (# 055297JA). This guidance from the AICPA’s forensic and litigation services committee for CPAs who perform litigation services supersedes Consulting Services Special Report 93-1.

Providing Litigation Services —Consulting Services Practice Aid 93-4 (# 055145JA).

Newsletter
CPA Expert (# CPXXX12JA).

Conferences
2004 Business Valuation Conference
November 7–9, 2004
JW Marriott Orlando Grande Lakes
Orlando, Florida

For more information to place an order or to register, go to www.cpa2biz.com or www.aicpa.org or call the Institute at 888-777-7077.

Other Resources
These are some of the organizations that provide training in how to become a competent financial expert witness in commercial litigation. Quite a few provide quality education in the field of litigation for consultants and experts. Do your homework, evaluate their offerings and decide which ones fit your needs.

American Institute for Expert Witnesses
Provides training in the practical aspects and ethical considerations of expert witness testimony. The goal is to enable professionals to become forensic consultants and expert witnesses in their respective fields of expertise.

New Technologies Inc. (NTI)
www.forensics-intl.com/expert.html
Offers training in the role of computer forensics in the courtroom and the methodology for proper presentation of expert witness testimony.

Seak Inc.
www.seak.com
Although best known for its legal and medical information systems, Seak also provides comprehensive educational opportunities for experts in any field of specialization. It offers seminars and workshops in testifying skills, cross-examination, expert-report writing and defending as well as seminars and publications that explain how attorneys impeach and destroy experts.

MANAGE THE ENGAGEMENT
CPA litigation services encompass several roles: expert witness (a person who renders an opinion before a trier of fact); consultant (a nontestifying adviser—but one who may become an expert witness at a later date); and other (people who serve in different roles, including a trier of fact, special master, court-appointed expert, referee, arbitrator or mediator). CPAs who plan to serve in any of those capacities need to understand and adhere to applicable standards, rules and laws and exercise care in managing the engagement. Pay particular attention to

Engagement letters. They should state the issue you will testify about, the form your reporting will take, what the engaging attorney expects and other business details including fees. Be specific about what you will provide. For example, determine whether you’ll assist in framing questions for the opposing expert witness during the taking of the deposition. Will the client expect you to be in the courtroom or at the attorney’s side during the trial? What does the attorney expect in terms of ongoing trial consultations? Make sure all questions are resolved and the details are in the engagement letter in advance of the trial.

Fees. These vary widely depending on the complexity and needs of the case, the expert’s reputation and the geographic area. Fees may be based on hourly or daily rates. Accountants new to the process should seek advice from CPA colleagues with experience in their jurisdiction. Ask your state society and local bar association for some names of experienced expert witnesses.

The lawyer may ask you to provide a “ballpark” estimate for the cost of your services once you learn a little about the case and have an idea what to expect in terms of time and effort. Still, the workload may change as a result of twists and turns the case may take. Make sure your retainer and fee schedule cover this contingency and the possibility the case may settle out of court. After you reach agreement on the major financial terms of the engagement, have the attorney sign before accepting the assignment. If possible, get paid prior to giving testimony; then opposing counsel cannot suggest your opinion has been compromised by fees due.

Never lose sight of the fact that you are being paid for your time and expertise: Your opinion is not for sale!

Discovery. If you are retained as an expert witness, your work product is subject to discovery, which means opposing counsel has the right to review it and attempt to refute your findings. Put very little of your research and notes in writing. Label interim working drafts “incomplete work product.” (Also see “ Attorney-Client Privilege: CPAs and the E-Frontier, JofA , Apr.04, page 64.)

Skeletons in the closet. The attorney will ask you to disclose any information of a personal nature that may diminish your effectiveness as a witness. During the deposition and the “no-holds-barred” cross-examination process, opposing counsel will try to destroy your testimony and credibility. If there is something in your background that could allow such a tactic to succeed, tell your counsel so the disclosure can be ameliorated. Attorneys need to know about anything that has the potential to damage their case.

PRACTICAL TIPS TO REMEMBER
Get your credentials in order: Research the many resources for obtaining expert witness training and get certification.

If a lawyer offers an engagement in a subject area that’s not your strong suit, provide the name of an expert whose qualifications are a better match.

Learn all pertinent aspects of the dispute and courtroom procedures for the witness stand.

Work closely with counsel to review the rules of the jurisdiction in which the case is pending.

If you cannot testify to something the attorney wishes you to, suggest another approach that can be independently supported.

Simplify the presentation of sophisticated accounting matters by using PowerPoint charts, graphs or related illustrations.

Above all, be careful, precise and truthful in your deposition and on the stand.

SUMMATION
The range of accounting and financial issues involved in court disputes today covers so many aspects of finance that CPAs of all types may be qualified to offer expert witness services in one or more areas if they meet the academic and professional requirements. The opportunity includes accounting instructors, who can bring their courtroom experience into the classroom as a learning tool for the benefit of students. CPAs with substantive knowledge in the following areas may find expert witness work a beneficial professional challenge:

Audits and related accounting principles analysis.
Complex tax issues.
The valuation of assets.
The valuation of a nonpublic company’s stock.
The determination of the value of goodwill and other intangibles.
Analysis of the profitability of a company (in divorce situations).
Understanding of cost accounting concepts and applications (cost allocations).
Financial statement analysis based on ratios, growth patterns and the type and content of income.
Information systems based on electronically generated information flows.
Capital budgeting decisions.
Cost estimations.
Calculation of lost profits and damages.
Tracing of assets.
Malpractice.
Tax and nontax fraud.

Accountants willing to endure having their professional lives scrutinized in the public arena of a courtroom in front of a sometimes hostile audience often find that service as an expert witness or litigation consultant is a challenge and an achievement—and even an unbelievable high. CPA experts who communicate effectively with the jury know, on leaving the witness chair, they’ve made a significant difference in the outcome of legal proceedings.

As a Matter of Fact
T he difference between lay witness and expert witness is shown in this exchange in a trial involving former Louisiana governor Edwin Edwards. Laura East, a Metairie, Louisiana, practitioner, testified as an investigative accountant for the prosecution to prove Edwards spent $742,310 more than he reported receiving from 1994 to 1996. Dan Small, Edwards’ attorney, defended him for rigging Louisiana’s riverboat licensing process. The excerpt is from a Baton Rouge Advocate story (“Witness, Attorney Have Testy Session” by Christopher Baughman and Adrian Angelette, The Advocate Online, March 2, 2000):

Edwards’ attorney, Dan Small, set off the fireworks when he said certified public accountant Laura East had lied about testifying as an expert in a federal trial in 1993. When East took the stand Tuesday, she said the 1993 trial was the only time she had testified as an expert witness in federal court. Under questioning by prosecutor Mike Magner, she went on to say it was her expert opinion that Edwards spent $742,310 more in cash than he reported receiving from 1994 to 1996. Prosecutors are trying to prove Edwards spent the cash to hide money he got by extorting riverboat casinos. Edwards, his son Stephen and five other men are on trial for allegedly rigging the riverboat casino licensing process.

On Wednesday, Small started out by asking East about her status as an expert in the 1993 trial. East again said she had testified as an expert. But when Small showed East a transcript from the 1993 trial, she changed her testimony. Small said East had testified in that case for the defendant as a “fact” witness. She had kept some of the man’s books and testified about that, Small said. The defense hadn’t even asked the judge to designate her as an expert witness, Small noted.

“I did not realize I had not testified as an expert,” East told Small.

“So your sworn testimony was totally false, wasn’t it?” Small asked.

“By accident,” East responded.

A short time later, [presiding judge Frank J.] Polozola sent the jury and East from the courtroom. Small asked that Polozola disqualify East and throw out her testimony. He also asked that the U.S. Attorney’s Office in Baton Rouge file a perjury charge against East.

“I have never in 21 years done this,” Small told Polozola. “I’m very upset about this.”

Small noted that Peter Strasser, who is part of the prosecution team in the Edwards trial, prosecuted the 1993 case that East was a witness in. Strasser told Polozola he did not remember East from the 1993 trial. In any event, Strasser said, East had given expert testimony in the 1993 trial, even if she had not been qualified as an expert.

Then Magner attacked Small, asking Polozola to hold him in contempt “for misleading the jury and the public.”

“I think that counsel has made a grandstand play here,” Magner said. “He has made a very big fuss out of very little.”

Polozola ruled East’s expert testimony could stand, and it was up to the jury to determine its credibility.

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