|EXECUTIVE SUMMARY |
CPAs can provide valuable services as litigation support consultants in lawsuits involving business damages. This analytical role allows CPAs to enter the litigation support business before taking on the greater challenge of being an expert witness.
Before accepting an engagement, the CPA should ask the attorney for all existing documentation to determine if that type of work is within the CPA’s professional capabilities and make sure the engagement is crafted to protect the attorney work product privilege. This will prevent the CPA from being called as a witness by the opposing party during trial.
A CPA should thoroughly analyze all financial documents connected with the case and the financial damages report prepared by the opposing party’s expert witness. Identifying flaws in the opposition’s analysis can damage their expert’s credibility and possibly prompt a settlement.
Analyses should be immediately forwarded to the client attorney ahead of applicable deadlines and be presented in a manner that nonfinancial persons can readily understand. Edmund Fenton Jr., CPA, DBA, CMA, Cr.FA, is a professor of accounting at Eastern Kentucky University. His e-mail address is email@example.com.
ouldn’t it be great if you could test the waters in litigation support to find out if it would be a good practice area for you? By serving as a consultant or adviser to an attorney about the financial matters of a case, you can reap the benefits of CPA litigation support work without fully immersing yourself in the murkier depths of the expert witness role. This article explains the basics of CPA litigation support work for the defense in a business damages case.
CPAs working in litigation support find it a challenging, fulfilling and lucrative part of an accounting practice. Combining expertise in auditing, tax and business consulting, CPA consultants must evaluate the complex calculations and reasoning behind an opposing party’s financial damages report to uncover any hidden facts or missing information in a business damages case. Possessing good financial sleuthing skills can prove invaluable to the CPA who wants to get started in this line of work.
Should you be contacted by an attorney seeking help in a case, you must first determine whether your experience as a CPA has given you enough insight to understand and analyze the issues, facts and type of business (for example, manufacturing, banking, etc.) involved in the lawsuit. Before committing to a case, ask the attorney for all existing documentation to determine if that type of work is within your professional capabilities.
Follow these critical steps:
Ensure your role as consultant (as opposed to expert witness) is fully understood by the attorney and the defendant. Your work product must fall, and stay, under “attorney work product privilege” to protect it from discovery and to prevent you from being called later to testify. (See Attorney Work Product, AICPA 2004, available online at the BVFLS Resources Center; “Attorney-Client Privilege: CPAs and the E-Frontier,” JofA, April 04, page 64; and “Accountants and the Attorney-Client Privilege ” JofA, April 97, page 53.)
Draft an engagement letter immediately. This vital step establishes the CPA as a consultant and clearly states that the attorney, not the plaintiff or defendant, is the CPA’s client. (See BVFLS Practice Aid 04-1, Engagement Letters for Litigation Services , for more detailed information and several sample letters.)
All contact with regard to any part of the case must be made through the attorney identified in the engagement letter. Contacting another party involved in the case, even the plaintiff or defendant who hired your client, the attorney, may expose part or all of your work to discovery by the opposing side.
||Options for Litigation Support
CPAs engaged in litigation support can focus on three main areas of service:
Consulting services. A CPA provides advice about the facts, issues, and strategy of a matter. The consultant does not testify as an expert witness before a trier of fact unless the consultant’s role subsequently changes to that of an expert witness.
Expert witness services. A CPA is designated to render an opinion before a trier of fact as to the matter(s) in dispute.
Once a CPA takes the stand as an expert witness, his or her qualifications and work product are exposed to intense scrutiny. If a consultant becomes an expert witness, all work, including the initial work performed as a consultant, is subject to discovery. For excellent articles about becoming an expert witness, see “ So You Want to Be an Expert Witness,” JofA, Oct. 04, page 23; and “An Expert Witness Can Make or Break a Case,” JofA, Aug. 01, page 37.
Other litigation services. A CPA can act as an impartial trier of fact, special master, court-appointed expert, referee, or arbitrator; or as a mediator on behalf of a client.
Source: Forensic Procedures and Specialists: Useful Tools and Techniques, AICPA Business Valuation and Forensic & Litigation Services (BVFLS) Section Special Report, 2006, page 10.
ACQUIRING THE NECESSARY DOCUMENTS
The CPA consultant’s goal is to provide a perspective to the attorney that will demonstrate the strength of your side’s position as to damages or the weakness of the opposing side’s position. This could help lead to a pretrial settlement, saving both sides unnecessary litigation costs. In reviewing the case documents, start with the original complaint and any amended or supplemental complaints the plaintiff filed. Obtain the defendant’s answer and all depositions. Ask for all related financial documents including the report prepared by the plaintiff’s financial expert witness, along with copies of the original documents upon which the expert relied. In a business damages case the documents may include tax returns, financial statements, bank statements or contracts. Think creatively to identify other sources of information. Consider items such as supplier and customer contracts, insurance policies and claims, employment records, sales tax returns, detailed asset schedules, and loan documents filed with a bank.
Be aware of the subpoena process for obtaining additional documentation, itself a lengthy process with court-imposed deadlines. Keep a close eye on deadlines—provide your work to the attorney well before those dates.
Preparing Deposition Questions
Preparing deposition questions can be as challenging as analyzing expert witness reports. The defense may have only one chance to depose a person before trial, so the session must be productive. Take the following steps to make the best use of this valuable fact-finding tool:
- Form questions in a way that will extract precise answers about unclear issues concerning the financial damages report.
- Review each question with the attorney and explain why the question should be asked.
- Prepare alternative follow-up questions that depend on possible responses given during the deposition.
- The attorney may want you present during the depositions to discuss strategy and help with “on the spot” questions if new or unexpected financial issues arise.
THE WORK BEGINS
The consultant must understand the issues and facts asserted by each side since the attorney is placing most of the responsibility on you to comprehend all financial aspects of the case. When reviewing original court filings, note relevant dates, timelines, actions/damages claimed, monetary issues, and other relevant information to compare to additional facts gathered from supporting documents. Immediately inform the attorney of any discrepancies. Do the same comparison evaluation between existing depositions and original court filings. If depositions have not been taken, offer to help the attorney develop questions.
||AICPA Code of Professional Conduct, Rule 201(A)
Professional Competence. Undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence.
ANALYZING THE EXPERT’S REPORT
Thoroughly analyze the financial damages report prepared by the plaintiff’s expert witness. Since one of your goals is to help settle the case before trial, finding errors in the expert’s report might damage their credibility to the extent the work is ruled inadmissible. The other side will do the same to you if given the chance. (For a definition and discussion of Daubert challenges, see “ Expert Testimony After Daubert…,” JofA, July 01, page 59; and “Guidelines for Guarding Against Daubert Challenges to Expert Testimony,” The CPA Expert, Spring 99, AICPA BVFLS Resources Center.)
1. Check the Math
Fully review and understand every calculation in the expert witness’ report. Identify all methods, assumptions, discounts and rates. In one case involving estimated damages, the plaintiff’s expert testified that he used a computer program to calculate damages. A manual check of the present-value calculations by the defense’s expert brought to light a $300,000 mathematical error when the damages being sought were only $1.5 million. Pointing out a simple error such as this in front of a jury can severely hurt the plaintiff’s case.
2. Examine Supporting Documents
Trace facts from supporting documents to the expert’s report. Review financial data to determine if correct amounts were used in the expert’s computations. If the plaintiff is suing for lost profits, and actual profits immediately before the event were used as the starting point, verify that the correct actual profit amount was indeed used. If the disagreement is over the loss of a key customer, determine how the expert isolated that customer’s previous contribution to profits. Verify that the expert used correct accounting items for damage bases, such as not using “lost gross sales” in place of “lost net profits” (which would inflate the damages).
As part of the verification process, look for changes in the plaintiff’s business in the years prior to the event, and confirm the expert applied those changes. In one case, a plaintiff owned three income-generating business assets, but sold one and lost another in a casualty in the year prior to a “damaging” event. Neither asset was replaced. The plaintiff’s expert witness, however, prepared a report based on the business still owning the two non-existent assets. When the defense pointed out the discrepancy at trial, it made the expert’s testimony a disaster.
Another angle to the verification process arises if the plaintiff’s expert witness also prepares the documents used as the basis for estimating damages. One tax preparer advised a client who was the 100% owner and full-time employee of an S corporation to pay himself an annual salary of $5,000. The owner was, in effect, receiving the small salary to avoid paying FICA taxes. When the client sued for lost profits after getting injured in a car accident, this incorrect tax advice was called into question during a deposition when the tax preparer became an expert witness. The plaintiff’s attorney, acknowledging the damaged credibility of the tax preparer-turned-expert witness, settled out of court shortly after the deposition for a fraction of the original claim.
3. Evaluate the Assumptions
Common factors used to estimate future damages include inflation rates, revenue growth rates, predicted future economic conditions, present-value discount rates, minority-interest discount rates, and length of the damage period. The expert will use his or her experience to determine the numerical value for each assumption; a disagreement between two experts may be a difference of opinion rather than a clear error. Still, the consultant should evaluate whether the assumptions and their numerical values are reasonable in an overall business and financial sense.
Also look at the reasonableness of the length of the damage period. A small business owner filed suit for business damages, claiming the defendant caused the loss of a revenue-generating asset. The plaintiff’s expert witness estimated the damage time period at 23 years, which would take the plaintiff to retirement. The analysis failed to consider the plaintiff’s ability to mitigate damages by replacing the asset (which the owner had not done). The unreasonable length of the damage period was raised during trial, throwing doubt on the plaintiff’s claims.
PRESENTING WORK TO THE ATTORNEY
Forward your analysis to the attorney immediately so he or she can determine how best to use it. Be as clear as possible so nonfinancial persons will fully understand your work. Use caution with accounting and financial terms; include your own definitions for clarity. Overall, the analysis should offer better insights into the financial dynamics of the case to help the attorney develop an appropriate strategy.
As a consultant in litigation support, you can enter a fascinating area of accounting. Financial damage lawsuits are big business, and CPAs who can analyze the numbers, provide sound advice, and explain the financial merits of a case are in big demand. Consulting provides a great way to gain valuable experience in a new area while limiting your exposure. The next step is to become an expert witness. In either capacity, this type of work can turn into one of the most challenging and rewarding aspects of your career.