Consulting

Tougher Rules for Expert Witnesses

“I‘ve been doing this kind of work for 30 years and this is the way it’s always been done” has been the refrain of some CPA expert witnesses in defending their opinions, but courts may no longer buy that, according to Vincent Love, CPA. Proposed changes to rules of evidence will force expert witnesses to substantiate their opinions with concrete data and appropriate methodology, said Love, who sits on the board of directors of the American Arbitration Association. “CPAs, no matter how experienced and distinguished, will have to make sure their assumptions have a basis in fact and their methodologies are not novel and are properly applied. Accounting opinions will need to stick more closely to GAAP, GAAS and SSARS. The judges are ‘from Missouri’—you’ll have to show them.”

Proposed Rule 702 of the Federal Rules of Evidence says expert testimony is admissible only if

1. The testimony is sufficiently based on reliable facts or data.

2. The testimony is the product of reliable principles and methods.

3. The witness has applied the principles and methods faithfully to the facts of the case.

Until recently, judges would admit expert testimony if it was likely to assist the judge or jury and if the witness was an acknowledged expert. Love gave some examples of how the proposed rule—as well as several recent court decisions—could affect CPAs. In JMJ Enterprises, Inc. v. Via Veneto Italian Ice, Inc. , the court rejected expert testimony on how much money a food distributor lost because of alleged misconduct. The court noted that the expert had not performed a marketing survey, for example, and had assumed that revenues would increase while costs stayed the same, with no substantial evidence to back that up.

Love said the use of price erosion as an element of damages is a good example. As used in damage models, he said, “price erosion” is the money a plaintiff would have received from increasing the sales price of the product if the defendant had not taken some action—hence, the lawsuit. “Price erosion is good methodology, but recently I’ve seen it improperly applied: The expert needs to show that the defendant’s action was the cause of the price erosion. For example, an expert needs to show the effect on demand for the product if prices had been raised, the effect on the ability to increase prices if lower price substitutes had been available, and so on.

Love believes the proposed changes, which improve the quality of expert testimony, will be good for CPAs. The new rule reduces the likelihood that their testimony will be thrown out of court if it is supported with proper analysis and authentication.

The proposed rule has to make its way through several committees and Congress, but Love said it enjoyed wide support and could take effect by December 2000.