| EXECUTIVE SUMMARY
|
 THE CPA EXPERT WITNESS MUST CHOOSE
an approach in the pretrial planning phase
that will develop and integrate facts and legal
theories presented later in trial testimony. CPAs
may find using a visual framework works best both in
the preparation stage and as a tool on the witness
stand.
VISUAL GRAPHICS PREPARED BY THE
EXPERT witness can outline logical
sequences and relationships in the case and can
help to structure a trial plan. At trial the
graphics can become exhibits to explain salient
points and to educate the trier of facts.
ONE ADVANTAGE TO A VISUAL
PRESENTATION is that the CPA can
display the entire case on a single page. The
graphic analysis flows logically, provides facts,
theories and claims and highlights what
information is missing.
WITH A DETAILED GRAPHIC AS A COMMON
POINT of reference, the experts and
counsel can then develop a list of exhibits the
client must ultimately produce and decide whether
additional expert witnesses are needed for trial.
CREATE A CUMULATIVE ANALYSIS,
displaying both sides of the case,
including claims, counterclaims and factual
interpretations. Identify strengths and
weaknesses. Focus on discussing the points that
will help prove your case or disprove the
opponent’s. The completed visual establishes a
simple path for the trier of fact during trial
testimony. | | GEORGE L. JOHNSON, CPA, CFA, is
president of Brueggeman and Johnson, P.C., in
Seattle. His accounting firm is a member of the
Financial Consulting Group and specializes in
business valuation and litigation support services.
His e-mail address is george@bjval.com
. CYNTHIA WALLER VALLARIO, JD, is a senior
editor with the Journal of Accountancy. Ms.
Vallario is an employee of the American Institute of
CPAs. Her views, as expressed in this article, do
not necessarily reflect the views of the AICPA.
Official positions are determined through certain
specific committee procedures, due process and
deliberation. |
 ecause most commercial disputes involve an
accounting issue—such as valuation of a business for a
change in ownership, amortization of intangible assets,
calculating earnings to define a business’s net profits—CPAs
often are hired by plaintiff and defense lawyers to provide
expert testimony as litigation support consultants. The CPA
expert witness can play a variety of roles in business
valuation cases—from performing simple damage calculations
to orchestrating complex research and analysis and creating
case strategies. To do this, the CPA expert witness must
choose an approach in the pretrial planning phase that will
help him or her develop and integrate facts and legal
theories presented later in the trial testimony. CPAs may
find using a visual framework helps them in the preparation
stage and as a tool on the witness stand. |
Litigation Support as a Consulting Niche
Approximately 12% of all AICPA
members in public practice either serve as expert
witnesses or have expressed an interest in this
consulting area. Litigation support services were
among the top ten CPA growth niches in the 1990s.
Source: AICPA membership data.
| Visual graphics
prepared by the expert witness can outline logical sequences
and relationships in the case and can help to structure a
trial plan. At trial the graphics can become exhibits to
explain salient points and to educate the trier of facts.
Most CPAs and attorneys make checklists or chronologies to
depict events, but lists alone will not meet the demands of
complex litigation since experts and counsel cannot
determine the course of events, what is important or what is
missing without something tangible pulling all the pieces
together. A visual approach makes it possible for the CPA
expert witness to completely integrate the case on one
document by:
 Showing what happened.
Identifying both the expert’s and opponent’s
claims.
Highlighting relevant data.
Identifying missing data.
Identifying key areas and responsibilities of
the client, counsel and experts.
Creating a damages model.
Providing a way to challenge and test the other
expert’s case to achieve optimal results. One
advantage to a visual approach is that the CPA can display
the entire case on a single page. The graphic analysis flows
logically, provides facts, theories and claims and
highlights what information is missing. With a detailed
graphic as a common point of reference, the experts and
counsel can then develop a list of exhibits the client must
ultimately produce and decide whether additional expert
witnesses are needed for trial. The completed
visual, while initially used in preparation and planning,
also serves as an outline for the expert’s later, more
complicated, technical testimony in court. It establishes a
simple and understandable path for the jury, arbitrator or
trier of fact to follow and then provides the basis for the
details. This approach allows the expert witness to use a
broad range of presentation formats to accompany his or her
testimony, from the structured “drill-down” approach of
computer-supported Powerpoint presentations to the use of
audiovisuals or simple flip charts.
CASE STUDY: BUILDING BLOCK APPROACH
A court case in which an
emerging technology company filed suit against its auditor
illustrates the application of the visual approach and some
“land mines” facing a CPA expert witness. The technology
company claimed it would have successfully gone public and
raised a significant amount of funds if its auditor had
returned audited financial statements on time. The company
hired a business valuation expert to determine damages based
on the allegations, but this particular expert did not look
at the big picture and focused solely on lost business
value. Plaintiff’s counsel ultimately declined to call the
business valuation expert at trial. A second expert witness
who testified for the plaintiff on lost profit calculations
likewise responded unsuccessfully to the scope of the
issues. Because the plaintiff company could not
prove the sequence of alleged events and assumptions
relating to its claim, the plaintiff, in fact, had no
financial damages and its case failed. On the other
hand, the defense expert used a visual approach to plan and
present his testimony, highlighting the other party’s
mistakes and illustrating that the plaintiff’s lost business
value claim was an inappropriate theory of damages. Using
the defense expert’s strategy in this actual case, an expert
witness can start preparation for trial testimony in this
manner:
Decide what data you need to prove your case.
Collect historical and prospective company data, other
potential experts’ testimony, industry, market and
regulatory information and data regarding causation and
potential or actual mitigation of damages.
Establish priorities of the claims and
responsibilities of key parties on both sides of the case,
as well as how factual events and theories of damages are
related.
Define any alternative theories of damages that
may exist and how to measure them. Decide who the damaged
party really is; how and when the damages occurred; what the
damages consist of and when and how alternative damages
should be measured. Then, the expert witness can
create a visual graphic for use at trial:
Choose the key elements which are the building
blocks for the case. List important points of the
plaintiff’s allegations under each key element (as shown in
exhibit
1 ).
Display your case. Identify the weaknesses in
the plaintiff’s strategy and valuation of the claims (see exhibit
2 ).
Create a cumulative analysis, displaying both
sides of the case, including claims, counterclaims and
factual interpretations (as shown in exhibit
3 ). Identify strengths and weaknesses. Focus on
discussing the points that will help prove your case or
disprove the opponent’s. In this case, the CPA
expert for the defense, instead of testifying about an
alternative business valuation, created the visual graphic
to accompany his courtroom testimony which identified
several weaknesses he had seen in the plaintiff’s strategy
and valuation of the claims. The graphic showed that lost
business value was not a valid theory to support a claim for
damages because the lost value primarily affected the
shareholders, not the plaintiff company. The plaintiff’s
expert had measured damages for the wrong party. The theory
on which a claim for damages is based must fit the facts of
the case. Contrary to the plaintiff’s allegations,
the defense’s expert said other reasons that had nothing to
do with the auditor prevented the IPO from going forward.
The product was not ready for the marketplace or investors
and the company didn’t have a qualified underwriter. In
addition, the defense’s analysis demonstrated the IPO would
have encountered significant regulatory obstacles. The net
result showed the plaintiff’s theories and assumptions were
weak, unsupported by the facts or inappropriate.
| Discovery
Woes W hether the CPA expert witness
uses a visual approach to prepare for trial or
relies on more traditional methods, his or her
experience and expertise are an advantage in the
lawsuit’s planning phase. The first step
for a CPA expert using either approach is to find
out what happened by interviewing counsel and
reading the complaint, motions and related
documents and reviewing a chronology if the
attorney has prepared one. Then, the expert
witness identifies elements of damages as outlined
in the complaint and requests relevant data in
order to conduct research and perform an analysis
for the case. Because of the nature of litigation,
counsel may not receive important data needed for
pretrial discovery on time, new facts may arise
and the focus of the case may change, thus
revising the expert’s preparation for the
execution and presentation stages of the trial.
One of the biggest hurdles the expert
witness faces is collecting and organizing the
thousands of pages of documents produced or
created in pre-trial preparation and discovery.
The CPA expert witness, on both sides of the
lawsuit, must literally sift through the data and
material to determine what is specifically
relevant to his or her testimony. Also, the trial
team always finds there seems to be either too
much, too little or missing data. Without proper
communication expert witnesses may initially fall
into the trap of “chasing” elusive data that
ultimately are never produced or turn out to be
immaterial. “The expert witness can shorten the
chase by focusing on evidence that is really
primary and accessible and making counsel aware of
this,” says Sandra K. Johnigan, CPA, of Johnigan,
P.C. in Dallas, and a member of the AICPA
litigation and dispute resolution services
sucommittee. “If a piece of evidence does not
exist and cannot be produced, discuss it with
counsel.” If other professionals on the
trial team do an incomplete or disorganized job,
the opponent will find it easier to attack the CPA
expert witness during his or her
cross-examination. Also, before trial the expert
should caution counsel not to ask him or her
questions which belong to other witnesses. “One
way to protect yourself is to agree to testify
only in your area of expertise, and not get
involved in commenting on others’ testimony over
which you have no control,” says Johnigan. “It’s
also important expert witnesses remember they are
there to testify on technical matters, not facts.”
NO CONFLICTS, PLEASE At
the beginning of the engagement when the attorney
contacts the CPA expert witness, the CPA needs to
examine his/her records to look for possible
conflicts of interest with the parties in the
lawsuit. An expert witness does not want to appear
on a case where he or she (or the firm) has
present or past professional relationships with
individuals on either side of the suit which
prevent or interfere with the witness’s objective
testimony. This also applies as the investigation
of facts proceeds and the attorney provides lists
of potential witnesses and third parties. “It is
imperative that the expert check the firm’s files
and records for professional conflicts
immediately. This check should include not only
the named parties, but also potential third party
defendants who could be named in the suit later.
The bigger the case the longer the list of
potential conflicts that may arise,” says
Johnigan. And the expert witness must
avoid appearing as too much of an advocate for the
client’s position. One way to do this is to
testify on both direct and cross-examination in
the same manner and avoid sounding as if reading
from a script. “Be careful about perceptions of
being part of the team. This can impair the
appearance of the CPA’s independence,” cautions A.
Marvin Strait, CPA, of Colorado Springs, Colorado.
|
DON’T RULE OUT CREATIVITY
Commercial lawsuits
requiring CPA testimony generally do not follow a simple
model of calculating lost profits or valuing a business.
These cases may require the expert witness to integrate
different aspects of finance, accounting, economics and
statistics and be conversant with relevant businesses and
industries. At the outset of an assignment, the CPA
expert witness will receive an engagement letter from the
lawyer stating the scope of the engagement and for whom the
expert is working. The CPA should establish the client’s
expectations towards possible outcomes along with the budget
to prepare the case for trial. To handle the variety of
challenges and the high level of performance required from
an expert witness at trial, the CPA needs a pretrial
planning system to apply to all cases. At the same time,
however, since each case is unique, the expert’s creativity
in approaching an engagement can be critical in the planning
stages. The CPA expert witness should prepare a
first draft of the damages analysis as soon as he or she
understands the facts of the case, and should review the
draft with counsel to ensure it is accurate and complete.
Sometimes legal and damages theories and the facts of the
case don’t mesh perfectly, and the expert must anticipate
the actions of any opponents who will attempt to exploit
those weaknesses. It’s much better for the trial team to
address these issues early in the planning phase. In
many situations, the expert witness can also use the visual
analysis to assist counsel in discovery and preparation for
settlement and as the basis for outlining the case in
opening arguments. Success in providing litigation advisory
services depends on the practitioner’s experience and his or
her ability to apply it to the facts and circumstances of
the case. But no model approach, no matter how well
designed, will guarantee success. The same holds true for
the amount of preparation; CPA expert witnesses can still be
anxious about their work because the other side will
challenge their testimony and credibility (see “Never
Underestimate the Opposition,” below). CPA expert
witnesses are retained based on their reputations and
technical expertise. “When companies hire a CPA expert in a
valuation matter, they want an objective, competent and
supportable valuation performed by an independent expert,”
says A. Marvin Strait, CPA, of Colorado Springs, Colorado, a
former AICPA board chairman who has worked as an expert
witness for more than ten years. The depth of the CPA’s
expertise ultimately determines how frequently he or she is
retained, the breadth of the engagements and the fees he or
she earns. “Do not testify beyond your area of competence
and do not appear in the courtroom without adequate
preparation,” advises Strait. When CPA expert witnesses
think broadly and use techniques which help them see all of
the strengths, weaknesses, opportunities and threats
inherent in a lawsuit, they take a long step in having their
testimony achieve the desired outcome.
| CASE STUDY
Never Underestimate the Opposition
B eing part of a trial team can
require more from CPA experts than creating a
visual approach to integrate facts and theories
for trial. When a CPA expert witness prepares
testimony for the courtroom, he or she must take
the time to educate counsel on any contingencies
that may arise. In other words, assume if
something can go wrong, it probably will.
Our firm was engaged to serve as a rebuttal
expert witness on a valuation report of an S
corporation. In our examination we found one
fundamental flaw that overstated the value of the
company. Of course, the opposing party’s counsel
had used that flaw to support the cause of his
client, the spouse of the company owner.
The opposing CPA expert witness had calculated
the S corporation’s pretax earnings and applied a
capitalization rate to it, using the capitalized
earnings method. This witness derived the
capitalization rate from the Ibbotson build-up
method, which uses publicly traded company
returns, adds company-specific risk factors and
subtracts an estimate of the company’s long-term
growth rate. Calculated earnings or cash flows are
then divided by the capitalization rate in order
to determine value of the subject company.
In our opinion, to apply the capitalized
earnings method correctly, the opposing expert had
either to apply appropriate income tax rates to
the S corporation earnings or to convert the
aftertax capitalization rate to a pretax
capitalization rate. Since the opposing expert had
done neither, I was called to testify as a
rebuttal witness. Our contention was that their
capitalization rate was an aftertax rate since the
Ibbotson build-up method uses returns of publicly
traded companies after they have paid corporate
income taxes. In preparing for trial, we had
documented the flaw in the opposing expert’s
reasoning and report. We introduced into evidence
documents from well-respected valuation sources
that supported our position. As part of my
testimony, I summarized my findings, reviewed the
contents of the documents and tendered a value of
the company applying hypothetical C corporation
rates to the company’s pretax earnings.
During cross-examination, the opposing attorney
had only a few questions for me, none of which
related to the capitalized earnings method or the
technical error itself. He did call his CPA expert
witness who, in essence, testified that he had
taken into consideration income tax issues within
the capitalization rate. Based on the details of
the report and the methodology he employed, the
other witness’s testimony could only be described
as false, since his report had not considered
income taxes, either directly or indirectly.
It was apparent that the judge was not
convinced by my rebuttal testimony since in the
divorce decree he decided to use the opposing
expert’s value. We learned three important
lessons from this engagement. First, the expert
witness cannot rely on the judge to understand
technical issues. Consequently, an expert witness
must take time to educate the trier of facts.
(Editor’s note: A visual approach might be very
useful in achieving this.) Many times an expert
witness feels rushed, fearful of losing the
judge’s attention if testimony runs too long on
technical issues. Therefore, it is essential the
expert witness be a master communicator on the
witness stand, explaining technical concepts in
easily understood ways. One way the expert does
this, while on the stand, is to address issues in
contention that anticipate the opposing expert’s
testimony, preventing the opposing expert from
sidestepping technical errors. Airtight testimony
goes a long way in countering an opposing expert
who counts on the judge’s ignorance of valuation
issues. Second, an expert witness must
never underestimate a clever opposing expert who
is a fast thinker and may have no problem with not
telling the truth on the stand. As frustrating as
it is, even when an expert witness knows his or
her analysis is correct, the verdict may not
always acknowledge that. One of the reasons the
opposing expert’s value determination prevailed
was because our attorney’s cross-examination did
not uncover the opposing expert’s unsupportable
testimony. Last, the expert witness must
educate his or her attorney on the testimony the
opposing expert may offer at trial. It is not
enough to present great direct examination if the
testimony by the opposing expert negates it and
the attorney cannot discredit that testimony. In
the pretrial preparations, it’s the expert
witness’s job to assist the attorney not only with
his or her direct examination but also with the
cross-examination of the opposing expert. It is
best to educate the attorney as much as possible
before the trial date. It is too late to provide
questions for cross-examination to counsel when
the opposing expert is under direct examination.
—Robert T.P. Metcalf, Jr. Robert
T.P. Metcalf, Jr., CPA/ABV, CVA, thanks Linda A.
Campbell for her help with this case study. Both
are members of Marks, Nelson, Vohland &
Campbell, LLC, a CPA firm in Leawood, Kansas, that
specializes in litigation support and business
consulting. | |
