| How
using instructional visuals can help CPAs in litigation
support. An Expert Witness
Can
Make or
Break a Case BY
GEORGE L. JOHNSON and CYNTHIA WALLER VALLARIO
| 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
opponents. 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 issuesuch as valuation of a business
for a change in ownership, amortization of intangible
assets, calculating earnings to define a businesss net
profitsCPAs 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 casesfrom 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 experts and
opponents 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 experts 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 experts 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. Plaintiffs 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 partys mistakes and illustrating
that the plaintiffs lost business value claim was an
inappropriate theory of damages. Using the defense experts
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 plaintiffs allegations under each key element (as shown
in
exhibit 1 ). Display your case. Identify the
weaknesses in the plaintiffs 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 opponents. 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 plaintiffs 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 plaintiffs
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 plaintiffs
allegations, the defenses 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 didnt have a qualified
underwriter. In addition, the defenses analysis
demonstrated the IPO would have encountered significant
regulatory obstacles. The net result showed the plaintiffs
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 lawsuits
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
experts 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. Its
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 witnesss 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 firms 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
clients 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 CPAs independence, cautions A.
Marvin Strait, CPA, of Colorado Springs, Colorado.
|
DONT 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 clients 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 experts 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 dont mesh perfectly, and
the expert must anticipate the actions of any opponents who
will attempt to exploit those weaknesses. Its 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
practitioners 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 CPAs 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 partys 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 corporations 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 companys 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 experts
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 companys 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 witnesss 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
experts 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. (Editors note: A visual approach might
be very useful in achieving this.) Many times an
expert witness feels rushed, fearful of losing the
judges 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 experts
testimony, preventing the opposing expert from
sidestepping technical errors. Airtight testimony
goes a long way in countering an opposing expert
who counts on the judges 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 experts value determination prevailed
was because our attorneys cross-examination did
not uncover the opposing experts 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, its the expert
witnesss 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. |
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