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© D.L. Crumbley 1 The Litigation Side of Forensic Accounting Copyrighted 2001 D. Larry Crumbley, CPA, Cr.FA, CFD KPMG Endowed Professor Department of Accounting Louisiana State University Baton Rouge, LA Fax Dr. Crumbley is the editor of the Journal of Forensic Accounting: Auditing, Fraud, & Risk, former chair of the Executive Board of Accounting Advisors of the American Board of Forensic Accountants, member of the NACVA’s Fraud Deterrence Board, and on the AICPA’s Fraud Task Force ( ). A frequent contributor to the Forensic Examiner, Professor Crumbley is a co-author of CCH Master Auditing Guide, along with more than 50 other books and 350 articles. His latest book entitled Forensic and Investigative Accounting is published by Commerce Clearing House ( ). Some of his 12 educational novels have as the main character a forensic accountant. His goal is to create a television series based upon the exciting life of a forensic accountant and litigation consultant. I am not engaged in rendering legal services or legal opinions. If legal advice or assistance is required, the services of a competent attorney should be sought.
© D.L. Crumbley 2 Forensic Accounting Areas Investigative Auditing Litigation Support Forensic: Latin for “forum,” referring to a public place or court. Black’s Law Dictionary: Forensic, belonging to the courts of justice. Note: Corporate spooks are used to check on competitors.
© D.L. Crumbley 3 Definition of Forensic Accounting Litigation Service Forensic accounting litigation services are the professional assistance accountants provide related to the litigation process. These services may involve accounting, financial, auditing, tax, quantitative analysis, and investigative and research skills, as well as an understanding of the legal process to provide assistance for actual, pending, or potential legal or regulatory proceedings before a trier of fact in connection with the resolution of a dispute between parties “Briefly, forensic accounting is a science that deals with the relation and application of facts to business and social problems.” Lenny smiled and turned toward the jury. “As I tell my students, a forensic accountant is like the Columbo or Quincy character of yesteryear, except he uses accounting records and facts to uncover fraud, missing assets, insiders’ trading, and other white-collar crimes.” Lenny turned back to the pinstriped lawyer. I.W. Collett & M. Smith, Trap Doors and Trojan Horses, Thomas Horton & Daughters, p. 76
© D.L. Crumbley 4 Forensic Auditing Forensic auditing is a type of auditing that specifically looks for financial misconduct, and abusive or wasteful activity. It is most commonly associated with gathering evidence that will be presented in a court of law as part of a financial crime or a fraud investigation. Source: B.L. Derby, “Data Mining for Improper Payments,” Journal of Government Financial Management, Winter, 2003, pp Life is good, the grass is green The good Lord smilin’ on you and me Sweet sunshine everywhere I look You love me like no one could Life is good Kenny Chesney
© D.L. Crumbley 5 Open Job Orders Valuation Partner for NJ Forensic Firm - Roseland, NJ...up to $250K base. Key words - Matrimonial, business valuation, expert testimony, litigation support, forensic. Forensic Partner for NY firm - up to $300's base. Key words - Bankruptcy, forensic, litigation support, expert testimony,insolvency CPA a must and solid public acct. experience. Audit Partner, Houston, Texas- up to $120k base first 12 months, 60% of collection between 12&17month, 70% of collection between 17&36 month-client prefers a manager or director level candidate with good business development skills. They rather mold. No book of business required. SEC exp. a must. CPA a must. The firm ranks among the top 10 nationally in "number of public companies audited." Currently, they have 4 audit partners and will be looking to add a 5th one this fall. Revenues last year were $1.3 million and for 2003 they estimate $1.7 million. Litigation Support Manager - NY office up to $115K. One CPA firm has 5 offices, 300+ staff. CPA a must and mid size firm experience. Big 4 experience not a good fit. (Valuation, Audit and Tax Senior/Managers from big 4 and CPA, always welcomed with this client.) Forensic Senior for Southern NJ firm - up to $80K...Forensic firm has three 3 office in NJ, 7 partners, 60+ staff. CPA a plus. Audit professional from big 4 or top firm okay. Litigation Support Senior - up to $70K plus bonus...Woodbury NY (LI).The firm has 24 Partners, 230 staff, 4 offices....Forensic and litigation support and CPA firm experience a must. CPA a plus. Jessica Cardona, Executive Recruiter 218 North Wood Ave. Suite # 3Linden, NJ 07036main: direct:
© D.L. Crumbley 6 Consulting Fees Forensic accountants work with attorneys, private investigators, law enforcement officers, corporate security specialists, the IRS, and the FBI. In 1999, Kessler International stated that the firm charges about $300 per hour for forensic consultations. Salaries start around $30,000 Senior-level government employees can earn between $75,000 to $90,000 In the private sector, one can earn between $125,000 to $150,000
© D.L. Crumbley 7 A Forensic Accounting Expert Witness Harvey R. Kelly led the investigation and testified against CEO Richard M. Scrushy (HealthSouth). He acknowledged turning up “nothing that had Mr. Scrushy’s name on it,” that connected the former CEO to the fraud at HealthSouth. That inflated earnings by $2.7 billion. “Our job wasn’t to figure out who all the bad guys were. Our job was to help the company get the right numbers and figure out how much the fraud was.” He and his investigators sifted through millions of documents during their 23,000-hours fraud investigation. PWC was paid about $9 million to conduct the forensic audit in HealthSouth deleted old s every 60 days. Now with the NYC office of Alix Partners LLC, he was being paid about $700 an hour by the government for his testimony Source: Evelina Shmukler, “Scrushy Team Cross-Examines Forensic-Accounting Witness,” WSJ, February 1, 2005, C-4
© D.L. Crumbley 8 Top Niche Services Source: Accounting Today. 1. Business Valuations89% 2. SOX Compliance77% 3. Litigation Support69% 4. Attest Services67% 5. Estate/Trust/Gift66% 9. Forensics/fraud56%
© D.L. Crumbley 9 Six Areas of Litigation Services 4)Valuation *Business and professional practices *Pension *Intangibles/intelligent property *Property 5)General Consulting *Arbitration *Mediation *Actuarial analyses *Statistical analyses *Projections *Industrial engineering *Market analyses *Computer consulting *Industry practices *Merger/acquisitions *Document management 6)Analyses *Tax bases *Cost allocations *Tax treatment of specific transactions 1)Damages *Lost profits *Lost value *Lost cash flow *Lost revenue *Extra cost *Mitigation *Personal Injury *Environmental 2)Antitrust Analysis *Price-fixing *Market share, market definition *Pricing below cost *Dumping and other price distribution *Anti-competition actions *Monopolization 3)Accounting *CPA malpractice *Bankruptcy/ reorganization *Tracing *Contract cost and claims *Regulated industries *Frauds (civil and criminal) *Historical analyses *Family law Source: Management Advisory Services Technical Consulting Practice Aid 7: Litigation Services, (AICPA, 1986);
© D.L. Crumbley 10 A forensic accountant has extensive experience in investigations to determine solutions to disputed accounting matters, to write expert reports on their investigation, and to appear in court as expert witnesses. Zeph Telpner and Michael Mostek A normal accountant is like a guarddog (e.g., a bulldog); a forensic accountant is like a bloodhound; an internal auditor is like a seeing-and-eye dog (e.g., monitoring and guiding management), a corporate accountant is a mix breed, and a governmental accountant is an afghan. D. Larry Crumbley Definition
© D.L. Crumbley 11 Forensic Accountant Criminology Accounting Computer Science Law Investigative Auditing © Hugh M. Christensen Forensic Accountant’s Knowledge Base
© D.L. Crumbley 12 “A lawsuit is like a parachute jump; you have to get it right the first time.” - Hal Rosenthal “The party who has command of the paper trail most often controls in the courtroom.” - D. Larry Crumbley Quotes
© D.L. Crumbley 13 “Accounting concepts are a foreign language to some lawyers in almost all cases, and to almost all lawyers in some cases.” U.S. v. Kovel., 296 F.2d 922 (CA-2, 1961) Foreign Language
© D.L. Crumbley 14 Three Branches of Government Executive (regulations) Legislative law [takes precedence] Judicial law [a referee]
© D.L. Crumbley 15 U.S. tort system cost $246 billion in 2003, which is $845 per U.S. citizen ($12 in 1950). U.S. tort costs accounted for 2.23% of GDP, (similar to 2002). In 2002, the increasingly inefficient U.S. tort system returns less than 50 cents on the dollar to people it is designed to help; only 22 cents to compensate for actual loss. Medical malpractice costs totaled nearly $27 billion in 2003, or $91 per person (compared to $5 per person in 1975). Tort costs increased by a total of 33.5% in past three years. Tillinghast-Tower Perrin, U.S. Tort Costs: 2004 Update, December 10, U.S. Tort Costs Climbing
© D.L. Crumbley 16 Camico August 2003 Survey 62% of the prospective jurors agreed that a professional accounting firm would “look the other way” if a client violated the law in order to maintain the client relationship. 57% of prospective jurors agreed with the statement “Accountants often manipulate their numbers and opinions to say what their clients want them to say.” 17% were neutral and 26% disagreed. 74% of prospective jurors agreed that an auditor “should easily detect fraud.”10% were neutral and 16% disagreed. Who is responsible for the legal and/or ethical problems facing corporate America? CEO, 70% Board of Directors, 55% Senior Executives, 68% Inside Accountants, 53% CFO, 62% External Accountants, 42% Inside lawyer, 58%
© D.L. Crumbley 17 Body of rules and practices by which justice is handed out by the legal system. Federal Rules of Civil Procedure (FRCP): governs U.S. district courts.* Federal Rules of Criminal Procedure. Federal Rules of Evidence. * Find at Civil Procedure
© D.L. Crumbley 18 You have to remember one thing, and that is the fact that our laws aren’t designed to punish guilty people; they’re intended to protect innocent people. E.J. McMillan, The Audit, Churchton, MD: Harwood Publishing, 2000, p Robert Durst in Galveston, Texas admitted killing his neighbor, cutting up the body, and tossing the pieces in trash bags in the Gulf. He was found innocent Deanna Laney claimed God ordered her to bash in the heads of her two sons. She was acquitted in April 2004 by a Tyler, Texas jury. Hard To Convict
© D.L. Crumbley 19 I have never come to terms with a system based on the principle that it is better to let a hundred guilty people go free rather than wrongly convict one innocent person. It’s okay for people to be victimized again and again as long as no one is mistakenly locked up. Clinton McKinzie, The Edge of Justice, New York: Bantam Dell, Hard To Convict
© D.L. Crumbley 20 “Well you do what you do, and you pay for your sins.” Tim McGraw’s “Red Ragtop” “ It’s a Great Day to Be Alive” Travis Tritt And it’s a great day to be alive I know the sun’s still shinin’ when I close my eyes There’s some hard times in the neighborhood But why can’t every day be just this good? Tim McGraw’s Position
© D.L. Crumbley 21 A lawyer’s job is ultimately to avoid trial. Largely uncontrollable variables such as individual juror predisposition, judicial bias and even the skill and acumen of opposing counsel make all trips before the bar of justice a veritable crapshoot. Therefore, opt for pre-trial settlement. As an investigator, your role in avoiding the cost and uncertainty of trial can not be overestimated. Source: H. Silverstone and M. Sheetz, Forensic Accounting and Fraud Investigation, Hoboken, N.J.: John Wiley & Sons, 2004, p. 233 Miscellaneous Ideas
© D.L. Crumbley 22 Since forensic accounting is often used in legal forums, forensic accountants must be familiar with legal concepts and procedures. Nothing spoils a great case quicker than the lack of evidence. Expert opinions are evidence. FRE 702. Source: D.W. Squires, “Problems Solved With Forensic Accounting: A Legal Perspective,” Journal of Forensic Accounting, Vol. IV, 2003, p Knowledge of Legal Concepts Necessary
© D.L. Crumbley 23 Five Major Phases of Litigation Pleadings Discovery [Most of our work occurs here]. Trial Outcome Possible Appeal
© D.L. Crumbley 24 Pleadings Complaint – Plaintiff files. Service of Process – served on defendant. Answer – Defendant must admit or deny allegations. Demurrer- No cause of action exists. Possible cross-complaint Sharp v. U.S., 199 F. Supp. 743 (D.Del 1961), aff’d 203 F.2d 783 (3 rd Cir. 1962).
© D.L. Crumbley 25 Major Ways to Sue Two major methods are 1) by ambush, and 2) by serve and volley. With the ambush, we would prepare the skeletal framework of our allegation, run to the courthouse, file the suit, leak it to the press, and hope we could prove what we thought we knew. The advantage was surprise, and embarrassment for the defendants, and, hopefully, public opinion. The downside was the legal equivalent of jumping off a cliff with the strong, but unconfirmed, belief that there was a net down there somewhere. The serve and volley would begin with a letter to the defendants, in which we made the same allegations, but rather than sue we would invite them to discuss the matter. The letters would go back and forth with each side generally able to predict what the other might do. If liability could be proved, then a quiet settlement would probably occur. Litigation could be avoided. Source: John Grisham, The Street Lawyer, New York: Bantam Dell, 1998, p. 274
© D.L. Crumbley 26 Our purpose: Assist the trier of the facts. Question of Facts v. Question of Law [not always clear]. Negligence may be either. Expert Witnessing
© D.L. Crumbley 27 Frequent Terms (1) Appellant (Petitioner) (Plaintiff): Person filing suit. Respondent (Defendant): Person sued. Stare decisis: case once decided, will control. Doctrine of precedential authority: follow prior case only where issues/facts are essentially the same. Judge not required to follow judicial precedent beyond own jurisdiction.
© D.L. Crumbley 28 Frequent Terms (2) Res judicata (collateral estoppel): Once case or issue resolved, matter precluded from being litigated again. Law of the case: Once an issue decided one way, if not properly challenged, will not be reconsidered. Full Faith and Credit Clause: Court in one state must honor and enforce judgment of another state. Venue: The appropriate court to bring a dispute (cause of action occurs or where crime committed).
© D.L. Crumbley 29 Frequent Terms (3) Pro se: Party representing himself or herself. Per curiam: Decision of the whole court. en banc: decision rendered by full court. Concurring opinion: Agrees with court’s conclusion, but… Dissenting opinion: Disagrees with majority. Dicta (Dictum): incidental facts; not binding on future cases. 30 (b) (6): names a public or private organization for deposition.
© D.L. Crumbley 30 Frequent Terms (4) Affirmed (aff’d; aff’g): agrees with lower court. Reversed (rev’d; rev’g): disagrees with lower court. Writ of Certiorari: Asks Supreme Court to hear your case. Cert. Granted Cert. Den. Remand: Vacate the lower court decision and send back for further considerations Overruling: Does not impact either party in the earlier case. Overrules a previous case
© D.L. Crumbley 31 Frequent Terms (5) Ad hoc: for one particular or special purpose (e.g., an Ad hoc committee) Ad valorem: According to value (e.g., in tax, assessment of taxes based on property value). Bona fide: in good faith and without fraud or deceit. Covenant: an agreement or promise to do or not to do something. Dejure: in law or lawful; legitimate. Deposition: A written statement of a witness under oath, often question/answer
© D.L. Crumbley 32 Frequent Terms (6) Enjoin: to command or instruct with authority (e.g., judge can enjoin someone to do or not to do something). Habeas corpus (writ of): procedure to determine if authorities can hold a person in custody. Nolo contendere: a party does not wish to fight or continue; person will not fight a charge. Parol evidence: renders any evidence of a prior understanding of a party to a contract invalid if it contradicts the term of a written document.
© D.L. Crumbley 33 Frequent Terms (7) Brief – written arguments supported by citations of court decisions, statutes, and other authorities. Stipulation – voluntary agreement before trial between opposing parties concerning the disposition of certain facts or points. Amicus-curiae – a brief filed by a party not directly related to a lawsuit. Habeas corpus – a writ which permits a prisoner to challenge a conviction on constitutional grounds. Executor/executrix – one appointed by a will to execute the provisions. Ex parte hearing – court hears only one side of an issue. Special Master – appointed by a court or judge to decide certain facts, etc. Pro bono- providing a professional service without compensation.
© D.L. Crumbley 34 Frequent Terms (8) Subpoena ad testificandum – command to appear and testify as a witness. Default judgment – judgment won by the plaintiff because the defendant failed to respond to a summons or appear at trial. De novo – new; a new proceeding without regard to prior legal actions. Double jeopardy – prohibition in the U.S. Constitution, 5 th amendment, against trying a citizen twice for the same crime. Enabling act – legislation by which an administrative agency is created and powers are delegated to it. Jurisdiction – power of a court to hear and decide the issues in a case and to bind the parties. Long-arm statute – a state law extending personal jurisdiction over out-of-state persons (including corporations).
© D.L. Crumbley 35 Frequent Terms (9) Pleadings – papers in court, with copies to other parties, in preparation for bringing or defending a lawsuit. Scienter – with intent to deceive; with guilty knowledge. Voir dire – jury selection process; lawyers and judges ask. Actus reus – brought about the criminal act. Mens rea – caused the criminal act with guilty knowledge; state of mind indicating culpability. Staples v. U.S., 511 U.S. 600 (1994). Preponderance of the evidence – greater than 50%. Civil trial. Clear and convincing evidence – ca 70%. Beyond a reasonable doubt – greater than 95%. Criminal trial.
© D.L. Crumbley 36 Voir Dire The concept of voir dire- the questioning and selection of jurors has undergone a sea of change in California since the passage in June 1991of Proposition 115. Before that time attorneys on both sides of a case were given a wide latitude in questions they could ask prospective jurors. What did they do for a living? How many brothers and sisters did they have? What are their hobbies? Favorite books and/or movies? Feelings about puppies? Cats? Gold-fish? Almost anything went if it might serve to bring out a prospective juror’s character. Often the questions were thinly disguised speeches designed to sway prospective jurors. And because of this, jury selection in a capital case such as this one could easily take as long as two months and in some cases longer..
© D.L. Crumbley 37 Voir Dire Since Proposition 115, however, voir dire was conducted by the judge and –as the proposition had contemplated- tended to go much more quickly. Attorneys could supply the judge with a list of questions they wanted to see asked, but often these were ignored Lawyers for the prosecution and the defense still had their twenty peremptory challenges- the right to dismiss a prospective juror for any reason whatsoever or no reason at all- but the empaneling of the jury was now much more outside the perceived control of either counsel. It was the judge’s show. Source: J.T. Lescroart, The 13 th Juror, New York: Dell Publishing, 1994, pp
© D.L. Crumbley 38 Frequent Terms (10) Preponderance of the evidence – greater than 50%. Civil trial. Clear and convincing evidence – ca 70%. Beyond a reasonable doubt – greater than 95%. Criminal trial. Bates numbers - a numerical or alphanumeric system placed on documents retrieved during the discovery process. Stipulations – before trial the parties agree to certain facts to simplify the trial. Ipse Dixit- thing speaks for itself.
© D.L. Crumbley 39 Frequent Terms (11) Chain of custody – accounting for evidence and documents from the time obtained until the end of the trial. Capias – a court writ directed an officer to arrest a person. Ad damnum – the damages claimed by a plaintiff. Demurrer – plea for a dismissal of a dispute on the grounds that even though the plaintiff’s arguments are true, they are insufficient to sustain a claim. Intestate – one dies without a will. Stay – delay a legal order (e.g., an execution). Sidebar – discussion between judge and lawyers at the bench, outside the hearing of the jurors. Soddit- Some Other Dude Did It! Vacatur- a decision is set aside, annulled, or vacated.
© D.L. Crumbley 40 Bates Numbers Unpublished- some federal appellate opinions are not published in the Federal Reporter, but after January 1, 2001 now appear in West publication known as the Federal Appendix. Sometimes called non-precedential, they are not binding. About 40% of Federal appellate Daubert decision are unpublished.
© D.L. Crumbley 41 Attorney: Walking Away You got to know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run. You never count your money when you’re sitting at the table. There’s be enough time for counting them when the dealing’s done. The Gambler by Kenny Rogers
© D.L. Crumbley 42 That First Telephone Conversation 1.Answer all the questions and keep the conversation simple and to the point; avoid hesitation and long pauses. The attorney is well experienced is asking questions; in a sense, you are being cross-examined. 2.Let the attorney explain fully the case, in his way at his pace. Be a good listener ( attorneys like that). 3.Ask as many questions as necessary in order for you to understand the case. Show that you know what you need to know in order to evaluate the situation. 4.If you have been contacted by the opposing party in this particular matter, immediately disclose that to the caller. Some courts do not allow an expert to testify for one side if he has been contacted previously by the opposing side. 5.When asked your expertise and experience, especially in the particular area of interest, be succinct. Say, “ I have given expert testimony in
© D.L. Crumbley 43 The First Telephone Conversation ten or twelve such cases over the past four or five years,” instead of trying to enumerate each case. Avoid arrogance. 6.Show your desire to meet with him soon at a time and place most convenient for him. He may simply ask you to mail, or fax your CV and fee schedule, and later may retain you on basis of this material- and the phone conversation. (What’s more likely, however, is that the attorney will want to meet with you to personally evaluate your demeanor and dress.) 7.Be firm and direct so that the attorney will feel confident in retaining you. If the conversation goes on at length or otherwise appears that the attorney is serious about engaging your services, you might want to ask some questions: 8. Is he a one-man operation or part of a large law firm? How large is his staff? What back-up does he have (e.g., how many paralegals)?
© D.L. Crumbley 44 The First Telephone Conversation 9.What is his experience in using experts in general and experts in your particular field? 10.How did he get your name? Source: Jesse E. Dines, Expert Witness Manual, Irvine, CA: Pantex International, 2004, Ch.12. The attorneys each acted in the role of opposing movie directors--calling witnesses and orchestrating carefully timed presentations. All of it designed to sway the jury’s disposition in favor of their respective client’s position. Civil cases, like this one, are decided based only on which side has the greatest preponderance of evidence in its favor. Evidence of guilt or innocence beyond a reasonable doubt is the criterion for deciding criminal cases only, and therefore did not apply to this case. It turned out my role was relatively small in this case, but the per diem fees were quite substantial. I.W. Collett and D. Forgione, Costly Reflections in a Midas Mirror, Thomas Horton and Daughters, p.131
© D.L. Crumbley 45 Finding Information About Attorneys 1.Search on Internet ( e.g., Legal Database, Legal Match, Thompson FindLaw) 2.American Bar Association 3.Martindale- Hubbell, paper and internet 4.Prentice-Hall Directory
© D.L. Crumbley 46 The Federal Judicial System SUPREME COURT 9 Judges U.S. COURT OF APPEALS Federal Circuit (Created in 1982 by a congressional statute; formed by merging the Court of Claims and the Court of Custom and Patent Appeals; sit in panels of three on cases involving customs, copyright, trademarks, and patents.) U.S. COURT OF APPEALS 12 Circuits (Three-judge panels, not the entire circuit court, hear most cases.) ADMINISTRATIVE AGENCIES (In some cases, appeals to a U.S. District Court, instead of the circuit courts.) U.S. DISTRICT COURTS 50 States Washington, D.C., Puerto Rico, Virgin Islands, Guam* U.S. COURT OF INTERNATIONALT RADE (Created in 1980, formerly the U.S. District Court, instead of the circuit courts.) U.S. Court of Federal Claims and some special agencies (e.g., Board of Contract Appeals, Patent/Trademark Boards, and Merit Systems Board) U.S. MAGISTRATES U.S. BANKRUPTCY COURTS U.S. Tax Court 19 judges, with 1 judge hearing most tax cases * Patent disputes go from the district courts to the Federal Circuit.
© D.L. Crumbley 47 Some Judicial Facts Have right to jury trial in district court, but jurors can only determine facts (not law). No jury trial in probate, family law, estate issues equitable issues, Tax Court, and Court of Federal Claims Automatic right to appeal from trial court to the first level of the appellate process. But higher court (e.g., Supreme Court) must decide whether to hear dispute. To get to Federal court, must raise the question of a federal law or diversity of citizenship (e.g., different state) For Federal court, controversy must exceed $50,000. State courts have trial courts, appeals courts, and supreme court.
© D.L. Crumbley 48 The Seventh Circuit had this to say about a trial court’s right to determine facts: The trial court … has ‘the best opportunity to observe the verbal and nonverbal behavior of the witnesses focusing on the subject[s]’ reactions and responses to the interrogatories, their facial expressions, attitudes, tone of voice, eye contact, posture and body movements, as well as confused and nervous speech patterns in contrast with merely looking at the cold pages of an appellate record. Source: United States v. Duarte, 1 F.3d 644, 651 (CA-7, 1993), cert. denied, 510 U.S. 1058, 126 L.Ed. 2d 688, 114 S. Ct. 724 (1994). Facts Determination
© D.L. Crumbley 49 Helpfulness to the trier of the facts is the ultimate touchstone for the admissibility of expert testimony. To be helpful the (1) witness must be qualified as an expert, (2) expert must have a reasonable factual basis for the testimony, (3) testimony must be based upon reliable methods, and (4) testimony must be relevant to the facts in dispute. Accounting testimony can be the subject of expert testimony. Sources: In Re Paoli Railroad Yard PCB Litigation, 916 F.2d 857 (CA-3, 1990). Fed. Rul. Evidence 702 and 703; General Electric Co. v. Joiner, 522 U.S. 136 (1997). Computer Systems Engineering, Inc. v. Qantel Corp., 740 F.2d 67 (CA ). Helpfulness
© D.L. Crumbley 50 The Judge Controls A 2000 dispute involved an alleged Ponzi scheme where a defendant sold airline tickets procured by debtors using frequent flier miles purchased by brokers. The defendant relied on an expert who was a CPA, a bankruptcy trustee, an insolvency accountant, and a fraud investigator with substantial experience and impressive qualifications and credentials. The judge, Herbert A. Ross, was not impressed with this expert, F. Wayne Elggren, employed by Arthur Andersen. At trial Mr. E questioned the experts of the trustee and the expert of the plaintiff (who had no CPA or certification). Mr. E found numerous faults with the methodology and analysis of the trustee and the plaintiff’s expert, E. Jayne MacPhee. Mr. E concluded his argument by stating there was too much unaccounted for cash and profits from the ticket business to claim it was a sham or Ponzi scheme. He relied on a “smoking gun” of $9 million in ticket revenues. Ms. MacPhee found only $6 million and the trustee only $4.8 million. The judge said that Mr. E had misunderstood or had been misadvised about the context of the $9 million of ticket sales “He [Elggren] is hoisted on his own petard when he uses it to analyze the debtors’ business history.” The rest of his criticisms are of “such small size or consequence, or so speculative or inclusive, that they are akin to straining at gnats.”
© D.L. Crumbley 51 The judge had this to say about MacPhee’s lack of a CPA degree or certification in certain accounting fraud detection professional organizations and Mr. E’s criticism of her: The type of expertise truly needed in this case is someone who can take poorly kept, incomplete records, involving commingled funds, and reconstruct the business out of them. MacPhee has training in accounting matters and experience in forensic accounting situations. She has worked as an accounting analyst reconstructing what really happened in the M&L Business Machine case, one of the major Ponzi schemes to reach the bankruptcy courts. Experience and training, despite the lack of a specific degree or designation, qualify her to render an expert opinion on accounting matters related to the reconstruction or analysis of business records, especially when a Ponzi-type business, with commingling of funds, is suspected. While she does not have the credentials of belonging to all the professional groups that Mr. E does, she has accounting training and experience in working on Ponzi cases, and has done an admirable job in assisting the court in understanding debtors’ operations - - a much more intellectually honest job than Mr. E at that. She qualifies as an expert in reconstructive accounting in a situation where the books and records are incomplete and not up to standards, and the funds of the debtors are commingled. The Judge Controls
© D.L. Crumbley 52 Likewise, the trustee, even though he is a party, may qualify as an expert, even though his bias can be challenged. He is a CPA and a panel trustee in Alaska, which have given him on-the-job experience in understanding and reconstructing financial transactions. Judge Ross concluded as follows: In short, I find that Mr. E’s report is based on substantial factual mistakes, speculation, innuendo, and inferences which are not supported by full explanations and analysis. It is not worthy of an expert of his caliber, nor worthy of admission as evidence in this case. His expert opinion will be excluded. Source: In re Bonham, 55 Fed. Rul. Evidence Serv. (Callaghan) 419; 2000 Bankr. Lexis 727. The Judge Controls
© D.L. Crumbley 53 Miscellaneous Decisions Admissibility affirmed. Exxon complains that expert had no specialized knowledge of petroleum pricing and employed flawed methodology. But district court conducted six-day Daubert hearing exhaustively canvassing reliability issues, and expert was fully subject to cross-examination. No abuse of discretion. Allapattah Servs v. Exxon Corp., 333 F.3d 1248 (11 th Cir. 2003) Exclusion affirmed. Expert exhibited “utter lack of any familiarity, knowledge, or experience with damage analysis;” his methods were “misleading, not reliable, and unsupported by use in any other comparable setting” and did not fit facts of case, and his testimony would have confused jury rather than assisting it. Lifewise Master Funding v. Telebank, No (10 th Cir. June 29, 2004) On trial for filing false tax returns, defendants offers “tax expert” to testify that she was not required to report certain income on personal return. District court excludes testimony. Exclusion affirmed. Proposed testimony represented legal conclusion, and it is judge’s role to instruct jury on law. United States v. Rosales, No (9 th Cir. Apr. 12, 2001) (unpublished).
© D.L. Crumbley 54 Miscellaneous Decisions (Cont.) Admissibility reversed. Courts have permitted owners and officers of businesses to offer lay opinion on damages, based on their familiarity with enterprise. But plaintiff’s witness was neither owner nor officer, and his testimony therefore should have been evaluated for admissibility as expert opinion under Fed. R. Evid 702. Remanded for new trail on damages. JGR. Inc. v. Thomasville Furniture Indus., Inc., 370 F.3d 519 (6 th Cir. 2004). Admissibility affirmed. Defendants complain that experts incorrectly accounted for effects of theater size and stadium-style seating on revenues, and also that Greenwald had no specific experience with movie theaters. But Greenwald is CPA who has testified in fifty court cases, and defendants’ other arguments amount to methodological quibbles, which were fully explored before jury. No abuse of discretion. Regal Cinema, Inc. v. W & M Properties, No (6 th Cir. Jan. 27, 2004) (unpublished). Admissibility reversed. It is true that lay opinion on lost profits is sometimes permitted, when offered by present or former officers or employees. But despite her experience and advanced degree, this witness was neither of those things, nor was she otherwise
© D.L. Crumbley 55 Miscellaneous Decisions (Cont.) sufficiently acquainted with company’s affairs to ground any lay opinion on lost profits. Remanded for new trial on damages. Dijo, Inc. v. Hilton Hotel Corp., 351 F. 3d 679 (5 th Cir 2003). Admissibility affirmed. Defendant argues auditor should have followed “net worth method” applicable in tax prosecutions under Holland v. United States, 348 U.S. 121 (1954). But Holland need not be followed in non-tax cases. Unlike tax prosecutions, narcotics conspiracy charges do not involve financial gain as necessary element of offense, so less stringent standard are permissible. United States v. Cuervo, 354 F. 3d 969 (8 th Cir. 2004), cert. denied, 73 U.S.L.W (Oct. 4, 2004) If the expert “could or would not explain how his conclusions met the Rule’s requirements, he was not entitled to give expert testimony. As we so often reiterate: “An expert who supplies nothing but a bottom line supplies nothing of value to the judicial process.” Zenith Elecs. Corp. v. WH-TV Broad. Corp., No (7 th Cir. Jan. 20, 2005).
© D.L. Crumbley 56 Motions Motion: Requests a rule or order in favor of the applicant Source: Babitsky et. al, The Comprehensive Forensic Manual, Seak, Inc., Motion to dismiss: The moving party is requesting that a cause of action be dismissed because the alleged facts, even if proven, do not constitute a valid legal claim. Motion for a directed verdict: The moving party requests at trial that a cause of action be dismissed because the party with the burden of proof has failed to establish sufficient facts so that a reasonable fact finder (e.g., the jury) could find in the claimant’s favor. For example, in a complex toxic tort case, the plaintiff’s only expert witness is barred from testifying as to causation under the Daubert rule. After the plaintiff rests, the defense moves for a directed verdict on the grounds that the plaintiff has not submitted sufficient proof of causation through an expert witness. Motion for judgment notwithstanding the verdict: This motion is made by the losing party after an adverse jury verdict. The moving party is asking that the judge reverse the verdict of the jury. These motions may be granted if the judge determines that the jury verdict had no reasonable support in fact or was contrary to law. Motion for a continuance: The moving party is requesting that a scheduled event, for example a hearing or trial, be postponed or continued to a later date. Motion in limine: The moving party is requesting that evidence it expects the opposing side to offer be held inadmissible. For example, a party may make a motion in limine to exclude the testimony of an expert for failure to comply with the Daubert rule. Motion for summary judgment: The moving party is requesting, prior to trial, and based solely on documentary evidence (including expert deposition transcripts, reports, and affidavits), that the court grant judgment in its favor because no material facts are in dispute. This device is used to throw a case out of court without it ever getting to the jury. Many times a lawyer with a weak case will seek to survive summary judgment in order to be able to settle the case on favorable terms over the threat of a jury trial.
© D.L. Crumbley 57 Discovery: process of getting information from the other party Fed. R. Civ. Pro. 26(b)(1). Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action, whether it relates to the claim or defense of the party seeking discovery or to the claim or defense of any other party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things and the identity and location of any persons having knowledge of any discoverable matter. The information sought need not be admissible at trial if the information sought appears reasonably calculated to lead to the discovery of admissible evidence.
© D.L. Crumbley 58 Judge Admonishes Medco A federal judge admonished Medco Health Solutions, Inc., for violating his order to turn over documents in the company’s legal battle with the Justice Department. Medico, one of the country’s largest pharmacy- benefit managers, has been “dilatory” in its disclosure of certain documents that were supposed to be turned over and “any further violations of this court’s orders may result in sanctions.” If a judge or jury agrees with the Justice Department, Medco could technically be liable for an $11,000 fine on each of the millions of prescriptions Medco processed for government employees. In his order, the judge said Medco has turned over documents on disks that have technical defects, and that the plaintiffs have complained about the defects to Medco. “Medco argues that it has not been made aware of any defects in electronic document production,” the judge wrote. Clearly, this is disingenuous.” Source: Barbara Martinez, “Judge Admonishes Medco On Case Documents,” WSJ, February 4, 2005, p. A-5.
© D.L. Crumbley 59 Privilege: discovery may not be made of privileged matters Attorney – client Husband – wife Physician – patient Government secrets Ordained clergyman-parishioner Attorney work product [FRCP 26 (b)(3)] [But not experts who will testify] “Something is happening here, but you don’t know what it is, do you, Mister Jones?” Ballard of a Thin Man Bob Dylan (1965)
© D.L. Crumbley 60 Elements of the Attorney-Client Privilege Communication. Between attorney and client. For obtaining legal advice or services. Intended to be confidential. Privilege is not waived. [Be careful with s and cell phones.] U.S. v. United Shoe Machine Corp., 89 F. Supp. 358 (D. Mass. 1950)
© D.L. Crumbley 61 Protecting Work Product Privilege Attorney should directly retain the consultant. Agreement should be between attorney and expert. Expert should obtain facts through, or at direction of the attorney. Investigation should be done at the direction of attorney. Attorney included when meeting with client. Source: Zeph Telpner and Michael Mostek, Expert Witnessing in Forensic Accounting, Boca Raton, FL: CRC Press, pp. 209 – 237. If opinion work product is shared with a testifying expert, it is discoverable (e.g., Lamonds v. General Motors Corp., 180 F.R.D. 302 (W.D. Va. 1998)
© D.L. Crumbley 62 SAMPLE AGREEMENT Our understanding is that you have retained us as consulting experts. If you decide to change our status to that of testifying experts, we will return all documents, records and any work product to you and request from you only those documents and records necessary for our testimony.
© D.L. Crumbley 63 Accountant Privilege (§7525) Taxpayer’s communications made to federally authorized tax practitioners (e.g., lawyers, CPAs, enrolled agents) Applies only to tax advice: given by an individual regarding a matter that is within that individual’s authority to practice as a federally authorized tax practitioner under Treasury Circular 230. I.R.C. §7525(a)(3)(B)
© D.L. Crumbley 64 Accountant Privilege (§7525) Contains many exceptions, either poorly or not at all defined, thus limiting the privilege’s effectiveness in protecting the confidentiality of taxpayer communication. Can not be asserted in (1) criminal tax matters, (2) investigations by regulatory agencies, and (3) tax advice regarding the promotion of corporate tax shelters. Source: R.J. Buchanan, “Corporate Tax Shelter Exception to the Accounting Client Privilege,” Tax Notes, September 16, 2002, p
© D.L. Crumbley 65 Accountant Privilege contd … Tax practitioners are not entitled to privilege when they are doing other than lawyers’ work. Information provided to a practitioner for purposes of preparing a client’s tax return is not privileged. U.S. v. Frederick, 182 F.3d 496 (CA-7,1999) Federal District Court: Most tax advice falls into the category of return preparation for which there is no privilege [U.S. v. KPMG, No (D. D.C. Dec.20, 2002)] The practice of tax is not the practice of law (U.S. v. KPMG).
© D.L. Crumbley 66 Bureau of Prison’s Rule A new Bureau of Prison’s (BOP) rule which permits federal law enforcement agencies to eavesdrop on confidential attorney-client communications of persons in custody of the Department of Justice (DOJ) under certain circumstances, without federal judicial oversight. This rule means that forensic accountants and others hired by attorneys to assist in providing legal services must be on their guard to avoid disclosure of confidential information. Source: Carl Pacini, “Privileged Communications Between Forensic Accountants, Attorney, and Clients Threatened by Federal Rule.” 28 C.F.R. §§ 500, 501 (2002): Prevention of Acts of Violence and Terrorism, 66 Fed. Reg. 55,062 (Oct. 31, 2001).
© D.L. Crumbley 67 Evidence KPMG is fighting clients about questionable tax-shelter products. The IRS disclosed s dated March 14, 1998, in a Tax Court case involving an estate in litigation against the IRS. The s document discussions among high level KPMG executives about a product known as FLIP. One of the s referred to the product’s “troublesome issues.” s created on a company’s system belongs to the company. evidence has been used in cases involving accounting fraud, harassment, antitrust, discrimination, retaliation, whistle- blowing, insider trading, trade secrets, and more. Discovery is broad: instant messages, web visit logs, hard drives, PDA’s, pagers, voice mail, laptops, back up tapes, and cell phones call records. Source: Rita Risser, “ = Evidence: How to Protect Yourself,” Fair Measures.
© D.L. Crumbley 68 Evidence (cont.) In October, 2003, a special master recommended to federal court that KPMG does not have to produce many tax-shelter documents. In mid-October 2003, a federal judge blocked prosecutors from using an e- mail that Martha Stewart wrote to her attorney as evidence in her upcoming trial. She had forwarded the same e- mail to her daughter the next day after sending it to her attorney. Source: Rita Risser, “ = Evidence: How to Protect Yourself,” Fair Measures.
© D.L. Crumbley 69 Best Practices Know and follow employer policies. Assume a boss or judge is reading your . Don’t send s in anger. Do not be sarcastic. Don’t send or receive jokes from work. Insure mail lists are current for confidential information limit copies. Do not mark ‘Attorney-Client’ unless authorized. Don’t mark ‘Company Confidential’ unless authorized. Source: Rita Risser, “ = Evidence: How to Protect Yourself,” Fair Measures.
© D.L. Crumbley 70 Dangers Aiding and abetting is a favorite phrase on cop shows and courtroom dramas. For Motorola Inc. and Scientific-Atlanta Inc., the phrase is hitting close to home these days. The names of both companies have surfaced frequently in the federal fraud trial of four former executives of Adelphia Communications Corp., most recently in an e- mail message read aloud in court earlier this week that indicated top Scientific-Atlanta executives approved a transaction that allegedly helped Adelphia cook its books. The electronic message, read by a defense attorney, comes on top of earlier testimony about the same set of transactions by the government’s star witness, former Adelphia finance executive James R. Brown. Source: Jesse Drucker and Mark Maremont, “An Casts Two Key Suppliers As Adelphia Abettors,” WSJ, June 1, 2004, p. C-1.
© D.L. Crumbley 71 IRS Summons Accountants have very little protection under federal law from the enforcement of IRS Summons. Couch v. U.S., 409 U.S. 322 (1973). U.S. v. Arthur Young & Co., 465 U.S. 805 (1984).
© D.L. Crumbley 72 Methods of Discovery Interrogatories: Written questions [FRCP 33(a) – max. 25 / 30 days]. Requests for Production of Documents. Depositions [FRCP 30(a): limits each side to 10]. Subpoenas duces tecum: request for specified documents for inspection and copying (especially from people not parties to a lawsuit, e.g., expert witnesses). Physical examination. Production of tangible things and entry upon land.
© D.L. Crumbley 73 Experts’ Depositions Covered by FRCP 26 (b) (4) (A). Can not occur until attorney has disclosed the required written report. Have no right to attend another expert’s deposition Some beach somewhere, There’s a beautiful sunset burnin’ up the atmosphere. Blake Shelton
© D.L. Crumbley 74 Civil Trial Jury selection and Pre-Trial Motions. Opening Statements. Burden of Proof: In Civil trial, preponderance of evidence – 51% or greater. Sometimes, higher clear and convincing evidence. For the opinion of an expert to be admissible, it must meet the 51% test: “My opinion is based upon a reasonable degree of scientific (or medical or economic or accounting) certainty.” Otherwise, opinion may be stricken from evidence.
© D.L. Crumbley 75 The other side schedules a deposition, deposes you, and does not pay you a reasonable fee. Who is required to pay you? Fed. R. Civ. Pro. 26(b)(4)(c): The party seeking discovery pays the expert a reasonable fee for time spent in responding to discovery. Getting Paid
© D.L. Crumbley 76 Incentive Test 1.A(n) stipulation is a device used by courts to have disputing parties to agree in advance of a trial to facts, evidence, etc. 2.A(n) amicus curiae brief is filed by a party not directly related to a lawsuit. 3.The stare decisis doctrine states that a case once decided will control. 4.The appropriate court to bring a dispute is called venue. 5.Dicta is opinions of a judge which goes beyond the facts before the court and are not binding on future courts as precedent. 6.A higher court remands a lower court decision and sends it back for further consideration. 7.You file a writ of certiorari to ask the Supreme Court to hear your dispute. 8.En banc refers to a decision of the full court. 9.A deposition is a written statement of a witness under oath, often in a question/answer format.
© D.L. Crumbley 77 Incentive Test 10.The voir dire is preliminary questioning by the court (or lawyer) of jurors to determine competency. 11.A motion in limine is a request before trial that evidence (or expert) of opposing side is inadmissible. 12.The complaint and answer would be called the pleadings. 13.The respondent is the person sued (defendant). 14.A subpoena duces tecum is a command to produce documents to a court that become evidence. 15.A subpoena ad testificandum is a command to appear and testify as a witness. 16.A(n) special master is appointed by a court or judge to decide certain facts, etc. 17.Models, forms, and exhibits would be considered demonstrative evidence. 18.Pro se means a party is representing himself.
© D.L. Crumbley 78 Evidence “Anything perceivable by the five senses, and any proof such as testimony of witnesses, records, documents, facts, data, or tangible objects legally presented at trial to prove a contention and induce a belief in the minds of a jury.” Black’s Law Dictionary A trial is too important to put in the hands of the jury. Runaway Jury.
© D.L. Crumbley 79 Gobbledygook “Documents” is used herein in the broadest sense and includes all written, printed, typed, graphic or otherwise recorded matter, however produced or reproduced, including non- identical copies, preliminary, intermediate, and final drafts, writings, records, and recordings of every kind and description, whether inscribed by hand or by mechanical, electronic, microfilm, photographic or other means, as well as phonic (such as tape recordings) or visual reproductions of all statements, conversations or events, and including without limitation, abstracts; address books; advertising material; agreements; analysis of any kind; appointment books; brochures; calendars; charts; circulars; computer cards; contracts; correspondence; data books; desk calendars; diagrams; diaries; directories; discs; drawings of any type;
© D.L. Crumbley 80 Gobbledygook Estimates; evaluation; financial statements or calculations; graphs; guidelines; house organs or publications; instructions; inter-office or intra-office communications; invoices; job descriptions; ledgers; letters; licenses; lists; manual; maps; memoranda of any type; microfilm; minutes; movies; notes; notebooks; opinions; organization; charts; pamphlets; permits; photographs; pictures; plans; projections; promotional materials; publications; purchase orders; schedules; specifications; standards; statistical analyses; stenographers’ notebook; studies of any kind; summaries; tabulations; tapes; telegrams; teletype messages; videotapes; vouchers; and working drawings, papers and files. Source: J.T. Lescoart, The 13 th Juror, New York: Dell Publishing, 1994, p. 102
© D.L. Crumbley 81 Best Evidence Rule Under the best evidence rule (also referred to as the original writing rule), to prove the contents of a writing, recording, or photograph, the original writing, recording, or photograph usually must be presented.
© D.L. Crumbley 82 Two Types of Evidence Direct evidence: directly proves a fact at issue, without the need for an inference or presumption (e.g., testimony of a witness). Circumstantial: a fact or issue may be proved indirectly (e.g., a perp was present at the time of the theft). Law does not value circumstantial evidence any less than direct evidence.
© D.L. Crumbley 83 Ensuring Admissibility Assume that documents or other evidence one handles may be used in a legal proceeding. Do not mark, staple, or otherwise alter the document. Record how you obtained the evidence and who handled it. Keep evidence in a secure location – fireproof safes or locked cabinets. If possible, avoid putting your or other investigators fingerprints on the document. Use see-through holders. Internal auditors at WorldCom worked at night and put much of the records on personal CD ROMS (e.g., bought own CD burner).
© D.L. Crumbley 84 Ink Analysis Martha Stewart was undone by a blue ballpoint pen. Stockbroker belatedly inserted a note to help cover up Ms. Stewart’s improper stock trading. Blue ballpoint ink used is different from ink elsewhere on the trading worksheet. Prosecutors used forensic ink analysis in Rite Aid case to show that certain documents were backdated (ink used to sign letter was not commercially available until 3 months after the letter was dated). Xerox laser printers now encode the serial number of each machine in tiny yellow dots in every printout, nestled within the printed words and margins. It tracks back to you like a license plate. Fraudsters: use pencil. Source: Mark Maremont, “In Corporate Crimes, Paper Trail Often Leads to Ink Analysts’ Door,” Wall Street J., July 1, 2003, p. A-1.
© D.L. Crumbley 85 Deductive vs. Inductive Source: W.S. Albrecht and C.C. Albrecht, “Root Out Financial Deception,” Journal of Accountancy (April 2002), p. 33. Deductive ApproachInductive Approach Generic data miningCustom data mining Digital analysisAnalysis of all data Discovery sampling Generic softwareCustom software For smaller organizationsFor larger organizations Basic featuresSophisticated features Easy to learnRequires advanced skills Relatively inexpensiveMore expensive Deductive: one goes from general to specific; fairly simple and economical. Inductive: one starts with specific experiences and then draws inferences.
© D.L. Crumbley 86 Benford’s Law Distribution of initial digits in natural numbers is not random Predictable pattern: There is software to detect potentially invented numbers in many situations 1= 30.1% 2= 17.6% 3= 12.5% 4= 9.7% 5= 7.9% 6= 6.7% 7= 5.8% 8= 5.1% 9= 4.6%
© D.L. Crumbley 87 Benford’s Law Uses Investments sales/purchases Check register. Sales history/Price history. 401 contributions. Inventory unit costs. Expenses accounts. Wire transfer information. Life insurance policy values. Bad debt expenses. Asset/liability accounts. Source: Richard Lanza, “Digital Analysis- Real World Example,” IT Audit, July 1, 1999,pp. 1-9.
© D.L. Crumbley 88 When Benford Analysis Is or Is Not Likely Useful When Benford Analysis is Likely UsefulExamples Sets of numbers that result from mathematical combination of numbers- Result comes from two distributions. Accounts receivable (number sold times price). Accounts payable (number bought times price). Transaction-level data – No need to sample.Disbursements, sales, expenses. On large data sets – The more observations, the better. Full year’s transactions. Accounts that appear to conform – When the mean of a set of numbers is greater than the median and the skewness is positive. Most sets of accounting numbers. When Benford Analysis Is Not Likely UsefulExamples Data set is comprised of assigned numbersCheck numbers, invoice numbers, zip codes. Numbers that are influenced by human thought. Prices set at psychological thresholds ($1.99), ATM withdrawals. Accounts with a large number of firm- specific numbers. An account specifically set up to record $100 refunds. Accounts with a built in minimum or maximum. Set of assets that must meet a threshold to be recorded. Where no transaction is recorded.Thefts, kickbacks, contract rigging. Source: Durtschi, Hillison, and Pacini, p. 24.
© D.L. Crumbley 89 Computer Forensics Important Joan Feldman: “Within three years, I’m sure all evidence collected in discovery will be electronic-based.” President of Computer Forensic, Inc. (Seattle). Players from three areas: 1.Accounting-forensic units of big CPA firms. 2.Data-recovery and computer-repair specialists, 3.Litigation support services. “Corporate investigations used to mean following a paper trial, but these days many follow an electronic one. Increasing demand for the skill and technology necessary to unearth digital secrets has led to the birth of a small but growing industry: computer forensics.” “They can dig up and documents that seemingly have been deleted, determine what web sites were visited and which key words were used to get there.” Source: Ellen Byron, “Computer Forensics Sleuths: Help in Rooting Out Fraud,” Career Journal, Wall Street J., reviewed June 16, byron.html
© D.L. Crumbley 90 Computer Forensics Primer Defined: acquiring and analyzing digital evidence in a manner that protects the integrity of the evidence to investigate a potential fraud. Currently only 5% of fraud investigations use electronic data in investigations. This low percentage is likely because much of the collected digital evidence is forensically unusable. SAS No. 99: In an IT environment, it may be necessary for the auditor to employ computer-assisted audit techniques (for example, report writers, software or data extraction tool, or other system-based techniques) to identify the journal entries and other adjustments to be tested. [par. 61]. Source: G.S. Smith, “Computer Forensic: Helping to Achieve The Auditors Mission,” Working Paper, December 2003.
© D.L. Crumbley 91 Digital Evidence: Today’s Fingerprints “The sight of hard drives, Internet files, and as courtroom evidence is increasingly common.” “In the wired world almost every crime intersects with the digital realm at one time or another.” “Laptops, digital cameras, phones and hard drives provide mountains of raw data for experts to sift through, part of the expanding field of computer forensics.” “A single file, credit card purchase or stray e- mail messages can provide the proof that clinches a case.” Source: Michael Coren, “Digital Evidence: Today’s fingerprints,” Digital+evi…
© D.L. Crumbley 92 Data Extraction v. Data Investigation There is a difference between the procedures used for traditional data extraction (i.e., data mining) and data investigation for evidentiary purpose. With traditional data extraction, tools such as Interactive Data Extraction and Analysis (IDEA) or ACL software are used to interactively extract, sample, and analyze data. Yet simply checking a client’s files or cross comparing data, files for forensic investigations are damaged. Such actions are similar to sending a housekeeper in to tidy up a murder crime scene before the forensic investigative team is allowed to start analyzing the evidence. For forensic purposes, software tools collect digital data without changing it. After the data is collected, it is analyzed. Examples of forensic software tools are Encase, SafeBack, or Ontrack’s Easy Recovery software. Increasing the time lag between initial fraud suspicions and the recovery of the related digital data makes the evidence less valuable. Source: G.S. Smith, “Computer Forensics: Helping to Achieve The Auditor’s Mission,” Working Paper, December 2003.
© D.L. Crumbley 93 Data Mining Data mining is an information extraction technique designed to discover hidden facts or red flags that may indicate previously undetected fraud, abuse, waste, or mismanagement. Using a combination of statistical analysis algorithms, exploratory analyses, modeling techniques and data base technology, data mining finds patterns and subtle relationships in data. One can not push a button and expect the software to pick the one bad apple out of the panel. Source: B.L. Derby, “Data Mining for Improper Payments,” Journal of Government Financial Management, Winter, 2003 Vol. 52, No. 4, p. 11.
© D.L. Crumbley 94 Gene Morse Used Data Mining at WorldCom The beauty of the new [software] system, from Mr. Morse’s perspective, was that it enabled him to scrutinize the debit and credit side of transactions. By clicking on a number for an expense on a spreadsheet, he could follow it back to the original journal entry – such as an invoice for a purchase or expense report submitted by an employee, to see how it had been justified …. By the first week in June, Mr. Morse had turned up a total of $2 billion in questionable accounting entries. Mr. Morse grew increasingly concerned that others in the company would discover what he had learned and try to destroy the evidence, he says. With his own money he went out and bought a CD burner and copied all the incriminating data onto a CD-ROM. He told no one outside of internal audit what he had found. Source: Pulliam Susan, Deborah Solomon, “Uncooking the Books – How Three Unlikely Sleuths Discovered Fraud at WorldCom,” Wall Street Journal, 30 October 2002.
© D.L. Crumbley 95 Some Data Mining Application 1. Human resources – Employees earning salaries inconsistent with their title; employees not availing themselves of benefit programs (perhaps to maintain as much anonymity as possible); employees whose household address matches an address from the vendor file; employees appearing more than once on umbrella security files. 2. Financial applications – Structured transactions (clients who make cash/travelers check/money order contributions to annuities, single premium life insurance, IRAs, mutual funds, etc.) in aggregate amounts that exceed the U.S. $10,000 reporting threshold; clients making contributions to investment vehicles that are disproportionate to their income.
© D.L. Crumbley 96 Some Data Mining Application 3. Medical/dental applications – Patient substitutions; over-utilizations of specific diagnoses inconsistent with the patient population; excessive number of patients traveling great distances to a provider open seven days a week for disproportionate number of non- emergency procedures (could indicate provider is filing false claims and is spreading out the submissions to divert suspicion). 4. Assistance in due diligence testing – By revealing the business rules, data mining tools can be used to train new auditors and, for new areas or new systems that are being audited for the first time, they are the ideal application to be used for due diligence testing.
© D.L. Crumbley 97 Some Data Mining Application 5. Construction and purchasing – Payments made earlier than the contract specification date; invoices for large purchases made at the end of fiscal accounting period; price of goods inconsistent with industry costs. Source: Bob Denker, “Data Mining and the Auditor’s Responsibility,” Information Systems Audit and Control Association InfoBytes.
© D.L. Crumbley 98 Evidence (varies) All relevant evidence is admissible, unless inadmissible due to another rule of evidence. Rule 403: probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence.
© D.L. Crumbley 99 Fingerprints Are Needed Legal experts say it remains far easier to prosecute those directly involved in disputed transactions because they leave a paper trail that can be easy for prosecutors to follow. “The government has been relatively successful against lower-level people in accounting cases,” said Howard Schiffman. Top brass are much tougher to prosecute because they rarely come out and say “go cook the books” and are hardly ever directly involved in the details of individual transactions, particularly smaller ones, legal experts say. Instead, bosses tell subordinates more-ambiguous things about not disappointing Wall Street. Employees who extrapolate that as a code for “cheat” are at great risk since “their fingerprints are all over the documents,” Mr. Schiffman said The Quest executives were acquitted in mid-April, Source: Shawn Young, “Quest Case Shows Underlings Vulnerabilities,” WSJ, April 2, 2004, p. C-1.
© D.L. Crumbley 100 Rule 701. Opinion Testimony by Lay Witnesses If the witness is not testifying as an expert, the witness, testimony in the form of opinions or inferences is limited to those opinions or inferences which are (a) rationally based on the perception of the witness, and (b) helpful to a clear understanding of the witness’ testimony or the determination of a fact in issue, and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702.
© D.L. Crumbley 101 Federal Rules of Evidence 702 – 705 (deal with expert witnesses) Rule Testimony by Experts a)"If scientific, technical or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify thereto in the form of an opinion or otherwise; if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.” (amendment in bold) b)Fed.R.Evid. Rule 702 requires the Trial Court to perform the gatekeeper role described in Daubert regarding all expert testimony 1)Proffered expert testimony must be both relevant and reliable to be admissible
© D.L. Crumbley 102 Federal Rules of Evidence Section 702 Comparative Analysis Source: AICPA Proposed Statement on Responsibilities for Litigation Services No. 1, December 1, Generally, if you meet the applicable AICPA professional standards, you probably meet Rule 702.
© D.L. Crumbley 103 a)“The facts or data in the particular case upon which an expert bases an opinion or inference may be those perceived by or made known to him at or before the hearing. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence.” b)Sources of information an expert may use include: 1)Firsthand knowledge 2)Information admitted into evidence during the trial 3)Information made known to the expert before the trial 4)The facts themselves need not be admissible as evidence if they are “of a type reasonably relied upon by experts in a particular field.” Rule Basis of Opinion Testimony by Experts
© D.L. Crumbley 104 Rule Opinion on Ultimate Issue a)"Testimony in the form of an opinion or inference otherwise admissible is not objectionable because it embraces an ultimate issue to be decided by the trier of fact." 1)The ultimate issue is that which is pivotal for the defendant or the plaintiff and determines the outcome. Rule Disclosure of Facts or Data Underlying Expert Opinion a)"In civil cases, the expert may testify in terms of an opinion or inference and give his reasons therefore without prior disclosure of the underlying facts or data, unless the court rules otherwise. The expert may in any event be required to disclose the underlying facts or data on cross- examination.” 1)Experts are, generally, allowed to testify about their opinions or give reasons for their opinions without first testifying about the underlying facts or data. 2)The court may require the expert to disclose the underlying facts or data during cross- examination.
© D.L. Crumbley 105 Rule 706 – Court-Appointed Experts a)The Court has the authority to appoint an expert whom all parties may cross-examine when: 1)The Court believes the experts for the litigants are “hired guns,” and their testimony is unreliable or prejudicial. 2)The proffered expert opinions have failed to adequately explain the complex issues upon which the Court must decide. b)The Court has ultimate discretion regarding the admissibility of all expert testimony
© D.L. Crumbley 106 Special Master and Court Appointed Experts A court may appoint someone (e.g., a financial expert) to determine certain facts in a dispute. They may be appointed pre-trial, during trial, or post-trial to oversee one or more aspects of a dispute. Appellate courts generally hold that special masters are reserved for special or unique circumstances. Special Masters can be subject to Daubert challenges. Source: See W.A. Lagraize and D. L. Crumbley, “Special Masters and Court Appointed Experts,” Journal of Forensic Accounting, Vol. V(2004), pp
© D.L. Crumbley 107 Rules of Evidence The rules of evidence are the rules governing the admissibility of evidence in a legal proceeding and the weight to be given to evidence that is admitted.
© D.L. Crumbley 108 What Is Evidence? Evidence is testimony, writings, and material objects offered to prove an alleged fact or proposition. Direct evidence is evidence that directly proves a fact at issue, without the need for any inference or presumption (e.g., copy of a check that has been altered). Circumstantial evidence is evidence from which a fact at issue may be proved indirectly (e.g., bank records show a deposit of unknown origin).
© D.L. Crumbley 109 Rule 401 – Definition of “Relevant Evidence” a)Evidence is relevant if it tends to prove or disprove an alleged fact. Rule 402 – Relevant Evidence Generally Admissible; Irrelevant Evidence Inadmissible 1)It is the attorney’s responsibility to insure that sufficient evidence is admitted at trial to support the expert’s opinion. Rule 403 – Exclusion of Relevant Evidence on Grounds of Prejudice, Confusion, or Waste of Time 1)Relevant evidence may be excluded if it is prejudicial, needlessly cumulative, threatens to confuse or mislead the jury, or causes an unnecessary delay or waste of time. Relevancy and its limits (evidence)
© D.L. Crumbley 110 Fed. Rules of Evidence (more) Rule 615. Exclusion of witnesses. Witnesses may be excluded so that they cannot hear testimony of other witnesses. Rule 802. Hearsay Rule. Hearsay, is generally not admissible. Many exceptions. Rule Requirement of Original Rule Admissibility of Duplicates Allowable. Rule Admissibility of Other Evidence of Contents. Rule Public Records. Certified copy.
© D.L. Crumbley 111 Fed. Rules of Evidence (more) Rule Summaries. Voluminous material may be summarized (e.g., charts, summary, calculations) Rule Functions of Court and Jury. In case of dispute, trier of the fact determines.
© D.L. Crumbley 112 Evidence Prima facie evidence: unless overcome by other evidence, suffices as proof of a fact in a dispute. Probative evidence: testimony which establishes or contributes toward truth. Parol evidence rule: an agreement in writing can not be modified by oral evidence. Secondary evidence: copies of instruments or oral evidence. Chain of custody: a log of evidence obtained and who had access to such evidence.
© D.L. Crumbley 113 Hearsay (evidence) Rule 803 – Hearsay Exceptions; Availability of Declarant Immaterial a)Generally, hearsay is not admissible as evidence. b)Exceptions relating to expert testimony 1.Business records such as memoranda, reports, records, or data compilations kept on a regular basis by a person with knowledge 2.Public records; such as records, reports, statements, or data compilations kept by public offices or agencies 3.Market reports and commercial publications; such as market quotations, lists, directories, etc. relied on by the public 4.Learned treatises; such as almanacs of business information and technical literature 5.Missing business records; reports normally prepared daily or the fact that they were not prepared is admissible c)Business records, such as computer printouts, may be entered into evidence without the testimony of the employee who actually prepared the records as long as the court considers the source of the information and the method of preparation trustworthy d)Experts are not required to prove that the information upon which they have relied is trustworthy a)May be grounds for a Daubert/Kumho challenge if confirmation is required or recommended by standards of practice.
© D.L. Crumbley 114 Hearsay evidence: a statement made outside the court to prove the truth of the matter stated You, Larry, try to state in the courtroom that Joe said “Paul is a crook.” Hearsay may be offered to prove a nonhearsay purpose. Trustworthiness. Unavailability of declarant. Practical considerations. Exemptions to Fed. Rules of Evidence. Major exceptions Excited utterances. Business records. Official records. Dying declarations. Learned treatises. Commercial publications.
© D.L. Crumbley 115 Top 10 Risks During Electronic Evidence Discovery in Litigation Lack of a central corporate repository. Information is spread across servers, backup tapes, and individual user-maintained archives, usually resulting in considerable overlap. If this information needs to be reviewed (e.g., as part of legal proceedings), a company faces increased time and higher costs to filter through layers of information and duplication. Lack of a corporate document management policy. Employees save any and all documents, with no organizing principle, significantly magnifying the cost and complexity of sifting through information. FTI consulting (www.nysscpa.org/cpajournal/2003/1003/nylny11).
© D.L. Crumbley 116 Top 10 Risks During Electronic Evidence Discovery in Litigation Intermingling critical and less critical documents. Little distinction is made between the relative importance of stored information, making it difficult for attorneys to determine what is considered privileged information. Consequently, computer forensics teams are often forced to sift through information to ensure no privileged information is inadvertently disclosed. Intermingling business and private use. Employees often use business computers for private use, forcing corporations facing litigation to spend resources separating company data from employees’ private data. FTI consulting (www.nysscpa.org/cpajournal/2003/1003/nylny11).
© D.L. Crumbley 117 Top 10 Risks During Electronic Evidence Discovery in Litigation Lack of distinction between disaster- recovery backup and business archiving. Corporations save too much unnecessary information for too long, adding to inefficiencies during information restoration and review. Most corporations save absolutely everything in preparation for disaster recovery and rely on the same store of information as a long-term business archive; in fact, different information is needed for each. Backup systems that cannot easily be restored. Corporations regularly update software and hardware with little regard to their existing backup collection. When faced with litigation, a corporation is obligated to pay for restoring or recreating data from a legacy system. Accomplishing this can often take several months and millions of dollars. FTI consulting (www.nysscpa.org/cpajournal/2003/1003/nylny11).
© D.L. Crumbley 118 Top 10 Risks During Electronic Evidence Discovery in Litigation Ad hoc caches of backup or miscellaneous information. Most companies have ad hoc stores of information and usually are unsure of whether they contain new or duplicate information. If backup data exists, a corporation has a legal obligation to review the content for relevance. Insufficient recognition of laptops. Laptop computers can represent a significant proportion of a corporation’s information. In addition to the ongoing risk of loss and theft, laptops typically are ineffective at deleting information. During litigation, “forensic copies” of laptops can be requested to recapture deleted information, adding another layer of complexity and cost. FTI consulting (www.nysscpa.org/cpajournal/2003/1003/nylny11).
© D.L. Crumbley 119 Top 10 Risks During Electronic Evidence Discovery in Litigation Automated processes. Companies are unsystematic about what information they automatically save and delete. When companies enter into litigation, they are under strict legal obligation to ensure that they preserve all relevant information. Upon determining that a loss of information (spoliation) has occurred, a judge can automatically instruct the jury to assume the worst; for example, that inadvertently deleted records contained unfavorable information. Depending upon the seriousness of the infraction, this can even lead to a directed verdict. Manual systems. Despite great advances in integration and enterprise resource planning (ERP) systems, many companies use a mix of automated and manual processes (e.g., the spreadsheet used to transform data from the inventory system before loading it into the general ledger). Such manual processes often suffer from a lack of documentation, lack of retention, and a lack of systematic application. This inevitably makes reconstructing what happened more difficult and costly. FTI consulting (www.nysscpa.org/cpajournal/2003/1003/nylny11).
© D.L. Crumbley 120 Most trials boil down to one issue: Credibility Expect the other side to present evidence that you are biased (to throw out your testimony). Prior Inconsistent Statements. You are an advocate for the truth.
© D.L. Crumbley 121 Entertainer As strange as it may be, an attorney wishes to present an expert who is “guaranteed to entertain and interest the jury - - the hallmarks of an expert who will be able to persuade.” Experts are now in the television and entertainment business. Source: D.M. Malone and P.J. Zwier, Effective Expert Testimony, Notre Dame, IN: NITA, 2000, p. 93.
© D.L. Crumbley 122 The Expert’s Paradox You are an advocate hired by one party in an adversarial dispute. However, you will only be persuasive if the jurors or judge believe that you are a neutral and objective expert (like a scientist), with an opinion that has not been influenced by the adversarial nature of the forum. Source: Sarah E. Murray, “Standing At The Crossroads of Truth and Advocacy,” NACVA Conference, Miami, June 3, 2004.
© D.L. Crumbley 123 Six Ways to Discredit Testimony 1.If an expert, the witness is not qualified. 2.The witness did not consider all the facts. 3.The witness relied on erroneous facts. 4.If an expert, the witness’s conclusions do not follow from a correct analysis of the facts. 5.The witness’s testimony is inconsistent with prior testimony. 6.The witness was biased or prejudiced and therefore shaded his or her perceptions or conclusions. A fact witness employed by the defrauded party generally will be grilled more than an expert witness about bias or prejudice. Source: D.R. Carmichael, et. al, Fraud Detection, 5 th, Fort Worth: Practitioners Publishing, 2002, p. 8 – 39.
© D.L. Crumbley 124 Avoid Conflicts of Interest You must not have present or past relationships with individuals on either side of the dispute which will prevent or interfere with objective testimony. Checking your firm’s files and records for professional conflicts early is extremely important.
© D.L. Crumbley 125 Side-Taking A trial judge may dismiss an expert witness who is influenced by side-taking. Hints at a lawyer’s line of arguments provided before reviewing evidence can influence an accounting expert’s decision about an auditor’s compliance with GAAS. The degree of certainty in an expert’s report can affect a mock judge’s decisions in settlement rulings. Jury trials in auditor-liability disputes are uncommon. D.N. Ricchiute, “Effects of an Attorney’s Line of Argument on Accountants’ Expert Witness Testimony,” Accounting Review, January 2004, pp Expert testimony is not useful when the expert is merely an advocate for the position argued by one of the parties. Estate of Jameson, T.C. Memo
© D.L. Crumbley 126 Result-Oriented Work Estate of Bessie I. Mueller v. Commissioner, T.C. Memo , Doc (57 pages), the issue was the valuation of stock of the Mueller Co. The IRS produced as its expert on the valuation questions Dr. Shannon Pratt, managing director of Willamette Management Associates and the acknowledged dean of business appraisers. Tax Court Judge Renato Beghe nevertheless concluded that “Willametie’s report was result-oriented and this was reflected in Dr. Pratt’s testimony.” The Judge noted that appraisers “have third-party responsibilities – just as certified public accountants do – to those who rely on their opinions, and their determinations must be independent and objective….” Dr. Pratt strayed from the standard of objectivity and cast aside his scholar’s mantle and became ‘a shill’ for respondent.” In Mueller, as a result, Judge Beghe rejected most of both the Willamette report and Dr. Pratt’s testimony, but did take account of Dr. Pratt’s criticism of the taxpayer’s expert’s reports and testimony. Source: B.J. Raby and W.L. Raby, “Reasonable Compensation, Expert Witnesses, and the Tax Practitioner,” Tax Notes, September 15, 2003 p
© D.L. Crumbley 127 Defensible Investigative Process The five-step process we use in this study entails: 1.Defining the question(s) of interest. A forensic accountant hired as an expert must segment a broad legal question (e.g., has fraud occurred?) into inquiries that can be objectively measured (i.e., has lapping occurred in accounts receivable?). 2.Employing benchmarks that are commonly accepted to address the question(s). Commonly accepted standards are selected for measuring the objective inquiries (i.e., industry average for accounts receivable turnover ratio). Source: Waldrup, Capriotti, and Anderson, Forensic Accounting Techniques: For Litigation Purposes, Journal of Forensic Accounting, June 2004, p. 5.
© D.L. Crumbley 128 Defensible Investigative Process 3. Cleaning data in a methodical fashion, which objectively allows the database to be compared to the benchmarks set forth. Data are purged of unreliable and unrepresentative observations in order to minimize the effects of data-entry error and increase the reliability of results (i.e., credit sales are isolated from cash sales). 4. Comparing the data to the benchmarks. The forensic accountant complies observations into a format in order to compare the data set to the commonly accepted standards (i.e., accounts receivable are aged, turnover ratios are computed, and these are compared to industry averages). Source: Forensic Accounting Techniques: For Litigation Purposes, p. 5.
© D.L. Crumbley 129 Defensible Investigative Process 5. Providing conclusions that link question(s) to the benchmarks and then to the data. Finally, conclusions are drawn which relate to the forensic techniques employed to the questions of interest (i.e., fraud, manifested through an accounts receivable lapping scheme, appears to have taken place as evidenced by comparisons with historical and industry turnover ratios). Such a conclusion precedes those steps where specific proof is demonstrated. Source: Forensic Accounting Techniques: For Litigation Purposes, p. 5.
© D.L. Crumbley 130 Alternative Dispute Resolution Mediation: appointment of an agreed-upon third party to facilitate settlement negotiations. before or after suit is filed parties control the outcome and all resolutions are voluntary. Arbitration: parties submit the dispute for resolution to an agreed- upon arbitrator or panel. rules less formal faster and cheaper can be binding or non-binding. Example: Arthur Andersen and Andersen Consulting. When testifying, remember arbitrator more sophisticated than the average juror.
© D.L. Crumbley 131 Written Agreement The written agreement should cover the following matters: The name of the attorney’s client. The litigants’ names and place for the legal proceeding. The nature of the litigation services to be performed. Whether the practitioner will be asked to testify as an expert witness. What restrictions will be imposed on use and disclosure of the practitioner’s work. Whether the practitioner has any conflicts of interest with the litigants and/or their attorneys. Whether the practitioner’s work will be protected by the attorney work product privilege. Circumstances under which the practitioner may terminate his or her engagement. Stress the independence of the expert. Fee (including payment arrangements).
© D.L. Crumbley 132 Motions To Exclude Expert Testimony 1. Daubert challenges. 2. Frye challenges. 3. Does not qualify as an expert by knowledge, skill, experience, training, or education. 4. Requires a valid connection to the pertinent inquiry as a precondition to admission. 5. Courts remain vigilant against the admission of legal conclusions. 6. In re Paoli Railroad Yard PCB Litigation, 35 F.3d 717 (3 rd Cir. 1994) lists others. a. Relationships of technique to methods already established to be reliable. b. Existence and maintenance of standards controlling technique’s operation. c. Expert witness’ qualifications and non-judicial uses to which method has been put. 7. Side-taking or result –oriented work. 8. Conflict of interest. 9. Ghost-written report. 10. Spoliation. 11. Name not disclosed within time limit. 12. Improper expert witness designation.
© D.L. Crumbley 133 Admissibility Of Experts Daubert for federal courts. 27 states apply Daubert or similar standards (e.g., Louisiana, Texas, Arkansas, Connecticut). 16 states still follow Frye (e.g., California, Colorado, Florida, Illinois, New York, Pennsylvania). 6 states have not rejected Frye but apply Daubert factors (Alabama, Hawaii, Massachusetts, Nevada, New Hampshire). 4 states have developed their own tests (e.g., Georgia, Utah, Virginia, Wisconsin).
© D.L. Crumbley 134 Qualifying as an Expert Witness Under the older Frye standard, the test for admitting expert testimony is: –Whether the expert’s testimony will assist the trier of fact in understanding the evidence or in determining a fact in issue –Whether the theories and/or techniques relied upon by the expert are generally accepted by the relevant professional community –Whether the particular expert is qualified to present expert testimony on the subject at issue
© D.L. Crumbley 135 Qualifying as an Expert Witness Under the Federal Rules of Evidence, a judge will permit an accountant to testify as an expert witness only if the judge decides that: –The accountant’s testimony will help the jurors or judge understand the evidence or determine a fact in issue –The accountant is qualified as an exert by knowledge, skill, experience, training or education –The accountant can show that his or her testimony (a) will be based on sufficient facts or data and (b) will be the product of reliable principles and methods that have been applied reliably to the facts of the case
© D.L. Crumbley 136 Qualifying as an Expert Witness In Daubert v. Merrill Dow Pharmaceuticals, Inc., the U.S. Supreme Court established the rule for federal courts that trial judges have a special responsibility to ensure that scientific testimony is not only relevant, but also reliable. In Kumho Tire Company, Ltd. V. Carmichael, the Supreme Court decided that a judge’s “gatekeeping” obligation applies not only to scientific testimony but to all expert testimony.
© D.L. Crumbley 137 Qualifying as an Expert Witness “Thus, in our view, the Court’s emphasis on reliability as well as on relevancy embraces within its standard the credibility of the witness proffering expert opinion. This is particularly true where, as here, it is the district court judge sitting as a finder of fact who must rule on issues is evidence. In the instant case, the District Court ruled that Dr. Gotteimer’s testimony would not be admissible for three reasons. First, the court found that Dr. Gotteimer’s educational credentials were not of the highest caliber. Second, during voir dire, the District Court found Dr. Gottheimer not to be credible because he had made statements about his credentials that were inconsistent with his deposition testimony. Finally, the District Court found that Dr. Gottheimer’s experience was in property casualty insurance, not life insurance, and that Gottheimer had admitted in his deposition that there are “fundamental” differences in evaluating the two types of insurances…. Source: In re Unisys Shavings Plan Litigation, 173 F.3d 145, (CA-3, 1999), cert. denied, 528 U.S. 950 (1999).
© D.L. Crumbley 138 Daubert’s Five Factors Whether the theory or technique used by the expert can be, and 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; and The degree of the method’s or conclusion’s acceptance within the relevant community. Did theory exist before litigation began. (on remand, CA-9 adds 5 th factor)
© D.L. Crumbley 139 Kumho Tire Co. Ltd. v. Carmichael, 119 S.Ct (1999). Daubert factors apply to nonscientific testimony as well as scientific expert testimony Court will probably not exclude testimony on the basis of one factor alone. Frye rule: general acceptance rule may still apply, especially in certain state courts. Daubert challenges generally occur after the deadline for naming experts. Thus, disaster if disqualified. Can open expert up to a malpractice claim.
© D.L. Crumbley 140 Supreme Court said: “The objective of that requirement is [Daubert] to ensure the reliability and relevancy of expert testimony. It is to make certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field My job would be to provide credible expert opinion on complex accounting issues. The opposing attorney’s job would be to make me look like a lying idiot. Any anger, loss of confidence, or other emotional lapse he can drive or insult me into, will inure to his purpose. My experience as a professor would work to my favor, since my career centers around explaining complex accounting issues in clear understandable terms. What I need to guard against, is treating the jury like my students. The opposing lawyer will accuse me of grandstanding and thinking I’m back in my ivory tower. He’ll try to make me look like a fool. The judge owns the courtroom. The witness is just a guest, and one that not every party appreciates. I.W. Collett & M.Smith, Trap Doors and Trojan Horses, Thomas Horton & Daughters, p.127 Kumho Tire
© D.L. Crumbley 141 Daubert Challenges Simple Daubert Challenge Motion of limine. Motion of summary judgment. Documents filed. Hearing with judge and lawyers. Motion for summary judgment may or may not be granted. Complex Daubert Challenge Multiple day hearing. Live Witnesses. Challenged Expert Rebuttal Expert
© D.L. Crumbley 142 A Hired Gun? On January 6, 2005, Andrea Yates’ capital murder conviction for drowning her children was overturned by an appeals court because of Dr. Park Dietz’s erroneous testimony about a nonexistent TV episode on Law & Order. His photo was shown on Fox News, and the talking heads called him a “hired gun” and a “whore.” One talking head said that “he’s dead.” Dr. Park Dietz during the 2002 Houston court case
© D.L. Crumbley 143 Qualifying as an Expert In an infringement of trademark and misappropriation of trade secrets, plaintiff offered an expert with 15 years’ experience with the marine crane industry to testify about profits. Excluded because so-called expert had no formal training in accounting and conducted no independent examination of defendant’s gross sales figures, which were supplied to expert by plaintiff’s counsel. Seatrax. Inc. v. Sonbeck Int’l. Inc., 200 F.3d 358 (CA-5, 2000).
© D.L. Crumbley 144 Qualifying as an Expert In an antitrust dispute a District Court excluded an economist and awarded summary judgment to plaintiff. Fourth Circuit affirmed the exclusion, saying that the expert had an MBA and significant executive experience in the relevant industry, but he subscribes to no economics journals, could identify no economics journals, had published no economics-related articles, was unfamiliar with basic terms employed by economists in antitrust analysis, had never conducted any relevant market analysis, and had read only materials provided to him by counsel. Berlyn, Inc. v. Gazette Newspapers. Inc., No (CA-$. Aug. 18, 2003) (unpublished ) Just because the expert has a MD degree is not enough to qualify him to give an opinion on every conceivable question. Christopherson v. Allied Signal Corp., 939 F.2d 1106 (CA-5, 1991)
© D.L. Crumbley 145 Qualifying as an Expert In a franchise termination suit, Seventh Circuit said that the CPA was not doing science, he was doing accounting. Based on financial information furnished by plaintiff and assumptions supplied by counsel, he calculated discounted present value of lost future earnings. Accountants are qualified to do that. Zelinski v. Columbia 300, Inc., 335 F. 3d 633 (CA-7, 2003)
© D.L. Crumbley 146 The Courts’ Opinion Valuation testimony that considers no other independent variables than the sequences of events will be rejected as a matter of law. Blue Dane Simmental Corp. v. American Simmental Association 178 F. 3d 1035 (CA-8, Cir. 1999). Unbelievable valuation testimony will be rejected as a matter of law. Frymire-Brinati v. KMPG Peat Marwick, 2 F. 3d 183 (CA-7, 1993). An expert may base opinion on business records reviewed even though records were not in evidence. Carter v. Steverson & Co., 106 S. W. 3 rd 161 (Tex. App. 2003). “When a litigant is knocked out after tying both its hands behind its back, a court may properly refuse to heed the litigant’s plea to be given a second chance for a fair fight.” There is no second chances where defendant presents no independent damages evidence or contrary expert testimony. Century 21 Real Estate Corp. v. Meraj International Investment Corp., 315 F. 3d 1271 (CA-10, 2003). The NACVA certification was mentioned as element in support of qualifications for business appraiser doing bank valuation. First Western Bank v. Olsen, 621 N.W. 2d 611 (S.D. 2001). Zelinski v. Columbia 300, Inc., 335 F. 3d 633 (CA-7, 2003)
© D.L. Crumbley 147 In Frank J. Laureys, Jr., 92 T.C. 101 (1989), the IRS offered the testimony of Dr. Bradford Cornell, a professor of finance and economics at UCLA, to demonstrate that taxpayer was never “at risk” as to his option trading activities. About his proffered testimony, Tax Court Judge Mary Ann Cohen commented: We agree with petitioner that the factual premises of Dr. Cornell’s report are unreliable and that neither his testimony nor his qualifications assist in determining petitioner’s purpose in engaging in the transactions in issue…. [W]e do not believe that the type of economic analysis set forth in Dr. Cornell’s report is relevant to the type of risk covered by section 465(b)…. Dr. Cornell’s testimony is tainted by his perception that, from an economic standpoint, wash sales are not legitimate. Source: B.J. Raby and W.L. Raby, “Reasonable Compensation, Expert Witnesses, and the Tax Practitioner,” Tax Notes, September 15, 2003, pp Rejecting Experts
© D.L. Crumbley 148 Second, his isolation of data as to certain transactions, on certain dates, chosen from a few transactions selected by respondent among hundreds engaged in by petitioner, is not reasonably representative. It is also inconsistent with his own statement that his analysis must consider “the investor’s overall strategy.” Third, his assumption of predictability of stock prices is inconsistent with reality and with the existence of an active national options exchange in which differing views of the future create buyers and sellers at different prices. Source: B.J. Raby and W.L. Raby, “Reasonable Compensation, Expert Witnesses, and the Tax Practitioner,” Tax Notes, September 15, 2003, pp Rejecting Experts
© D.L. Crumbley 149 Weight v. Admissibility Daubert analysis should not replace trial on merits, but any defects in an expert’s methods should be addressed through cross-examination. Mathis v. Exxon Corp., 302 F.3d 448 (CA-5, 2002). Defendant did not argue that the expert fails to comport with Daubert factors, but rather argues that his calculations do not support his conclusion. This attack is not a true Daubert challenge, but rather goes to weight. TFWS v. Schaefer, 325 F. 3d 234 (CA-4, 2003). Duty of district court is to ensure that basis of expert’s opinion is not so fatally flawed as to render his opinion inadmissible as matter of law. Inre Visa Check, 280 F.3d 124 (CA-2, 2001), cert.den. 122 S.Ct (2002).
© D.L. Crumbley 150 Weight v. Admissibility (Continued) Admissibility affirmed. Defendants did not object at trial court level and so review is for plain error. Defendants say expert is unqualified, but he spent 33 years as IRS agent, mostly investigating financial fraud. Defendants also fault expert for basing analysis solely on bank records supplied by plaintiffs, rather than broader array of transactions, but this objection goes to weight, not admissibility. Microfinancial, Inc. v. Premier Holidays Int’l, Inc., No (1 st Cir. Oct 5, 2004). Exclusion affirmed. Creditors argue that company’s quarrels with expert’s approach went to weight, not admissibility, but district court identified no fewer than eighteen deficiencies, and testimony was riddled with implausible and unexplained assumptions. No abuse of discretion. Lippe v. Bairnco Corp., 288 B.R. 678 (S.D. N.Y. 2003), aff.d No (2 nd Cir. Apr. 9, 2004) (unpublished)
© D.L. Crumbley 151 Weight v. Admissibility (Continued) Admissibility affirmed. Exxon did not waive appeal of pretrial evidentiary ruling by failure to renew objections at trial, such renewal being unnecessary under Fed. R. Evid. 103(a), as amended in 2000, when the district court has made definitive pretrial rulings on motions to strike. But expert was qualified and his opinion were admissible. Exxon says expert’s method were unsophisticated and that he should have concluded “competitive impact analysis” for each station to show that Exxon’s price caused it to loose business. But purpose of expert’s testimony was not to isolate precise economic effect for each station, but rather to show that Exxon had set commercially unreasonable price. Daubert analysis should not supplant trial on merits, and any defects in expert’s method could be addressed through cross- examination. Mathis v. Exxon Corp., 302 F. 3d 448 (5 th Cir. 2002). Admissibility affirmed. Plaintiff’s expert was qualified, and used mathematical extrapolation, straight line linear progression, and averaging to arrive at his figures. Defendants attacked none of these methodologies, and their objections go to weight, not reliability. CDM Mfg. v. Complete Sales Representation, Inc. No (9 th Cir. Oct. 29, 2002) (unpublished).
© D.L. Crumbley 152 Searchable Databases of Daubert Decisions 1.Daubert Tracker (launched August 2002) 93 accounting decisions (mid-February 2003). [46 accounting experts admitted, 38 denied, 9 admitted/denied in part] 14,000 trial and appellate opinions. 16,000 expert reports. Composed of five distinct services. The searchable database of all reported cases. Core documents – docket sheets, briefs and transcripts – for each case. An update of new cases from the previous week. A quarterly journal with articles by trial attorneys, law professors, judges and experts. A series of “Web lectures” delivered by authorities on Daubert and scientific evidence. A year subscription is $295.www.mdexonline.com
© D.L. Crumbley 153 Searchable Databases of Daubert Decisions (contd …) 2.“Daubert on the Web” Online free tracking service. In January, 2005, 67 cases were under the field “Accountants and Economists” with an admissibility rate of.627. There are a total of 25 fields with various “admissibility rate,” such as Computer experts, Criminologists,0.828 Marketing experts,0.400 Polygraphers,0.138 Toxicologists,0.333 In Louisiana, there have been at least 33 Daubert challenges with a 60% admission rate.
© D.L. Crumbley 154 Successful Daubert Challenges Accountant failed to incorporate into his opinion (without explanation) some of his findings that contradicted his testimony [similar to Kumho Tire engineering expert’s testimony]. Target Marketing Pub., Inc. v. ADVD, Inc., 136 F.3d 1139 (CA-7, 1998). Accountant testified from un-audited financial reports, did not analyze data covering the entire period of time in question, did not compare revenue to budget projections of revenue, and allowed his opinion to be influenced by subjective statements of an interested party. SEC v. Lipson, 46 F.Supp.2d 758 (N.D. Ill.1998). In comparing hosiery made by different manufacturers, expert relied upon an inadequate sample and destroyed the records of his methodology. Lithuania Commerce Corp. v. Sara Lee Hosiery, 179 F.R.D. 450 (D.N.J. 1998)
© D.L. Crumbley 155 Testifying at a Deposition The scope of their assignment Their current employment (job title, duties) Their educational background Licenses Work experience Memberships in professional organizations Publication and lectures Fields in which they are qualified as an expert Other work they have performed as an expert or other litigation consultant What compensation they are receiving (and what percentage of their compensation is derived from testifying as an expert witness) What opinions they have formed The bases for their opinions Expert witnesses can expect to be asked about the following at a deposition: Source: Crumbley, Heitger & Smith, Forensic and Investigative Accounting, 2003, p. 8-13
© D.L. Crumbley 156 Almost Unlimited Almost any question can be asked during a deposition In the fraud-related trial of Worldcom Chief Executive Bernard Ebbers, the judge ruled that the defense could question the prosecution’s star witness [CFO Scott Sullivan] about his ‘marital infidelities’ because it reflects on his truthfulness. U.S. District Court Judge Barbara S. Jones said that “the defense is entitled to wide latitude.” Source: A.Latour, S. Pulliam, and S. Young, “Ebbers Defense Rings Up a Win Over Testimony,” WSJ, January 19, 2005, pp. C-1 and C-4
© D.L. Crumbley 157 Clause In Written Report I have not attempted to set forth verbatim every detail of my expected testimony and every fact that supports my opinion. Thus, I may provide additional facts and address additional topics in response to arguments or assertions offered during the course of deposition and testimony.
© D.L. Crumbley 158 Preparing to Testify as an Expert Witness Maintain independence from the client Evidence upon which experts may rely Use of confidential client information Expert reports Working papers Evaluation of other experts Exhibits and other demonstrative evidence Source: Crumbley, Heitger & Smith, Forensic and Investigative Accounting, 2003, p. 8-13
© D.L. Crumbley 159 Differences Between Fact and Expert Witness Source: D.R. Carmichael, et. al, Fraud Detection, 5 th, Fort Worth: Practitioners Publishing, 2002, p FACTEXPERT Purpose of testimony To provide the court with relevant facts relating to the case. To help the court or trier-of-fact understand technical issues. TrainingNo specialized training is necessary, unless the witness undertakes a factual investigation. The witness must qualify as an expert. Therefore, he or she must have specialized knowledge, training, experience, or other qualifications (for example, writings) in a subject outside the average person’s understanding. What determines whether the witness will testify? The witness will be allowed to testify if he or she has information relevant to the case, and the testimony is not prejudicial or unnecessarily duplicative of evidence already presented. The judge must determine whether the witness has the qualifications needed to testify in the case. The testimony also must be relevant and must not be unnecessarily duplicative or prejudicial. TestimonyFacts and observations based on the witness’s perceptions and everyday common information. Facts and opinions based on the witness’s knowledge, training, and experience and the fraud procedures performed by him or her. Evidence and exhibits All documents referred by the witness must already be in evidence. The witness can testify about documents that have not been entered into evidence if they are of the type normally relied on by experts in that field to form an opinion. Can the witness testify about hearsay evidence? No.Yes, as long as it is something that is normally relied upon by experts in the field. Payment of feesThe witness is only entitled to the statutory daily fee (which is very small in most jurisdictions). The witness is entitled to a reasonable hourly rate.
© D.L. Crumbley 160 Four Phases of Interrogation at Trial Direct Examination – friendly attorney – no leading questions. Cross-examination – opposing attorney – credibility of the witness and generally what was covered in direct. Leading questions O.K. Redirect examination – friendly attorney gives expert opportunity to clear up confusion. Recross-examination – not required. New matters subject to re-cross exam. Own attorney has right for last words with expert.
© D.L. Crumbley 161 Direct Examination “ Trial rules permitted direct examination by the side giving its case-in-chief, then cross- examination by the opposition, then another round of questioning should they be required by the side that had called the witness in the first place. This last round was the redirect, and Powell was up and rolling before Freeman got back to the defense table.” Source: J.T. Lescroart, The 13 th Juror, New York: Dell Publishing, 1994, pp
© D.L. Crumbley 162 Leading Questions Didn’t the defendant appear to you to be stealing money from the cash register? A question that suggests a desired answer (e.g., yes or no). Leading questions can be directed to opposing parties and adverse witnesses during examination. Better questions: How much money was the defendant taking from the cash register? How can you estimate that amount? How was she taking the money?
© D.L. Crumbley 163 Leading Witness “ Did you hear her? Was she, for example, singing in the shower or something like that? Moving furniture around?” Freeman was taking advantage of the rules that allowed defense in cross-examination to lead witness, and Freeman was also using this bantering tone to get back into a more relaxed mode with Fred, showing him what a regular Joe he could be.” Source: J.T. Lescroart, The 13 th Juror, New York: Dell Publishing, 1994, p. 310.
© D.L. Crumbley 164 Some Research Findings 65% of surveyed jurors were influenced by expert testimony. Merely referring to a witness as an “expert” affords the witness credibility. Jurors assign more credibility to government rather AICPA standards. Jurors hold auditors to higher standards of care when the audit failure is severe. Juror decision making is not independent of the use and reliability of decision aids. Source: D.N. Ricchiute, “Effects of an Attorney’s Line of Argument on Accountant’s Expert Witness Testimony,” Accounting Review, January 2004, pp
© D.L. Crumbley 165 High Tech Is Best Studies show that the average person retains as much as 87% of information presented visually and as little as 10% for information given orally. Computer animations are even more persuasive. Both types of delivery impact the weight given to evidence by jurors (or judges). Use visual aids, computer animations, and other visual help whenever possible while on the stand. Source: David Yale, “Computers on the Witness Stand,” Univ. of Conn. Law School, Fall 1996, Moral: A picture is worth a thousand words.
© D.L. Crumbley 166 Important Visual Rules Storyboard your testimony (series of sketches). Do not overdo it. Design illustration so jurors can take away the message in 5 seconds. Title should give your conclusion. Color is important. Put the most important information in the top right-hand corner of the chart. Do not simply enlarge document. Highlight important stuff. Practice with your exhibits. Source: D.S. Scott and R. Laguzza, “Communication With The Jury,“ Litigation Services Handbook, John Wiley, 2001, pp.15-2 and Give your exhibits to the jurors in a plastic protective folder.
© D.L. Crumbley 167 Technology Captures Jurors: Smart Courts “Judge Mary Lisi of the U.S. District Court in Rhode Island keeps her eyes glued to two flat-screen panels on the bench. One displays evidence. The other displays testimony translated from the court reporter’s shorthand into English in real time. With an optical mouse, the judge flags key testimony and makes notes on the screen. Both counsel tables are equipped with a flat-screen monitor, and the jury box is equipped--one for every two jurors--with monitors as well. The courtroom has at its disposal a digital camera that projects the image of documents or objects onto each monitor in the courtroom. Lisi affectionately refers to it as ELMO, the manufacturer’s name. A self-described technological dinosaur, Lisi presides in a fossil of a courthouse, built during the Theodore Roosevelt administration. The courthouse recently went through rehabilitation and restoration that included state-of-the –art technology which was carefully integrated to avoid sacrificing the courthouse’s historic feel. Source: Jim Mckay, “Show & Tell,” Government Technology, January, 2005, p.16.
© D.L. Crumbley 168 Smart Courts (Cont.) “Our system went down a couple of weeks ago,”Lisi recalled. “I tried a relatively short case, but when the lawyer had a photograph to show to each individual juror, it felt like the world was standing still. It felt like an eternity as each one of them looked at it because you can’t do anything while they’re passing that photograph around.” With flat-panel monitors in the jury box, at the judge’s bench and at the lawyers’ tables everyone can see the evidence at the same time, rather than having to pass around a piece of evidence, which could take 10 or 15 minutes. “With an evidence presentation system, especially in document intensive trials, you put it up and everybody is looking at the document at the same time while the attorney is speaking.” Goldenberg said. “If you have 100 document--you do the math.” Source: Jim Mckay, “Show & Tell,” Government Technology, January, 2005, p.5
© D.L. Crumbley 169 Smart Courts (Cont.) “Presenting evidence electronically-- PowerPoint slides and scanned material--and showing it to jurors on their monitors makes for a more powerful presentation, and jurors appreciate the efficiency,” said Judge E. Dana Winslow of the New York State Supreme Court. “If you have records of 1,000 pages or 2,000 pages and you want to get to page 134, electronically it will take you about three to five seconds,” Winslow said. “If you try to do the same thing with massive documents through the witness and through the attorneys, it will take you a substantial amount of time. I’ve seen it take 10 minutes.” “Having monitors at the counsel tables also saves time by cutting down on objections because lawyers have the precise language in front of them,” Winslow said. Source: Jim Mckay, “Show & Tell,” Government Technology, January, 2005, pp
© D.L. Crumbley 170 Smart Courts (cont.) “Technology enhances understanding and retention, and establishes a greater degree of credibility, Winslow said. “There is always some reticence on the part of jurors to accept everything the attorneys or witnesses are saying. If they don’t have to be concerned that something they are hearing is something other than what is [real], it reduces the skepticism in the courtroom.” “It’s very powerful when the jury can see that instead of having to rely on the witness just jabbering on about it and having this tiny projectile in his hand that they are going to have wait and see afterwards.” Lawyers do get carried away with technology, making it incumbent on the judge and adverse counsel to call them on it. “The lawyers overuse it,” Lisi said. Source: Jim Mckay, “Show & Tell,” Government Technology, January, 2005, pp
© D.L. Crumbley 171 Types of Witnesses Percipient witness – one with direct personal knowledge of the facts, circumstances, and events surrounding the dispute (e.g., fraud, the robbed bank teller). Peripheral witness – may be able to provide background information. Hostile – normally unfriendly to the forensic accountant or to the lawyer. Friendly – friendly toward your position.
© D.L. Crumbley 172 Dines’ Exhibits Hints 1.Keep the number of exhibits to a minimum to prevent confusion. Refer to only the most important issues of the case. In fact, do not use more than ten minutes to explain a chart, as this is about the average attention span of most juries. 2.Provide only one message per exhibit. 3.Make sure that your exhibit supports and explains your opinion and conclusions. 4.Make sure that your exhibit is accurate and relevant, not misleading or difficult to understand. 5.Keep the contents of the exhibit simple and clearly organized in order that people viewing it can easily identify and understand what they are seeing.
© D.L. Crumbley 173 Dines’Exhibits Hints 6.Attach a copy of the source to the reverse of each exhibit and make it available to the court. Sign and date each exhibit for court reference. 7.Keep your exhibits in a dry cool place, even after the court has returned them to you, for possible future use, such as in an appeal. 8.Cover your exhibit up if it is set up in the courtroom before you identify it. You don’t want to distract the jury from other evidence being presented, and you do want to build up the jury’s curiosity. 9.Keep in mind that the opposing attorney will be constantly looking for ways to discredit your exhibit.
© D.L. Crumbley 174 Dines’ Exhibits Hints 10.Tests made to produce the exhibit must be done under the same or at least under very similar conditions in which the event occurred. 11. Do not over do the making of a demonstrative exhibit by, for example making it over dramatic. 12.An excellent exhibit is one that is self- explanatory. Standing by itself, it should tell a story, prove a point, or substantiate an opinion. It should leave an indelible impression with the jury after the evidence is removed. 13.Make sure you assign your own in-house number to each exhibit. This number should be placed on the back of the exhibit. Once accepted, the court will assign its own exhibit number as well.
© D.L. Crumbley 175 Dines’ Exhibits Hints 14.Have your attorney provide the assigned court exhibit numbers to you so that you can cross-reference them with your in- house numbers. This will enable the judge, jury and attorneys to quickly identify your exhibit, saving time and enhance your efficiency, a plus. 15.A rushed impromptu exhibit should not be considered. The lack of time needed to reason it out carefully and completely can result in inconsistencies or mistakes. If you’re lucky, the court will not let such an exhibit to be entered as evidence. 16.If possible, fax or mail copies of the exhibits to your attorney as soon as you finish them. If there are problems from the attorney’s standpoint, you want to hear about them as soon as possible.
© D.L. Crumbley 176 Dines’ Exhibits Hints 17.Stand to the side of the exhibit when explaining it in order not to block it from the judge’s view. When speaking, speak directly to the jury, letting your eyes roam to several of them and never only to one. 18.Encourage the jury to continually look at the exhibit while you focus your attention towards them at the same time. 19.Leave your demonstrative evidence uncovered while the opposing side is presenting its case or during cross- examination so that it will make a continuing impression on the judge and jury. Source: Jesse E. Dines, Expert Witness Manual, Irvine, CA: Pantex International, Ch. 8.
© D.L. Crumbley 177 Four Conditions An expert witness can state an opinion or conclusion if four conditions are satisfied: The validity of the opinion or conclusion depends on special knowledge, experience, skill, or training not ordinarily found in lay jurors; The witness must be qualified as an expert in the pertinent field; She must possess a reasonable degree of certainty (probability) about her opinion or conclusion; and Generally, in common law jurisdictions an expert must first describe the data on which her conclusion is based, or she must testify in response to a hypothetical question that sets forth such data. Source: J.R. Waltz, Evidence, New York: Foundation Press, 1999, p. 15.
© D.L. Crumbley 178 Three Approaches to Testifying 1.Express opinion based upon facts personally observed, or facts communicated to him by another expert. 2.Be present in courtroom and express opinion on such evidence (that is not in dispute). 3.Base an opinion on a hypothetical question embracing evidence in the record. Source: J.R. Waltz, Evidence, New York: Foundation Press, 1999, p. 15.
© D.L. Crumbley 179 Written Reports An expert should never draft a written report of any kind unless he or she has been expressly directed to do so by hiring counsel. Federal Rules of Civil Procedure 26(a)(2)(B) requires a written report. Keep a diary of interview dates, etc. Do not destroy interview notes.
© D.L. Crumbley 180 Written Report Contents (FRCP 26(a)(2)(B)) All opinions to be expressed and the bases for them. Data or other information considered in forming the opinions. Any exhibits to be used as a summary of or support for opinions. Witness qualifications, including a list of all publications authored within the last 10 years. Witness compensation. List of other disputes in which the witness has testified at deposition or trial during the last 4 years. Signature of the expert testifying. Note: Federal Rule of Civil Procedure 27(e)(1) indicates that an expert must update a written report or disposition.
© D.L. Crumbley 181 Types of Expert Reports Fact-oriented report – gathers and evaluates facts and uses them to prepare a report. Check and re- check the numbers and the facts. Opinion report (e.g., valuation report) – more subjective and rely more on the professional judgment of the expert. Combination of above types.
© D.L. Crumbley 182 Ghost-Writing Reports In a district court case in 2001, the plaintiff’s attorney argued that the government’s litigation consultants were ghost-writing expert reports, and the experts were destroying documents in order to prevent discovery. The court refused to allow the expert to participate in the dispute. “The more involvement the client’s attorney has with the expert’s report the more likely this involvement will be disclosed on cross-examination and result in the court discounting the expert’s testimony as lacking objectivity. Source: Jon Almeras, “Judges Offer Advice On Expert Testimony,” Tax Notes (March 18, 2002), p
© D.L. Crumbley 183 Ghostwriting Reports (Cont.) An expert report must be prepared by the expert and not by his or her attorney. An expert report prepared mostly from interrogatory answers prepared by the party’s lawyers is not sufficient. Source: FRCP 26(a) (2) (B)Smith v. State Farm Fire & Cas. Co., 164 FRD 49 (SD VA 1995) An attorney may provide assistance to an expert in preparing a report. Here the lawyers provided assistance in retyping and incorporating changes authorized by the expert Source: Marek v. Moore, FRD 302 (DKS 1997) Oh, I know there’s be hell to pay. But that crossed my mind a little too late! Well I know what I was feeling, but what was I thinking? From “What Was I Thinking” by Dierks Bentley
© D.L. Crumbley 184 Ghostwriting Reports (Cont.) Although an attorney actually wrote the report, the attached opinions and work papers were those of the expert, and he testified at deposition that the report reflected his opinions. Source: Indiana Ins. Co. v. Hussey Seating Co., 176 FRD 293(D. IN 1997 ) “Trial counsel may well have legitimate cause to give assistance to an expert witness in the preparation of the report.” But “the court also emphasizes that in no way does it suggest the attorneys have license to change the opinions and report of the expert witnesses.” Source: Marek v. Moore, FRD 298 (DKS 1997)
© D.L. Crumbley 185 Ghostwriting Reports (Cont.) The court found “significant evidence of teamwork and collaboration between ATE (a government litigation consultant) and the U.S.’s testifying expert”. There was “extensive substantive assistance in drafting the expert’s report.” Source:Trigon Insurance Co., 88 AFTR 2d (DC Va.2001) A report was “substantially derived” from a prior case, which was “substantially similar” to a different expert’s report in another dispute. Since there was “substantially similarity among the three expert witness reports derived from the authorship of this common language by plaintiff’s counsel, the court struck an expert’s report because it had “not been prepared by the expert” in violation of FRCP 26 (a) (2). Source: In re Jackson Natl. Life Ins. Co. Premium Litigation, 1999 WL (DC Mich, 1999)
© D.L. Crumbley 186 Ghostwriting Reports (Cont.) “Certain kinds of help are clearly in tune with the concept of assisting the expert.” “Specifically, an attorney’s assistance with the preparation of documents required by Rule 26, such as a list of cases in which the expert has testified, or fine-tuning a disclosure with expert’s input to insure that it compiles with the rules, is permissible.” Preparing expert’s opinion “from whole cloth and then asking the expert to sign it if he or she wishes to adopt it conflicts with Rule 26(a)(2)(B)’s requirements that the expert ‘prepare the report.’ Preparation implies involvement other than pursuing a report drafted by someone else and signify one’s name at the bottom to signify agreement. In other words, the assistance of counsel contemplated by Rule 26(a)(2)(B) is not synonymous with ghost-writing.” Source: Bank One Corp., 120 T.C. 174 ( 2003)
© D.L. Crumbley 187 Ghostwriting Reports (Cont.) The Tax Court rejected a jointly prepared 20- page expert rebuttal report on the behalf of two experts since prepared primarily by only one expert and by taxpayer’s counsel. The report went through 12 revisions. The witness never explained to our satisfaction that the words, analysis, and opinions in that report were his own work and a reflection of his own expertise…[W]e are unpersuaded that [the expert] played any meaningful role in composing the contents of the …rebuttal report. He was vague, uncertain, and unfamiliar with the contents of the report, and he was uncomfortable and evasive, and he was uncomfortable about his role in its preparation.” Source: Bank One Corp., 120 TC 174 (2003): Judge Laro’s Order dated 1/15/03, page 29.
© D.L. Crumbley 188 Ghostwriting Reports (Cont.) “Rule 26(a) (2) (B) does not preclude counsel from providing assistance to experts in preparing the reports, and indeed, with experts such as automobile mechanics, this assistance may be needed. Nevertheless, the report, which is intended to set forth the substance of direct examination, should be written in a manner that reflects the testimony to be given by the witness and it must be signed by the witness.” Source: Advisory Committee notes to FRCP 26
© D.L. Crumbley 189 Ghostwriting Reports (Cont.) Permissible assistance certainly should include familiarizing an expert with the requirements of Tax Court Rule 143(f) (1) and helping the expert understand what information must be included in the expert report for it to be admissible into evidence. By contrast, an expert’s report written entirely by counsel is automatically suspect. Behavior falling between these two extremes poses the more troubling question. Source: S.M. Hurwitz and R. Carpenter, “ Can An Attorney Participate in the Writing of an ‘Expert Witness’ Report in the Tax Court?” Journal of Taxation, June 2004, pp
© D.L. Crumbley 190 Ghostwriting Reports (Cont.) ‘ It appears likely that the U.S. Tax Court will allow an expert to serve as a scribe only when the expert is not capable of articulating his or her thoughts in the form of a written report.’ Source: S.M. Hurwitz and R. Carpenter, “ Can An Attorney Participate in the Writing of an ‘Expert Witness’ Report in the Tax Court?” Journal of Taxation, June 2004, pp
© D.L. Crumbley 191 Ghostwriting Reports (Cont.) Tax Court Sanctions: Denying admission of the expert’s report Denying the witness the opportunity to testify Disqualifying the expert. Disregarding all or portion of the testimony Imposing monetary sanctions against the faulty party and its counsel Granting a new trial Dismissing the petition Entering a default judgment Contempt Source: S.M. Hurwitz and R. Carpenter, “ Can An Attorney Participate in the Writing of an ‘Expert Witness’ Report in the Tax Court?” Journal of Taxation, June 2004, pp
© D.L. Crumbley 192 Citators Commerce Clearing House Citator (taxation) Research Institute of America (PH) Citator and Citator 2 nd Series (taxation only) Shepard’s (for virtually every case reporter series and specialized areas, e.g., taxation) RIA and Shepard’s give a notation why the case was cited. CCH does not.
© D.L. Crumbley 193 Shepard’s Oldest. Greater breadth. Must know court reporter citation (not just name). Go through LEXIS or Westlaw. Does not furnish name of cited case. Gives references to selective law review articles. Gives citations to Federal Statutes and Regulations. CCH Citator (2 volumes) lists cited cases for each court decision in reverse chronological order Missing most current cases (two or three months). Citators (cont.)
© D.L. Crumbley 194 Things to do Only use theories or techniques that have been tested and passed. Use theories or techniques that are objective. Specify the known error rate or potential error rate for the method. Use methods with acceptable error rates. Produce peer-review literature (i.e., journal studies, reports, and treatises supporting the expert’s conclusions and opinions). Produce reliable scientific data to prove that her methods and conclusions are generally accepted in the scientific community. Demonstrate that her theories existed prior to the commencement of the litigation. Not develop novel theories to support conclusions for specific litigation. Demonstrate that she maintained standards and controls (for example, good laboratory practices and simultaneous blinded controls). Source: Babitsky et. al, The Comprehensive Forensic Manual, Seak, Inc.,
© D.L. Crumbley 195 Things to do … Demonstrate that findings can and have been replicated by others. Demonstrate that her methodology followed the scientific method as it is practiced by at least a recognized minority of scientists in the expert’s field. Offer testimony that is sufficiently tied to the facts of the case to help the jury to resolve a factual dispute. Avoid relying on coincidence. Avoid extrapolating unjustifiably from an accepted premise to an unfounded conclusion. Adequately account for obvious alternative explanations. Demonstrate the same care and accuracy as in the regular professional work. Use the real-world methodology of her field. Use an appropriate methodology to ensure that her opinion derives from and constitutes a form of specialized knowledge. Source: Babitsky et. al, The Comprehensive Forensic Manual, Seak, Inc.,
© D.L. Crumbley 196 Judges Can Be Mean Judges can hurt an expert witness’ reputation by making negative comments about the expert in open courtroom. A judge in Florida’s Fourth District Court of Appeal said the following about an expert when a defense attorney asked why he excluded the expert: “Dr. ____ is an insidious perjurer who wouldn’t know the truth if it leapt up and bit him on the ***.” The expert is a doctor since 1963 and has testified for 25 years. On appeal the appellate court upheld the judge’s ruling that the expert’s claim lacked merit.
© D.L. Crumbley 197 There is an emerging trend of increased expert witness liability. General Rule: Immunity to a witness from civil liability from testimony / communication made in the course of litigation. Exceptions: Spoliation of evidence – losing or destroying evidence. Lying under oath. Defamation lawsuits against opponent's witnesses. Negligence (disappointed clients). $42M Mattco Forge decision (Acct. malpractice). Arthur Young [reversed on appeal on technicality] Court appointed expert can be liable for negligence. [e.g., Accountant in a divorce case: Levine v Wiss & Co, 478 F.2d 397 (N.J. 1984)] Risk Management
© D.L. Crumbley 198 Lying Under Oath Deadly Prosecutors said that ink expert Larry F. Stewart committed perjury on the stand during the obstruction-of justice trial of Martha Stewart. Mr. Stewart, laboratory director for the U.S. Secret Service, was charged with two counts of perjury, facing five years in prison if convicted. Prosecutors said that Mr. Stewart lied when he said he participated in the testing of ink on a worksheet supposedly showing a pre- existing agreement with Martha Stewart to sell her shares of Imclone stock. Source: Chad Bary, “Stewart Ink-Test Trial Starts, “WSJ, September 24, 2004, p. C-4
© D.L. Crumbley 199 Acquitted Larry Stewart was acquitted on October 5, He had said, “I performed a test to determine…..,” when in effect, he did not participate in analyzing the critical documents. One juror said, “ He put his foot in his mouth, and he couldn’t take it out because of his ego. He did not walk into the courtroom intending to lie.”
© D.L. Crumbley 200 I liked the grueling task of preparing beforehand and participating in a courtroom battle over accounting principles. There was the challenge to react and respond to the many innuendoes and leading questions asked by the opposing attorney. Probably the stress was not worth the daily fees I received, but I kind of enjoyed it. I sometimes imagined the opposing attorney to be a black-clad medieval knight racing towards me on horse-back with a long, sharp lance. I always toppled the vicious knight in my daydreams. Though not always in court. I.W. Collett and D. Forgione, Costly Reflections in a Midas Mirror, Thomas Horton and Daughters, p.131 It’s A Battle of Wits
© D.L. Crumbley 201 Witness Immunity State: State of Washington Pennsylvania States Ignoring Immunity: Alaska California Connecticut Louisiana Missouri New Jersey [court appointed] Texas West Virginia You Can Be Sued
© D.L. Crumbley 202 Hold-Harmless Provisions: Engagement Letters Limiting Liability: generally valid between parties to the agreement ( but not third parties). Clause 1: In no event will our firm be liable for incidental or consequential damages, even if we have been advised of the possibility of such damages. Clause 2: You and your client agree to hold our firm, its partners, and employees harmless from any and all liabilities, costs, and expenses relating to this engagement, and expenses (and those of our legal counsel) incurred by reason of any action taken or committed at your direction and taken by us in good faith; and you agree to indemnify us for any such action taken at your direction. Limiting Damages: generally valid between parties to the agreement ( but not third parties). Clause 3: Our aggregate liability to [attorney] or [attorney’s client] whether in contract, tort, or otherwise, will be limited to the amount paid to us by [attorney] or [attorney’s client] for the services under this engagement letter.
© D.L. Crumbley 203 Hold-Harmless Provisions: Engagement Letters Protecting Against Daubert (Frye) Rejection: Attach your curriculum vitae (CV) as an exhibit to the engagement letter. Clause 4: As an exhibit to this engagement letter, I have attached my CV. If a court later determines that I am not qualified to offer testimony, such determination will not deemed a breach of this agreement, and you will still be liable for the payment of fees and expenses as set forth herein. Source: C.L. Wilkins and J.H. Kinrich, Business Valuation/Forensic and Litigation Services Practice Aid 04-1, “ Engagement Letters in Litigation Services,” a practice aid issued by the AICPA Forensic and Litigation Services Committee.
© D.L. Crumbley 204 A client may win a breach of contract dispute by showing that the expert failed to (a) perform a specific contracted service, (b) perform the service in a timely fashion, (c) perform in a satisfactory manner, or (d) comply with professional standards. Examples of specific service performance would include engagements such as a review of a client’s internal control system or conducting a complete audit. Breach of Contract Source: “Breach of Contract” (New York Practicing Law Institute, January 2000), Ch. 3.2[B].
© D.L. Crumbley 205 There is no immunity for communication made outside the context of the lawsuit. Probably no immunity if the alleged misconduct results in a professional disciplinary proceeding. If you present false evidence, may be subject to criminal prosecution (e.g, Larry J. Stewart). Lack of Immunity
© D.L. Crumbley Guidelines to Meet Potential Legal Challenges 1.Know the relevant professional standards 2.Apply the relevant professional standards 3.Know the relevant professional literature 4.Know the relevant professional organizations 5.Use generally accepted analytical methods 6.Use multiple analytical methods 7.Summarize the conclusions of the multiple analytical methods 8.Disclose all significant analytical assumptions and variables 9.Subject the analysis to peer review 10.Test the analysis – and the conclusion – for reasonableness Source: R.E. Figlewicz and Hans-Dieter Sprohge, “The CPA’s Expert Witness Role in Litigation Services: A Maze of Legal and Accounting Standards,” The Ohio CPA Journal, July-September, 2002, p. 35
© D.L. Crumbley 207 Source: Ballentine’s Law Dictionary Sufficient Relevant Data A practioner needs to base his or her conclusions and judgments on sufficient relevant data. Ballentine’s Law Dictionary defines evidence as follows: The means by which any matter of fact, the truth of which is submitted to investigation, may be established or disproved. That which demonstrates, makes clear, or ascertains the truth of the very fact or point in issue, either on the one side or the other. The law of evidence embraces those rules which determine what testimony is to be admitted or rejected in the trial of a civil action, or a criminal prosecution, and what weight is given to evidence which is admitted.
© D.L. Crumbley 208 Source: Ballentine’s Law Dictionary Sufficient Relevant Data (contd…) Ballentine’s further defines sufficient evidence and relevant evidence as follows: Sufficient evidence—Abstractly, evidence of such probative value as to support the verdict of the jury or a finding of fact by the court. Practically, evidence such as will satisfy an unprejudiced mind of the truth of that which the court or jury has found to be the fact. [Emphasis added] Relevant evidence—Any matter of fact the effect, tendency, or design of which, when presented to the mind, is to produce a persuasion concerning the existence of some other matter of fact — a persuasion either affirmative or disaffirmative of its existence. Concisely, evidence of one fact rendering the existence of the fact in issue probable. A practitioner must advise the attorney of possible missing or questionable documents and the lack of sufficient relevant data upon which to reach an opinion.
© D.L. Crumbley 209 Eleven Guidelines for Evidence Relevance Objectivity Documentation Externality Sample Size Sample Method Corroboration Timeliness Authoritativeness Directness Adequacy of Controls Source: R.L. Ratliff and I.R. Johnson, “Evidence,” Internal Auditor, August 1998, pp.56-61
© D.L. Crumbley 210 Always tell the truth, but answer only the question asked. Think before answering. Never answer a question you do not understand. Do not guess or speculate. Do not bring notes, diagrams, books, or other written material to the deposition unless a subpoena or your attorney requires you to do so. Listen carefully to each objection made by your lawyer. Do not argue or become angry or hostile with the examining attorney. Even if a question calls for a yes or no answer, ask to explain your response if you feel a qualification or explanation is required to complete your answer. Beware of questions which involve absolutes. Do not memorize your answers before the deposition. Source: B.P. Brinig, “The Art of Testifying,” in Handbook of Financial Planning for Divorce and Separation, John Wiley, Ten Commandments for Depositions
© D.L. Crumbley 211 Always Be Truthful An investigator was asked in cross- examination: “You said that you wrote your notes contemporaneously. Is that correct?” ‘Yes,’ replied the witness. ‘And was the interview conducted at normal conversation speed?’ Counsel asked and witness agreed that this was the case. ‘They were very neat and tidy, Mr. Jones, aren’t they?’ ‘Yes,’replied the witness and then added a fatal piece of humor: ‘Unlike lawyers and doctors, I have been trained to write nicely.’ ‘Very good, Mr. Jones. I am now going to dictate a passage to you at normal conversational speed, and I would like you to write down notes of everything I say.’ Within two minutes the witness was a blubbering wreck, because he could not keep pace with dictation. The case was thrown out. Source: M.J. Comer and T.E. Stephens, Deception at Work, Burlington, Vt: Gower Publishing Company, 2004, p. 397.
© D.L. Crumbley 212 An Expert’s Advantages They are experts. They are not intimidated by the process. They can hide behind their expertise. Trial work is more lucrative than office or classroom work. They are more highly educated than lawyers. They like to teach. Source: D.M. Malone and P.J. Zwier, Effective Expert Testimony, Notre Dame, IN: NITA, 2000, p. 56.
© D.L. Crumbley 213 However, Malone and Zwier point out how to “get to” unintimidated experts; they “may lose sight of the deposing attorney’s goal, which is to find means to diminish the expert’s credibility or to challenge the bases for the expert’s opinions.” Call it arrogant. “Because they think they are safe within their own field, experts at deposition may be more willing to provide explanations and lengthy answers, to volunteer information, and to educate their ignorant but interested students.” They advise lawyers to smile, nod, lean forward, maintain eye contact, and ask open questions to “play” the expert. Encourage them to teach at the deposition. Getting to Experts Source: D.M. Malone and P.J. Zwier, Effective Expert Testimony, Notre Dame, IN: NITA, 2000, p. 57.
© D.L. Crumbley 214 Seven Answers at Deposition 1.Yes. 2.No. 3.Green. 4.I don’t know. 5.I don’t remember. 6.I don’t understand the question. 7.I need a break. Source: D.M. Malone and P.J. Zwier, Effective Expert Testimony, Notre Dame, IN: NITA, 2000, p. 81.
© D.L. Crumbley 215 Weaknesses of Experts It is the lawyer’s arena. They cannot resist teaching. Their time is finite and the universe is infinite. They must rely on assumptions. They are concerned about consistency. They worry about facts they do not know. You know how to use FRE 803(18). Source: D.M. Malone and P.J. Zwier, Effective Expert Testimony, Notre Dame, IN: NITA, 2000, p. 73.
© D.L. Crumbley 216 Federal Rule of Evidence 803(18) permits the introduction of relevant material from written sources to get around the hearsay rule. The opposing attorney can get the expert to “concede the existence of reliable authorities in the field” that later may be used at trial to help their side. Federal Rule of Evidence 803(18) Source: D.M. Malone and P.J. Zwier, Effective Expert Testimony, Notre Dame, IN: NITA, 2000, p. 73.
© D.L. Crumbley 217 Challenging The Opposing Expert General educational background. Areas of claimed expertise. Education in the field. Job history, terminations, multiple careers. Work experience in the field, practical experience. Ever sued in professional capacity? Subject to any investigation? Published works. Engagements Other opinions rendered. Other cases where testified. Acknowledge and importance of: a. Using accepted methodology. b. Fairness c. Careful math, if applicable. Materials Transcripts How the party first learned of the case. Source: D.E. Heinberg and B.C. Riopelle, “The Use of Financial Expert Witness (or Consultant)--- From Both the Attorney’s and Expert’s Perspective,” The Value Examiner, November/December, 2004, p.48
© D.L. Crumbley 218 Challenging The Opposing Expert (Cont.) Prior contact with parties. Other work for same party. Prior testimony for same counsel. First meeting with counsel- “Did counsel tell you what they needed?” All communications with counsel: a. Written b. c. Verbal Engagement letter All communications with outsiders. All communications with co-workers, staff and independent contractors Notes s Anything destroyed? Source: D.E. Heinberg and B.C. Riopelle, “The Use of Financial Expert Witness (or Consultant)--- From Both the Attorney’s and Expert’s Perspective,” The Value Examiner, November/December, 2004, p.48
© D.L. Crumbley 219 Challenging The Opposing Expert (Cont.) Terminology Precise methodology used Margin of error. Assistants involved, background checks, training Ever given an opinion on this subject before? Readings Precise opinions. All things relied on to give opinion. Theories rejected (e.g., if opinion is reasonable royalty, has he ruled out lost profits?) Process of preparing report: a. Ideas b. Exchange of drafts with counsel c. Changes suggested by counsel All opinions reached. Source: D.E. Heinberg and B.C. Riopelle, “The Use of Financial Expert Witness (or Consultant)--- From Both the Attorney’s and Expert’s Perspective,” The Value Examiner, November/December, 2004, p.48
© D.L. Crumbley 220 Challenging The Opposing Expert (Cont.) Time spent on report Test all assumptions Access to facts and process for gathering. Order in which all tasks performed. Individuals whom he or she considers to be experts in the field. Look for inconsistencies. Check math Work remaining to be done. Time records and bills Comment on your expert’s report. Source: D.E. Heinberg and B.C. Riopelle, “The Use of Financial Expert Witness (or Consultant)--- From Both the Attorney’s and Expert’s Perspective,” The Value Examiner, November/December, 2004, p.48
© D.L. Crumbley 221 Judges do say negative things about experts, and if an expert witness is denied, that side may lose. Most often the deadline for listing experts has passed. An old saying by Jerry Lee Lewis is appropriate: “You don’t miss your water until the well runs dry.” If the expert and report is not admissible, the lawsuit may be over. For example, a plaintiff lost a breach of contract and breach of fiduciary duty dispute by summary judgment because their accounting expert report was “pure speculation, based upon utterly implausible assumptions and unreliable methodology.” But Daubert challenges must be timely. Jerry Lee Lewis Sources: Target Market Publishing Co. v. ADVO, Inc., 136 F.3d 1139 (CA-7, 1998). Questar Pipeline Co. v. Grynberg, 2001 F.3d 1277 (CA-10, 2000).
© D.L. Crumbley 222 No substitute exists for good preparation. Before your cross-examination, question your assumptions and explore alternative positions. Study the opposing expert’s analysis. If you can’t answer the question yes or no, say so and shift the burden back to the lawyer to frame a proper question, one that can be simply answered or permits a fair explanation. Answer only the question asked. Become familiar with the examining attorney’s background, skills, and tactics. Be yourself, but be sensitive to negative habits which may distract from the quality or credibility of your testimony, such as averting your eyes when asked a difficult question. Be polite. Avoid the appearance of bias or untrustworthiness. Do not hesitate to concede an error. But be careful: “So, you just picked a number?” “So, your study isn’t accurate, isn’t it?” “So, after this brief, informal interview, you decided....” Don’t overstate your opinion. Source: B.P. Brinig, “The Art of Testifying,” in Handbook of Financial Planning for Divorce and Separation, John Wiley, Cross Examination Tactics
© D.L. Crumbley 223 Cross Examination Tactics (more) Do not speak to people outside courtroom while waiting and during breaks. Turn off your cell phone or pager before entering the court. Do not wear emblems. Avoid humor, but laugh at judge’s humor. Keep your hands on top of the table, not hidden. Be sure your attorney questions you in detail about your qualifications in order to impress the judge/jurors. Do not allow the other side to stipulate you as an expert. Dress neatly and conservatively. Arrive on time at the court house (have multiple reminders). When taking the oath as a witness, say loudly, “I do.” Be sincere and respectful.
© D.L. Crumbley 224 Cross Examination Tactics (more) Talk directly to the jurors (or judge if no jurors). Look them in the eyes. Make contact with each of the jurors. Explain number carefully, possibly using analogies with tax returns and checkbook. Pausing does not harm you. Use first person, active person: I reviewed these records, and I found…. Tell stories about people. Be careful when shown passages from textbooks, etc. Jurors have nothing to do for long periods. They are always watching. Be careful every place in the court house, even while driving to the court house. When you are in trouble in the court room, do not lean back. Instead lean forward. When you are finished, do not leave the courtroom until there is break.
© D.L. Crumbley 225 Judd Robbins Computer Forensic Expert "Judd Robbins is a litigator's dream expert witness: he not only has solid technical skills and a resume to support them, but is creative, litigation savvy, and a pleasure to work with, as well." Trial Attorney, New York, New York "Judd has that uncommon ability to take complex computer subject matter and break it down in a way that is understandable to a layman." Trial Counsel, Los Angeles, California "Judd related very well to the jury. He made himself available to us whenever he was needed. Easy to work with. Took the time to work with us. Always got back to us right away." District Attorney, South Dakota "He was easy to understand....made it seem easy... I believed his explanation." ……………..Juror Polling Feedback 4 Minute Video Deposition Extract
© D.L. Crumbley 226 “You have heard evidence in this case from witnesses who testified as experts. The law allows an expert to express opinions on subjects involving their special knowledge, training, skill, experience, or research. You shall determine what weight, if any, should be given such testimony, as with any other witness.” Jay W. Danker’s Four Rules: A relevant, coherent, understandable story. To keep their interest at all times. To be spoken to in clear, definite terms. Respect and sincerity.* * Jay W. Danker, Communicating with the Jury. Handout materials for the Fifth Annual National Expert Witness and Litigation Seminar, Hyannis, Massachusetts (June 20, 21, 1996) 2. Judge’s Instructions to Jury:
© D.L. Crumbley 227 The Three Cs The jurors expect an expert to Establish his/her competency. Convince the jury of his/her credibility. Communicate effectively his/her knowledge and opinions “He made his testimony relate to something the jury could understand from their own experience gain from buying lumber at a lumber yard.” Source; Judge Joseph B. Morris, Today’s CPA, May/June 1991, pp
© D.L. Crumbley 228 Kiss Business people often believe that their goal in a presentation is to deliver information. The reality is that information presented in a speech is rarely remembered. Images, metaphors, and anecdotes are what stick in listeners’ minds. Source: David Booth, “An Actor’s Guide to Giving a Great Speech,” Bottom Line Personal, March 1, 2004, p.8.
© D.L. Crumbley 229 A Bulletproof Expert They give opposing counsel little or nothing productive during cross-examination. This is dangerous to the other side because the jury expects counsel to make some good points during cross-examination. When few or no good Points are made during cross-examination, the expert’s stature is likely to grow significantly and opposing counsel’s stature is likely to diminish. Steven Babitsky and J.J. Mangrauiti, Cross-Examination, Seak, Inc. 2003, p.392
© D.L. Crumbley 230 Random Process “ Further, even though Gage and Terell hadn’t gotten them any points, neither had they put too many on the boards for Powell. That, though, could change in an instant. One false move now could turn the momentum of the entire trial. It was a time to be conservative in the literal sense- conserve what you’ve already got. Don’t let the other side score.” Source: J.T. Lescroart, The 13 th Juror, New York: Dell Publishing, 1994, pp
© D.L. Crumbley 231 Three Communication Techniques Central – focus on what you say. Peripheral – focus on how you say things. Amount of evidence presented. Number of points you make. Length of your testimony. Your qualifications. Trustworthiness. Likeability. Combination. Source: D.S. Scott and R. Laguzza, “Communication With The Jury,” Litigation Services Handbook, John Wiley, 2001, p
© D.L. Crumbley 232 Ross Davis and Ross Laguzza Say At least one of the jurors will not listen to you. Those that listen to you must understand you (e.g., Accounting/Taxation/Valuation issues are not easy). Jurors need to understand why you say what you say. You must persuade the jurors that what you say is correct, despite the cross- examination. Source: D.S. Scott and R. Laguzza, “Communication With The Jury,” Litigation Services Handbook, John Wiley, 2001, p
© D.L. Crumbley 233 Why Financial Experts Fail 1.The financial expert does not know the case story (e.g., the strategic messages). 2.Expert never develops home base messages, or develop the wrong ones (short simple messages). 3.Inconsistencies between direct and cross- examination. 4.Unnecessary use of jargon and terms or art. 5.Insufficient meaningful practice. Source: D.S. Scott and R. Laguzza, “Communication With The Jury,” Litigation Services Handbook, John Wiley, 2001, pp and
© D.L. Crumbley 234 Turning Jurors Off Over-rehearsed testimony. Unenthusiastic testimony. No directly examining relevant evidence. Overly technical presentation. Rambling and irrelevant testimony. Mistaken and contradictory testimony. Evasive or combative responses. Indirect eye contact. Ill at ease or nervous. Crossing arms across chest. Drinking a lot of water. Looking toward your attorney for help on cross. Source: Sarah E. Murray, “How Experts Can Win Jurors and Influence Outcome,” NACVA, June 3, 2004.
© D.L. Crumbley 235 Dines’ Potpourri of Advice 1.Read your client-lawyer’s entire case file, including the narrative, thoroughly and as often as necessary to understand all the known facts. Ask for more information from your client-attorney if needed. 2.Prepare a list of questions (with answers) for your attorney that he can ask you during the qualification phase as an expert witness. 3.Address your findings in a professional and business like manner. Be eloquent, clear and precise. Your demeanor should be proper. 4.Obtain a predetermined retainer. Your attorney may request a retainer agreement. This is okay. But get you initial retainer up-front. Remember the slogan of small general stores throughout the country in the late 19 th century: “ Cash makes no enemies.” 5.Never become an advocate or hired gun. Your mission is to determine certain facts within your expertise, and testify about them. That’s all.
© D.L. Crumbley 236 Dines’ Potpourri of Advice 6.Educate your attorney in simple lay terms so that he understands all the aspects of of your testimony related to your expertise. Sure, he may have graduated at the top of his class at Yale or Harvard, but what does he know about intangible assets or retained earnings? 7.Offer suggestions that will help your client-attorney in the trial. 8.Explain whatever test procedures you intend to use. Yes, you’re the expert in these procedures, but the lawyer is the expert in how juries will respond to your explanations. 9.Request additional information that you may need to conduct further research tests in order to formulate your evaluation. Provide your client attorney with an estimate of additional costs, if any. 10.Help your attorney draft interrogatories and interpret those of the opposition.
© D.L. Crumbley 237 Dines’ Potpourri of Advice 11.Help your attorney interpret numbered exhibits and demonstrative evidence and explain how you intend to use them. Also determine the estimated cost of these. 12.Fully review your CV and fee schedule. Be assured the opposing attorney will scrutinize it and attempt to discredit you during the qualifying phase. 13.Request a copy of the complaint, including all of the known evidence pertaining to your expertise, as well as the existing documents and photographs. Be cognizant of the current research and literature pertinent to the case that is available in the field of your expertise. You don’t want to build your opinion on a protocol that has been in use for fifty years-but was discredited within the past ninety years. 14.You should not exaggerate the strengths of the case. Sometimes it is more valuable to point out any weakness and voice more conservative opinions.
© D.L. Crumbley 238 Dines’ Potpourri of Advice 15.Discuss with your attorney any weak (as well as strong) points your opinion may possess, especially if you have not testified before, and how to handle questions relating to it. Have your attorney bring these points out immediately during cross- examination. Although the opposing attorney will doubtless make an issue out of these issues, his attack will have been blunted. 16.Focus on only the scientific, technical, or objective portions of the case. Avoid extraneous or unrelated issues. 17.Practice a mock trial at least once: more is better. You can never practice enough. Your attorneys can save you the embarrassment of not being qualified. Also, this will prevent misunderstanding and any apparent contradictions. 18.Be prepared to attend a settlement or arbitration conference that includes you and the opposing attorneys.
© D.L. Crumbley 239 Dines’ Potpourri of Advice 19.Do not drink any carbonated drinks or alcohol at least twenty-four hours prior to the trial. Drink water without ice at room temperature. Eat light, healthful meals. If you are on medication, explain it to your attorney. 20.Do not be late to court for any reason (outside a terrorist attack). “Stuck in traffic” is not an excuse, nor is “I couldn’t find parking space.” Being on time is one reason you charge by the half-day for your in-court testimony. 21.Your attorney will tell you whether or not you should sit in the spectator section of the court or be sequestered outside the courtroom until you are called to testify. This is determined by the judge. 22.Consider taking as aspirin or diarrhea preventive prior giving a deposition or testifying in open court. 23.Ask your client-attorney which files you should take to court. Keep in mind these files are considered discoverable and must be shown to the
© D.L. Crumbley 240 Dines’ Potpourri of Advice opposing attorney if he requests it. Privileged files should not be taken to court. 24.Before reading from your notes, obtain the judge’s permission. The opposing attorney may raise an objection. 25.You should also take several copies of your CV, and be prepared to provide them to the jurors if requested. 26.Business cards must not be used for solicitation. However, it is generally permissible to give the court reporter one to provide your full name, address, and so forth. 27.When appearing in state or municipal courts, learn beforehand whether or not you will be allowed to take pen and pad with you to the witness stand. (In federal court, you are allowed to take a pen and pad to the witness stand.)
© D.L. Crumbley 241 Dines’ Potpourri of Advice 28.Maintain close contact with your attorney throughout the proceedings as to the status of the case, even though you may not be in court. Your calendar will help him provide dates on which to schedule a deposition or trial appearances. Source: J.E. Dines, Expert Witness Manual, Irvine, CA: Pantex International, 2004, Chapter 14
© D.L. Crumbley 242 Investigative Techniques and Evidence Documentary evidence – written evidence on paper or computer medium. Testimonial evidence – testimony of individuals. Observational evidence – evidence, actions, or observations seen by an investigator. Physical examination of evidence (e.g., counts or inspections). Fixed point observations of activities (e.g., watching a scene and recording). Moving observations. Invigilation – strict temporary controls are imposed so that fraud virtually impossible. Keep detailed records. Covert observations. Forensic document examination. Source: D.R. Carmichael et.al., Fraud Detection, Vol. I, Practitioners Publishing Co., 2002, pp. 3-1 to 3-4
© D.L. Crumbley 243 Evidence Best evidence rule: original documents to be produced rather than secondary evidence (including oral testimony) Many exceptions: Computer print-out – now admissible if a foundation of accuracy is laid. Copies admitted if lost. Generally can get around the best evidence rule. Demonstrative evidence (the chalks) objects – the gun. models. photographs. videos. charts. exhibits Do they have the tendency to “assist the trier of the facts”?
© D.L. Crumbley 244 Authentication Requirement To be admissible as evidence in a legal proceeding, a document or other material usually must be authenticated or identified as to what its proponent claims it to be.
© D.L. Crumbley 245 Authentication Concept Authentication Concept: The writing or object must be proven to be what it purports to be direct testimony / chain of custody. content. other circumstances. e.g., computer records may be used in the courtroom by showing that they were prepared by an accurate process.
© D.L. Crumbley 246 Criminal Proceedings No plaintiff, but a prosecutor. A criminal defendant. Due process is stronger. Burden of proof beyond a reasonable doubt. 4 th Amendment, search and seizures. 5 th Amendment, right against self- incrimination. Obtaining information from defendant more difficult. Case dismissed if prosecutorial misconduct. Double jeopardy applies. Fewer depositions. Original documentation and chain of custody important. Normally jury must be unanimous.
© D.L. Crumbley 247 Motives, Means, and Opportunity “ Motive, means, and opportunity. These facts remain, and we will prove them. And the facts will show that Jennifer Witt killed her husband for five-million dollars--motive. The murder weapon was his own gun, which she and her husband kept in the bedroom of her house--means. She was alone in the house with her husband and son when she turned the gun on them--opportunity. We will prove these beyond a reasonable doubt, and in so doing, will recommend that a person capable of these crimes has forfeited her right to live in our society.” Source: J.T. Lescroart, The 13 th Juror, New York: Dell Publishing, 1994, p. 227
© D.L. Crumbley 248 Criminal Investigations Differ Different mentality – look for the financial evidence to support or refute an allegation. Different skill set (an investigative competency) – inquiring, observant, professional skepticism, and attention to detail. Your job is not to determine guilt or innocence. Strategy – team approach – requires obtaining witnesses, collecting evidence, and proving fraudulent intent. Source: Laura J. East, “The Role of the Forensic Accountants In a Criminal Investigation.” Journal of Forensic Accounting, Vol. IV, 2003, pp
© D.L. Crumbley 249 Common Problems In Criminal Investigation Identifying the criminal activity and the violation. Locating witnesses who have moved. Gaining the cooperation of witnesses. Establishing fraudulent intent. Organizing and maintaining documents and other evidence. Responding to defense motions and anticipating defenses. Completing investigations within the statute of limitations. Investigators and prosecutors being reassigned over the life of the case. Criminals adapting their schemes to new technology. Competing for a prosecutor’s time. Source: Laura J. East, “The Role of the Forensic Accountants In a Criminal Investigations.” Journal of Forensic Accounting.
© D.L. Crumbley 250 Criminal Grand Jury (e.g. Fraud) Arrest or grand jury. 16 – 23 sworn jurors; meet bi-weekly or monthly. Indictment if at least 12 votes (without prosecutor present). Accused has no right to be informed. Have power to accuse, not to convict. Can subpoena witnesses and documents. If accused attends, no right to an attorney. A witness may be compelled to testify under a grant of immunity. If immunized witness refuses, can be found in contempt, jailed. Arraignment: reading of the indictment in open court. Burden of proof much higher: beyond a reasonable doubt. Innocent until proven guilty (U.S. constitution).
© D.L. Crumbley 251 Criminal Expert’s Report After a suspect has been indicted but before the trail, an expert testifying in a criminal trial may be asked to prepare a written summary of the testimony expected to be given. Under Federal Rule of Criminal Procedures 16(a)(1)(E), a defendant has a right to request that the government provide a written summary of the testimony expected to be given by the government’s expert if prepared, the government’s summary report should include the information listed above. Once the government provides the defendant with this summary information, the government is entitled under Rule of Criminal Procedures 16(b)(1)( C ) to reciprocal discovery of the same information from the defendant’s expert.
© D.L. Crumbley 252 Rule 26 Ramification Dear Dr. If, hypothetically, I was engaged as an expert witness by an attorney in connection with “undesirables” let’s say, for example, drug dealers and I gave expert testimony. Would the fact that I was associated with such people be a reason the opposing counsel or trier of fact might use to have me dismissed as an expert witness in future cases? I believe that under Rule 26 I must indicate the cases I have served on as an expert witness. If there are negative ramifications, that is certainly something I wish to avoid. Will the court or anyone else hold the above hypothetical example against me in any way? Thank you for your attention in this important matter.
© D.L. Crumbley 253 Administrative Proceedings May have own particular procedures. Broad standard of procedural due process. Technical rules of evidence may not apply. Procedural formality may be missing. Prosecution and judicial function may be the same. But be prepared to document and support your opinion. Often no formal appeal from an administrative decision. Therefore, must file a separate pleading to obtain a judicial review (e.g., writ of mandamus or writ of review).
© D.L. Crumbley 254 AICPA Consulting Aids AICPA Consulting Services Report 93-1 (superseded by AICPA Consulting Services Special Report 03-1, March 2003) AICPA Consulting Services Special Report 93-2 CPA serving as an expert witness for a client is not an advocate. Trier of fact. AICPA Consulting Services Practice Aid 95-2 If a CPA acts as an expert witness, engagement letter discoverable. Detailed engagement letter can be a roadmap for opposing attorney. May wish to restrict services to a broad statement. CPA work product not protected.
© D.L. Crumbley 255 AICPA Consulting Aids AICPA Consulting Services Report Practice Aid 96-3 Minimum elements to be included in your report. Table of contents, executive summary,introduction and background, objectives of the engagement, assumptions, and references. Does not require a report. Sampling less useful for off-the-book fraud. AICPA Consulting Services Report Practice Aid 97-1 List of selected badges of fraud. Description of fraud schemes. Legal references. Illustrative engagement letter scope paragraph. A short letter or memorandum. Statement of prediction, list of interviews conducted, and summary of interview information. Avoid stating any conclusions about the presence and absence of fraud. Avoid editorial content or judgments. Opinion on guilt or innocence left to judge or jury. (CFE has similar directive).
© D.L. Crumbley 256 AICPA Consulting Aids Statement on Standards for Consulting Services No.1 – Consulting Services Definitions and Standards. These standards apply. Professional competence. Due professional care. Planning and supervision. Sufficient relevant data. Client interest. Understanding with client. Communication with the client.
© D.L. Crumbley 257 EXPOSURE DRAFT STATEMENT ON RESPONSIBILITIES FOR LITIGATION SERVICES NO. 1 December 1, 2001 Prepared by Litigation and Dispute Resolution Subcommittee Statement on Responsibilities Task Force Comments should be received by January 31, 2002, and addressed to Anat Kendal, Director, Member Innovation— Financial Planning, Harborside Financial Center, 201 Plaza Three, Jersey City, NJ or via the Internet to
© D.L. Crumbley 258 Litigation Services Consulting services that involve pending or potential formal legal or regulatory proceedings before a trier of fact in connection with the resolution of a dispute between two or more parties. A trier of fact is a court, regulatory body, or government authority; their agents; a grand jury; or an arbitrator or mediator of a dispute. Roles of Litigation Services Practitioner Expert witness Consultant Other
© D.L. Crumbley 259 Litigation Services Practitioner Products and Services Computation Consulting Business valuations Proactive and reactive fraud investigation Pre- and post-bankruptcy restructuring, solvency analysis, and liquidation consulting Special accountings, tracings, reconstructions, and cash flow analysis Source: AICPA Proposed Statement on Responsibilities for Litigation Services No. 1, December 1, 2001.
© D.L. Crumbley 260 Litigation Services Practitioner Products and Services (contd …) Tax issues assessment and analysis Marital dissolution’s assessment and analysis Contract costs and claims assessment and analysis Historical results assessment and analysis Antitrust and other business combinations assessment and analysis Construction and environmental disputes assessment and analysis Business interruption and other insurance claims assessment and analysis Source: AICPA Proposed Statement on Responsibilities for Litigation Services No. 1, December 1, 2001.
© D.L. Crumbley 261 Tasks of the Litigation Services Practitioner Issue identification Locating other experts Fact-finding Analysis Discovery assistance Document management Settlement assistance Expert testimony Trial and deposition assistance Post-trial support (for example, accounting services, and funds administration) Negotiations Arbitration Mediation Training Source: AICPA Proposed Statement on Responsibilities for Litigation Services No. 1, December 1, 2001.
© D.L. Crumbley 262 Three guidelines for admissibility of expert testimony a.The testimony should assist the trier of fact to understand the evidence or to determine a fact in issue. b.The expert should have some minimum qualifications, which would include one or more of the following: –Special knowledge –Special skills –Special experience –Special training –Special education c.In addition, before providing testimony, the expert would have to show that the testimony (a) is based upon sufficient reliable facts or data, (b) is the product of reliable principles and methods, and (c) is the result of the application of established principles and methods to the facts in the case. The reliability standards set for expert testimony are based on three pillars: (a) reliable data, (b) a reliable methodology, and (c) the reliable application of the methodology. Source: AICPA Proposed Statement on Responsibilities for Litigation Services No. 1, December 1, 2001.
© D.L. Crumbley 263 Pyramid of Standards and Responsibilities Source: AICPA Proposed Statement on Responsibilities for Litigation Services No. 1, December 1, 2001.
© D.L. Crumbley 264 Testimony Pyramid Expert testimony must be based upon sufficient facts or data, be the product of reliable principles and methods, and the principles and methods must be reliably applied to the facts of the case. Source: AICPA Proposed Statement on Responsibilities for Litigation Services No. 1, December 1, 2001.
© D.L. Crumbley 265 Professional Responsibility AICPA Standards Code of Professional Conduct Rule 102: Objectivity and integrity 1.Conflict of interests expert accepts work against the interest of an existing client. make conflict search of names before receiving confidential information. 2.Objectivity and subordinating judgment make sure your opinion is your opinion. expected to defend your position avoid allowing opposing attorney to put words in your mouth. Rule 201 – General Standards professional competence due professional care. adequate planning/supervision of services sufficient relevant data. Rule 202 – Technical Standards. Rule 203 – Accounting principles Rule 301 – Confidential client communication Rule 302 – Contingent fees if contingent, can not be objective.
© D.L. Crumbley 266 Understanding With The Attorney a.Identification of the attorney’s client b.The title of the litigation, including the litigants’ names, the court, and docket number c.A description of the nature of the litigation services to be provided or a statement that the services will be as the attorney may direct d.An identification of the expert witness or the willingness of the person who will be the expert witness if necessary e.Reference to the absence or existence of conflicts of interest f.The absence or existence of the attorney’s work product privilege g.Restrictions of the use or exposure of the CPA’s work h.The CPA’s right to withdraw from and terminate the engagement in certain circumstances Source: AICPA Proposed Statement on Responsibilities for Litigation Services No. 1, December 1, 2001.
© D.L. Crumbley 267 Cash Receipts Statement? Beginning Balance $268,439Money Distributed to Investors $2,281,255 Money Raised From Investors 6,704,320Employees / Principals / Overhead $2,332,066 Oil and Gas Production 394,575Oil Field Operations $1,616,000 Other194,575Attorney’s Fees Other 1,027, ,626 $145,978 The receiver, Thomas F. Lennon, hired a CPA, William Ling, from San Diego. The receiver’s November 6, 1997 “cash receipt statement” prepared by Mr. Ling appeared as follows:
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