Forensic and Investigative Accounting Chapter 8 Litigation Services Provided by Accountants © 2009 CCH. All Rights Reserved W. Peterson Ave. Chicago, IL

Chapter 8Forensic and Investigative Accounting2 Litigation in the United States The U.S. tort system cost $252 billion in 2007, which was $835 per U.S. citizen ($12 in 1950). Medical malpractice costs totaled nearly $30.3 billion in 2006, or about $101 per person (compared to $5 per person in 1975). Some of these costs are expert witnessing fees. (continued on next slide)

Chapter 8Forensic and Investigative Accounting3 Litigation in the United States The five major phases of litigation are: Pleadings. Pleadings. Discovery. Discovery. Trial. Trial. Outcome. Outcome. Possible appeal. Possible appeal. Much of the work for forensic accountants occurs in the discovery stage.

Chapter 8Forensic and Investigative Accounting4 Forensic Report

Chapter 8Forensic and Investigative Accounting5 Body of rules and practices by which justice is handed out by the legal system. 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

Chapter 8Forensic and Investigative Accounting6 Types of Litigation Services Provided by Accountants Consultant Consultant Expert witness Expert witness Court-appointed experts and special masters Court-appointed experts and special masters

Chapter 8Forensic and Investigative Accounting7 Standards of Conduct for Performing Litigation Services Knowledge, skills, experience, training, and education. Knowledge, skills, experience, training, and education. Professional codes of conduct. Professional codes of conduct. Conflicts of interest. Conflicts of interest. Written agreement to perform litigation services. Written agreement to perform litigation services.

Chapter 8Forensic and Investigative Accounting8 Expert vs. Lay Witnesses A lay (or fact) witness testifies as to facts. A lay (or fact) witness testifies as to facts. An expert witness is an individual who, because of specialized training or experience, is allowed to testify in court to help the judge or jurors understand complicated and technical subjects. An expert witness is an individual who, because of specialized training or experience, is allowed to testify in court to help the judge or jurors understand complicated and technical subjects.

Chapter 8Forensic and Investigative Accounting9 Qualifying as an Expert Witness Under the 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. (continued on next slide)

Chapter 8Forensic and Investigative Accounting10 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 expert 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. (continued on next slide)

Chapter 8Forensic and Investigative Accounting11 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. (continued on next slide)

Chapter 8Forensic and Investigative Accounting12 Qualifying as an Expert Witness In Daubert, the U.S. Supreme Court suggested that judges consider the following factors: –Whether the theory or technique in question can be (and has been) tested. –Whether the theory or technique in question has been subjected to peer review and publication. –The theory or technique’s known or potential error rate. –Whether the theory or technique has attracted widespread acceptance within the relevant community. (continued on next slide)

Chapter 8Forensic and Investigative Accounting13 Qualifying as an Expert Witness Figlewicz and Sprohge in their article, “The CPA’s Expert Witness Role in Litigation Services: A Maze of Legal and Accounting Standards,” offer ten guidelines to help avoid 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. (continued on next slide)

Chapter 8Forensic and Investigative Accounting14 Qualifying as an Expert Witness 5.Use generally accepted analytical methods. 6.Use multiple analytical methods. 7.Synthesize 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 conclusions—for reasonableness.

Chapter 8Forensic and Investigative Accounting15 Preparing to Testify as an Expert Witness Maintaining independence from the client. Maintaining independence from the client. Evidence upon which experts may rely. Evidence upon which experts may rely. Use of confidential client information. Use of confidential client information. Expert reports. Expert reports. Working papers. Working papers. Evaluation of other experts. Evaluation of other experts. Exhibits and other demonstrative evidence. Exhibits and other demonstrative evidence.

Chapter 8Forensic and Investigative Accounting16 Testifying at a Deposition The scope of their assignment. The scope of their assignment. Their current employment (job title, duties). Their current employment (job title, duties). Their educational background. Their educational background. Licenses. Licenses. Work experience. Work experience. Memberships in professional organizations. Memberships in professional organizations. (continued on next slide) Expert witnesses can expect to be asked about the following at a deposition:

Chapter 8Forensic and Investigative Accounting17 Testifying at a Deposition Publication and lectures. Publication and lectures. Fields in which they are qualified as an expert. Fields in which they are qualified as an expert. Other work they have performed as an expert or other litigation consultant. 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 compensation they are receiving (and what percentage of their compensation is derived from testifying as an expert witness). What opinions they have formed. What opinions they have formed. The bases for their opinions. The bases for their opinions. Almost anything. Almost anything.

Chapter 8Forensic and Investigative Accounting18 Cross Examination Tactics  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. (continued on next slide)

Chapter 8Forensic and Investigative Accounting19 Cross Examination Tactics  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.

Chapter 8Forensic and Investigative Accounting20 Testifying at Trial According to Bursztajn and Brodsky in their article, “Ethical and Effective Testimony During Direct Examination and Cross-Examination Post-Daubert,” the following should be the primary goals of an expert witness: –To communicate the truth to the jury in an ethical, objective, and effective way. –To maintain your autonomy, authenticity, and integrity. –To uphold the values of your profession. (continued on next slide)

Chapter 8Forensic and Investigative Accounting21 Testifying at Trial –To interact with attorneys and with the judge and jury in an atmosphere of mutual respect. –To engage in an ongoing dialogue with your attorney so that, together, you can educate as well as learn from the judge and jury as to what questions each may have. –To speak directly to the issues. –To make complex matters understandable without oversimplifying.

Chapter 8Forensic and Investigative Accounting22 Liability of Expert Witnesses Witness immunity Witness immunity –Threat of lawsuit –Claims of negligence Bases for liability Bases for liability –Breach of contract –Negligence –Criminal process

Chapter 8Forensic and Investigative Accounting23 Searchable Databases of Daubert Decisions 1. Daubert Tracker (launched August 2002) 570 accounting decisions (mid-July 2006).570 accounting decisions (mid-July 2006). 314 accounting experts admitted, 203 denied, 53 admitted/denied in part.314 accounting experts admitted, 203 denied, 53 admitted/denied in part. 55%, 36%, and 9.3% ratios55%, 36%, and 9.3% ratios 14,000 trial and appellate opinions.14,000 trial and appellate opinions. 21,000 expert reports.21,000 expert reports. Composed of five distinct services.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. A year subscription is $295.

Chapter 8Forensic and Investigative Accounting24 Daubert

Chapter 8Forensic and Investigative Accounting25 Searchable Databases of Daubert Decisions 2. “Daubert on the Web” Online free tracking service.Online free tracking service. In July, 2009, 87 cases were under the field “Accountants and Economists” with an admissibility rate of.598.In July, 2009, 87 cases were under the field “Accountants and Economists” with an admissibility rate of.598. There are a total of 25 fields with various “admissibility rate,” such asThere are a total of 25 fields with various “admissibility rate,” such as Appraisers0.800 Computer experts, Criminologists,0.847 Marketing experts,0.333 Polygraphers,0.121 Statisticians,0.625 In Louisiana, there have been at least 33 Daubert challenges with a 60% admission rate.

Chapter 8Forensic and Investigative Accounting26 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.

Chapter 8Forensic and Investigative Accounting27 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.

Chapter 8Forensic and Investigative Accounting28 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.