Forensic and Investigative Accounting Evidence: Litigation Services and the Accountant C Delano Gray

2 Litigation Services and the Accountants Consultant Consultant Expert witness Expert witness Court-appointed experts and special masters Court-appointed experts and special masters

3 Accountants and Evidence. First: What to Know about evidence

Persuasiveness of Evidence Competence Sufficiency Persuasiveness and cost

5 Competence Relevance Independence of provider Effectiveness of internal controls Auditor’s direct knowledge Qualifications of provider Objectivity of evidence Timeliness

6 Accountants use ofEvidence in auditing in auditing

7 Types of Audit Evidence 1. Physical evidence 2. Confirmation 3. Documentation 4. Analytical procedures 5. Inquiries of the client 6. Reperformance 7. Observation

Relationships Types of evidence Auditprocedures Items to select Specific instructions SamplesizeTiming of tests

9 Now

10 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

11 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.

12 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

13 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

14 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.

15 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’s or technique’s known or potential error rate –Whether the theory or technique has attracted widespread acceptance within the relevant community

16 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)

17 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

18 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

19 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:

20 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

21 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)

22 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

23 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

Forensic and Investigative Accounting Proper Evidence Management

25 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.

26 What Is Evidence? Evidence is testimony, writings, and material objects offered to prove an alleged fact or proposition. 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. Direct evidence is evidence that directly proves a fact at issue, without the need for any inference or presumption. Circumstantial evidence is evidence from which a fact at issue may be proved indirectly. Circumstantial evidence is evidence from which a fact at issue may be proved indirectly.

27 Relevance Requirement Circumstantial evidence Circumstantial evidence Inflammatory evidence Inflammatory evidence Evidence about plaintiff’s character Evidence about plaintiff’s character Evidence of habit Evidence of habit Exclusionary rules Exclusionary rules Evidence of liability Evidence of liability

28 Privileged Communications Attorney-client privilege Attorney-client privilege –Employee communications –Work product rule –Attorney-requested accounting work Medical privilege Medical privilege Spousal privilege Spousal privilege Other types Other types –Religious –Governmental

29 Hearsay Rule Hearsay is an oral or written assertion, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted. Hearsay is an oral or written assertion, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted. As a general rule, hearsay is not admissible as evidence in a legal proceeding. As a general rule, hearsay is not admissible as evidence in a legal proceeding.

30 Hearsay Rule In some situations a statement that appears to be hearsay is offered to prove a fact other than the matter asserted: –Legally operative fact: That the Declarant made a statement, not if the statement is true –Effect on the listener: –State of mind of the declarant –Impeachment

31 Hearsay Rule There are three concepts underlying the exceptions to the general rule barring hearsay: –Trustworthiness –Unavailability of the declarant –Practical considerations

32 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.

33 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.

34 Demonstrative Evidence Demonstrative evidence is an item that illustrates testimony but has no probative value in itself (such as a chart, diagram, photograph, video, or model).

35 Special Rules Criminal cases Criminal cases Administrative proceedings Administrative proceedings –Tone of the proceedings –Residuum rule

36 Residuum Rule The residuum rule is that no finding may be supported solely by hearsay evidence.

37 Maximizing Client Confidentiality Michael Mostek, in Expert Witnessing in Forensic Accounting, provides the following advice for protecting the work product privilege: –The attorney should directly retain the consultant. –The agreement should be between attorney and expert. –The expert should obtain facts through, or at the direction of, the attorney. –The investigation should be done at the direction of the attorney. –The attorney should be present when the consultant meets with the client.

38 AICPA Top Technologies Task Force The task force found the following top ten technologies for 2002 in descending order of importance: 1.Business and financial reporting applications 2.Training and technology competency 3.Information security and controls 4.Quality of service

39 AICPA Top Technologies Task Force 5.Disaster recovery (includes business continuation and contingency planning) 6.Communication technologies bandwidth 7.Remote connectivity tools 8.Web-based and web-enabled applications (Internet) 9.Qualified IT personnel 10.Messaging applications ( , faxing, voic , instant messaging)

40 Using Technology to Gather Evidence Drill-down functionality Drill-down functionality Electronic imaging Electronic imaging Digital Analysis Tests and Statistics (DATAS) Digital Analysis Tests and Statistics (DATAS) Data warehousing/mining Data warehousing/mining

41 Computer Evidence Protecting data in hardware seizures Protecting data in hardware seizures Insidious s Insidious s Documenting computer evidence Documenting computer evidence

42 Evidence Management Do not mark, staple, or otherwise alter any documents or other evidence that might find its way into court Do not mark, staple, or otherwise alter any documents or other evidence that might find its way into court Record how the documents were obtained and who has handled it Record how the documents were obtained and who has handled it Use see-through holders to avoid putting fingerprints on documents Use see-through holders to avoid putting fingerprints on documents

43 Evidence Management Store original documents and working papers in fireproof safes or locked cabinets Store original documents and working papers in fireproof safes or locked cabinets Protect material stored on a computer with a password Protect material stored on a computer with a password Make backup copies on a regular basis and store in a separate location Make backup copies on a regular basis and store in a separate location Copy, inventory and index evidence so that it can be readily found when needed Copy, inventory and index evidence so that it can be readily found when needed

Forensic and Investigative Accounting Litigation Support in Some Special Situations

45 Antitrust Laws Antitrust laws are an outgrowth of the early years of the Industrial Age in the United States when a small number of powerful businessmen used any tactic at their disposal to force competitors out of business. Because such business practices were not in the best interest of the country, federal legislation was passed that prohibits the formation and continuation of monopolies except when in the best interest of the public.

46 Role of Accountants in Antitrust Litigation Accountants may be called upon to determine whether there is liability under the antitrust laws. The primary issue that forensic accountants address is whether the defendant has engaged in predatory pricing.

47 Predatory Pricing Predatory pricing is the act of pricing a product so low that the only logical explanation is that the pricing is designed to drive competitors out of business. Predatory pricing is the act of pricing a product so low that the only logical explanation is that the pricing is designed to drive competitors out of business. The operational definition is whether a company prices its products or services below “average variable cost” and, if so, predatory pricing is present. The operational definition is whether a company prices its products or services below “average variable cost” and, if so, predatory pricing is present.

48 Federal False Claims Act The Federal False Claims Act was passed to protect the government from the unscrupulous acts of a few government contractors that intentionally or carelessly overcharge the government for goods or services.

49 Accountant’s Role in Federal False Claims Act Litigation Typical questions that accountants help courts to answer are: –What costs should be included in the contract? –How should costs be measured under the contract? –What is the correct timing of the costs and/or revenues under the contract? –What accounting concepts, rules, etc., apply under this contract? –What is the magnitude of the damages that occurred because of the fraud that took place?

50 Accountant’s Role in Federal False Claims Act Litigation Under the Federal False Claims Act, a person acts knowingly with respect to information if the person has: –Actual knowledge of information –Acts in deliberate ignorance of the truth or falsity of the information –Acts in reckless disregard of the truth or falsity of the information

51 The End Questions??????Thanks