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40 Carbon[1] - Working on the Accounting Malpractice Case...

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Unformatted text preview: Working on the Accounting Malpractice Case as an Expert for the Plaintiff and Defendant Paul Carbon Comments and opinions expressed by the speaker do not necessarily reflect the positions, opinions or beliefs of the AICPA and should not be construed or interpreted as such. Speakers retain the copyright for all of the following materials. Any replication without written consent is unlawful. Session 40 AICPA NATIONAL FORENSIC ACCOUNTING CONFERENCE AICPA National Forensic Accounting Conference September 23 - 25, 2009 Walt Disney World Swan, Lake Buena Vista (Orlando), Florida WORKING ON THE ACCOUNTING MALPRACTICE CASE AS AN EXPERT FOR THE PLAINTIFF OR THE DEFENDANT. Paul A. Carbon, Esq.1 Margolis Edelstein I. INTRODUCTION. Accounting experts play a vital role in accounting malpractice cases. Indeed, because of the nature of accounting and auditing standards, it is almost impossible to present an accounting malpractice case without introducing expert testimony. This article discusses the role of the expert in accounting malpractice cases, the more common theories of liability in accounting malpractice cases requiring expert evidence,2 guidance on qualifying as an expert witness in accounting malpractice cases, and practical tips for the preparation of expert reports and preparing for and providing deposition and trial testimony. 1 Mr. Carbon is a Partner with the law firm of Margolis Edelstein, in its Berkeley Heights, New Jersey office, concentrating in the areas of professional liability claims, with particular emphasis on accounting, legal, and insurance agents and brokers liability claims and risk management, complex commercial litigation, class action and mass tort litigation, estate and trust litigation and mergers and acquisitions. In the area of accountants’ liability, Mr. Carbon is frequently called upon by insurers and accountants to defend claims in state and federal courts, including claims by bankruptcy trustees and creditors, stemming from improper tax advice and tax preparation services, negligent auditing, review and compilation services, securities class action and minority shareholder claims, failure to detect fraud and other defalcations, deepening insolvency claims, improper valuation services, conflict of interest and other ethical violation claims. Mr. Carbon has also represented accountants in investigations by federal, state and local agencies, including the Securities and Exchange Commission, the Federal Bureau of Investigation, the Internal Revenue Service, the U.S. Commodity Futures Trading Commission and the New Jersey State Board of Accountancy. Mr. Carbon is frequently called upon to provide pre-litigation risk management services to insurers and accountants, including claims handling assistance and public and private subpoena response and risk management services. Mr. Carbon is also general counsel to several accounting firms, providing advice on quality control training and manuals, employment liability and general risk management. 2 Excluded from the scope of this article is a discussion of the need and use of expert evidence in common law fraud claims, securities fraud claims, and breach of fiduciary duty claims. 1 II. THE ROLE OF THE ACCOUNTING EXPERT IN ACCOUNTING MALPRACTICE CASES. Generally, the expert accountant will be retained to act as either an expert consultant or an expert testifying witness. An expert consultant is often retained by the plaintiff’s counsel before the case is filed to assist with evaluating the merits of the claim against the defendant accountant and may be called upon to assist counsel in preparing the Complaint in such a manner as to overcome a defense motion to dismiss the pleadings for failure to state a cause of action or not containing sufficient specificity to prove the claim pursuant to the particular jurisdiction’s local rules. The expert consultant will usually continue to assist plaintiff’s counsel in developing areas of discovery and an overall discovery plan to develop the facts and evidence sufficient to prove the claims asserted, including assisting counsel with deposing or cross examining a fact witness and the opposing experts. Defense counsel may retain an expert consultant before the institution of the lawsuit if there was pre-litigation claim communication seeking to resolve the claim without litigation. Certain claims relating to negligent attestations services, tax advice and tax return positions are so technical that in order to properly assess the viability of the claims asserted, and develop all available defenses thereto, an expert consultant’s services are necessary to understand the applicable accounting, audit and/or tax standard, whether there was a violation of the applicable standard of care and whether there are any defenses to the claims. However, more often, an expert consultant will be retained by defense counsel after the lawsuit has been filed to assist counsel in understanding and developing the technical accounting related defenses to the claims asserted and, similar to the retention by plaintiff’s counsel, assist defense counsel in 2 developing a discovery plan to develop the defenses to the claims, including assisting with deposing and cross examining fact witnesses and opposing experts. An expert consultant is usually retained as an agent of the attorney and communications between the expert consultant, the attorney and the client are usually protected from disclosure on the basis of the attorney-client privilege pursuant to United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).3 If the expert consultant is later retained as a testifying expert in the case, the communications between the expert, the client and counsel and the expert consultant’s work product is likely to be discoverable. For that reason, counsel may retain a separate expert to act as the testifying expert in the case. Depending on the complexity of the case and the technical accounting claims and issues involved, a testifying expert may be retained by counsel early in the factual discovery phase of the case, if not before, so that the testifying expert witness is educated on the facts pertinent to his or her opinion as they are developed. However, it is not uncommon for the testifying expert witness to be engaged by counsel or the client toward the end of factual discovery or after the close of factual discovery when faced with a deadline for submission of expert reports. All too often counsel will seek the assistance of a testifying expert witness at the eleventh hour, providing the expert with very limited time to review the claims, relevant records and evidence and issue a written 3 See also Federal Trade Commission v. TRW, Inc., 628 F.2d 207, 212 (D.C.Cir. 1980)(“the attorney-client privilege can attach to reports of third parties made at the request of the attorney or the client where the purpose of the report was to put in useable form information obtained from the client.”). However, note that the privilege can be waived where the third party to whom disclosure is made is not aligned in interest with the disclosing party or does not have litigation objectives in common. See e.g., Medinol , Ltd. V. Boston Scientific Corp., 214 F.R.D. 113, 115 (S.D.N.Y. 2002)(Citing Verschoth v. Time Warner, 2001 WL 546630, at 4 (S.D.N.Y. May 22, 2001). 3 report.4 For that reason, the prudent expert witness will inquire about the deadline for his or her opinion or written report and assess the volume of records and evidence that must be reviewed prior to agreeing to the engagement to determine whether a proper and timely expert evaluation can be accomplished. Some jurisdictions require that, in particular types of professional liability cases, a plaintiff file a certificate of review or affidavit by an appropriately licensed person opining that the conduct or omission of the defendant fell below accepted standards of the profession and provide for dismissal of the claims where the certificate or affidavit is not filed or served.5 Usually, the certificate or affidavit must be filed or served at the early stages of the lawsuit. As such, in those jurisdictions, plaintiff’s counsel is more likely to retain a testifying expert early in the case, not only to assist in developing a litigation plan, but also to comply with the statutory requirement of the certificate or affidavit. The testifying expert witness, whether testifying on behalf of the plaintiff or the defendant, is usually instrumental in assisting counsel to formulate specific areas of inquiry to address with the opposing expert witness, either at pre-trial deposition or trial, and assist counsel in properly framing questions that go to the technical aspects of the engagement that is the subject of the lawsuit. Counsel will collaborate with the testifying expert to timely serve his or her expert report, if one is required in the particular jurisdiction, within the court-ordered deadlines, dates stipulated by the parties or after the factual record has been sufficiently 4 Not all jurisdictions require submission of a written expert report. See discussion at Section V. and footnote 54, infra. The expert witness should consult with counsel retaining him or her on the rule in the particular jurisdiction. 5 The jurisdictions include Arizona, Colorado, Georgia, Louisiana, Minnesota, New Jersey, Pennsylvania and South Carolina. 4 developed. The testifying expert may thereafter be interrogated under oath by counsel for the adverse party in what is commonly known as a discovery deposition. The purpose of the discovery deposition is to fully understand the expert’s methodology, opinions and conclusions and discover the facts and treatises relied upon by the expert, as well as, the expert’s education and experience to assess whether the witness is sufficiently qualified to testify as an expert witness. If there is a challenge to the qualifications of the expert and/or the admissibility of his or her expert opinion, counsel will petition the court prior to the start of trial and the court will decide the issue, usually after hearing testimony from the expert on his or her qualifications, methodologies and opinions. Assuming the witness is deemed qualified to testify as an expert on a particular subject, the expert will be called to testify on behalf of the party who engage him or her and may be cross-examined by opposing counsel. III. COMMON THEORIES OF LIABILITY IN ACCOUNTING MALPRACTICE CASES REQUIRING EXPERT EVIDENCE.6 The type of claim most frequently asserted against an accountant, and the one in which most often expert evidence is required, is a common law negligence claim. A common law negligence claim requires plaintiff to prove that the accountant owed the plaintiff a duty of care, failed to conduct his or her engagement in accordance with applicable professional standards and such failure caused the plaintiff's injury. Negligence claims against accountants can be based upon several different theories, including (1) professional malpractice by the accountant, (2) failure to inform 6 See footnote 2, supra, for limitations on scope of discussion. 5 the client of information discovered by the accountant, and (3) negligent misrepresentation by the accountant. 7 A professional malpractice claim involves an allegation by a client that the accountant failed to perform his or her services in accordance with the applicable professional standard of care. Many activities by accountants have the potential to be the bases of malpractice claims, including: (1) negligence during an audit that results in a failure to discover embezzlement or the underaccrual of taxes; (2) negligent advice regarding legal, tax, or investment matters; and (3) negligence in the filing or preparation of tax documents, leading to the loss of tax benefits or the imposition of penalties.8 The second type of negligence claim involves an allegation that the accountant failed to inform the client of information discovered by the accountant in the course of performing his or her services, such as unexplained irregularities which are signs of defalcations. This type of claim is likely to arise where the accountant is engaged to perform unaudited services for the client, such as compilation and review of engagements and tax preparation services.9 A third type of negligence claim alleges that the accountant made a negligent misrepresentation that was relied upon by the plaintiff. This type of claim is likely to be made by a person who is not the client of the accountant or, in other words, who is not 7 Dan L. Goldwasser, N. Thomas Arnold, John H. Eickemeyer, Accountants Liability, Practicing Law Institute, § 4:1.2 (Release No. 11, November 2008). 8 Id. 9 Id. at § 4:2.2. 6 in privity of contract with the accountant.10 This type of claim is commonly asserted in connection with representations made by the accountant in an audit opinion. 11 In some cases, plaintiffs assert claims against accountants on a breach of contract theory in an effort to impose greater responsibilities on the defendant accounting firm or to avoid a comparative negligence defense, often a significant defense in negligence actions.12 In a breach of contract claim, the plaintiff need only establish that the accounting firm undertook to perform professional services in accordance with professional standards, that it failed to do so, and that the failure resulted in damages to the plaintiff. Many states, however, do not recognize a separate cause of action against professionals based upon a breach of contract theory and require that such claims be brought in the form of negligence or tort actions.13 Therefore, whether couched as a negligence cause of action or a breach of contract claim, a plaintiff will require expert evidence in order to prove the professional standards 10 Id. at § 4:1.2. 11 I d. 12 While the trend in the law is to permit an accountant to raise the defense of contributory negligence against a client, some courts have limited the availability of the defense in situations where the accountant has clearly contracted to discovery defalcations or have limited the defense to negligence which actually contributes to the accountant’s failure to perform his or her duties. Id. at § 4:3.2[B] 13 Id. at § 1:4.2 (Citing FDIC v. Ernst & Young, 967 F. 2d 166, 172 (5th Cir.) (contract claim merely asserts that auditors violated its common-law duty of care, which is a tort claim under Texas law), reh'g en banc denied, 976 F. 2d 731 (1992); Clark v. Milam, 847 F. Supp. 409, 420-21 (SD W Va. 1994) (applying West Virginia law), aff'd 139 F. 3d 888 (4th Cir. 1998); Askanase v. Fatjo, 828 F. Supp. 465, 469 (SD Tex. 1993) (applying Texas law; complaint stated claim in tort); Robertson v. White, 633 F. Supp. 954, 972-74 (W.D. Ark. 1986) (applying Arkansas law; stating that majority rule and better rule was that claim sounded only in tort); Baehr v. Touche Ross & Co., 62 B.R. 793, 797 (E.D. Pa 1986) (applying Pennsylvania law; rejecting argument that contract statute of limitations should apply to claim for professional malpractice because the claim arose from a contractual relationship); Thomas v. Cleary, 768 P. 2d 1090, 1092 n. 6 (Alaska 1989) (gravamen of complaint lies in tort and not in contract); Sato v. Van Denburgh, 123 Ariz. 225, 599 P. 2d 181, 183 (1979) (complaint sounds in tort); Brueck v. Krings, 230 Kan. 466, 638 P. 2d 904, 907 (1982); Philpott v. Ernst & Whinney, No. 61203, 1992 WL 357250 (Ohio Ct. App., Nov. 25, 1992) (refusing to allow professional malpractice claims to be transformed into contract claims for purposes of statute of limitations), jurisdictional motion overruled, 66 Ohio St. 3d 1460, 610 N.E. 2d 423 (1993)). 7 that the accountant should have adhered to in connection with the services rendered and how the failure to perform to the minimum requirements of such professional standards caused the plaintiff's claimed damages. To recover against an accountant in a negligence case, the plaintiff must prove (1) the duty owed to the plaintiff, (2) the breach of that duty, (3) factual causation (4) proximate causation and (5) damages.14 In outlining the elements of an accounting malpractice claim, courts often join the factual and proximate causation elements into a requirement that the breach "caused injury" to the plaintiff15 or that the breach of the duty owed was a "substantial factor" in causing injury to the plaintiff. 16 In determining the nature of the duty owed by accountants, the standard of care applicable to accountants is the same as that applied to other professional persons who render skilled services for compensation.17 An accountant has a duty to use the skill and knowledge normally possessed by an accountant in good standing in a similar community.18 The standard of skill and knowledge required is not that of the best 14 Id. at §4:2 (Citing Olson, Clough & Straumann, CPAs v. Trayne Props., Inc., 392 N.W. 2d 2, 4 (Minn. Ct. App. 1986); E.F. Hutton Mortgage Corp. v. Pappas, 690 F. Supp. 1465, 1470 (D. Md. 1988) (giving elements of negligence actions); Linck v. Barokas & Martin, 667 P. 2d 171, 173 n. 4 (Alaska 1983) (giving elements of cause of action for professional negligence). 15 Carroll v. LeBoeuf, Lamb, Green & MacRae, L.L.P., 392 F. Supp. 2d 621, 625 (S.D.N.Y. 2005). 16 Comeau v. Rupp, 810 F. Supp. 1127, 1143 (D. Kan. 1992); PNC Bank, Kentucky Inc. v. Housing Mortg. Corp.; 899 F. Supp. 1399, 1403 (W.D. Pa 1994). 17 Dan L. Goldwasser, N. Thomas Aronld, John H. Eickemeyer; Accountant’s Liability, Practicing Law Institute § 4:2-2 (Release No. 11, November 2008) (Citing Restatement (Second) of Torts § 299 A cmt. b (1965), Gantt v. Boone, Wellford, Clark, Langschmidt & Pemberton, 559 F. Supp. 1219, 1227 (MD La. 1983) (applying Louisiana law), aff'd 742 F. 2d 1451 (5th Cir. 1984); Vernon J. Rockler & Co. v. Glickman, Isenberg, Lurie & Co., 273 N.W. 2d 647, 650 (Minn. 1978); Richard v. Staehle, 70 Ohio App. 2d 93, 434 N.E. 2d 1379, 1385 (1980); Robert Wooler Co. v. Fid. Bank, 330 Pa. Super. 523, 479 A. 2d 1027, 1031 (1984); Kemmerlin v. Winngate, 274 S.C. 62, 261 S.E. 2d 50, 51 (1979). 18 Id. Restatement (Second) of Torts § 299A (1965); Richard v. Staehle, 70 Ohio App. 2d 93, 434 N.E. 2d 1379, 1385 (1980). 8 members of the accounting profession. Rather, it is essentially a standard of reasonable competence19 or, in other words, that which is commonly possessed by members in good standing of the accounting profession.20 Thus, an accountant does 21 not guarantee correct judgment or infallibility. An accountant will be held to a higher level of duty where he or she in fact has greater skill or knowledge than that which is commonly possessed by members of the accounting profession or where he or she represents to the client that he or she has superior skill or knowledge beyond that which is commonly possessed by members of the accounting profession.22 Thus, an accountant is required to exercise any skill that he or she has, or any skill that he or she holds himself or herself out as having.23 Expert testimony is usually necessary to establish the standard of care required 24 of an accountant since the matter is "beyond the realm of ordinary lay knowledge." Usually, the plaintiff will attempt to establish that the accountant was negligent because 19 Id. (Citing Stanley L. Bloch, Inc. v. Klein, 45 Misc. 2d 1054, 258 N.Y.S. 2d 501, 505 (Sup. S. Ct. 1965); Delmar Vineyard v. Timmons, 486 S.W. 2d 914, 920 (Tenn. Ct. App. 1972). 20 Restatement (Second) of Torts § 299 A cmt.e (1965). 22 See Restatement (Second) of Torts § 299A cmt. b and d (1965) 23 Compare Duffey Law Office, S.C. v. Tank Transp., Inc., 194 Wis. 2d 674, 535 N.W. 2d 91 (Ct. App. 1995) (concluding that attorney represents to client that he or she has greater expertise than average attorney is held to standard of care consistent with claimed expertise) with Bassim v. Halliday, 234 A.D. 2d 628, 650 N.Y.S. 2d 467, 469 (1996) (rejecting argument that law firm was subject to higher standard of care based upon its claimed expertise in administrative law), appeal dismissed, 89 N.Y. 2d 1001, 679 N.E. 2d 638 (1997). 24 See Greenstein, Logan & Co. v. Burgess Mktg., Inc., 744 S.W. 2d 170, 185 (Tex. Ct. App. 1987) holding testimony of several experts in accounting profession established standard of care and skill required of a reasonably competent accountant when performing an audit), writ denied; Compare Christopher v. Bethune, 749 A. 2d 130 (D.C. 2000) (legal malpractice case; expert testimony is not required when defendant admits to having made mistakes). 9 he or she did not comply with professional standards.25 Professional standards, such as generally accepted accounting principles ("GAAP") or generally accepted auditing standards ("GAAS"), are commonly looked to as evidence of the appropriate standard of care in a negligence case, and generally establish a minimum standard by which liability will be determined. More often than not, an accountant who has complied with applicable professional standards will be protected from liability for negligence.26 On the other hand, compliance with professional standards will not always immunize an accountant from liability for negligence, since there is some authority that such standards are only evidentiary.27 Under this view, while professional standards are helpful to the trier of fact in determining the standard of care, the question is ultimately one of fact to be decided by the jury.28 All activities on the part of accountants are governed by four general standards which are designed to ensure the professionalism of accountants. These standards, set forth in AICPA Rule 201, are as follows: 1. Professional Competence. Undertake only those professional services that the member’s firm can reasonably expect to be completed with professional competence; 25 For a good summary of the standards applicable to the accounting profession, see Dan L. Goldwasser, N. Thomas Arnold, John H. Eickemeyer, Accountants' Liability, Practicing Law Institute, Chapter 2 (Release No. 11, November 2008). 26 Hagen, Certified Public Accountants’ Liability for Malpractice: Effect of Compliance with GAAP and GAAS, 135 CONTEMP. L. 65, 78 (1987) (good faith compliance with GAAP and GAAS generally satisfies duty of care). 27 See e.g. Bilyn v. Arthur Young & Co., 271 Cal. Rptr. 470, 475-76 (Cal. Ct. App. 1990), rev’d , Bily v. Arthur Young & Co., 11 Cal. Rptr. 2d. 51, 834, P. 2d 745 (1992). 28 I d. 10 2. Due Professional Care. Exercise due professional care in the performance of professional services; 3. Planning and Supervision. Adequately plan and supervise the performance of professional services; and 4. Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed. In addition, Rule 102 of the AICPA Code of Professional Standards (“Code”) requires that “[i]n and the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.” These general standards apply irrespective of the nature of the engagement being undertaken by the accountant. Therefore all engagements, including expert witness and forensic consulting engagements, undertaken by accountants are required to proceed in an orderly and scientific manner. That means they must be performed by competent and trained personnel who are supervising the work. Moreover, the members of the engagement team are required to amass competent and sufficient evidence to support the conclusions and their measures should be documented in their work papers. These rules provide a fertile basis for cross examining any expert witness who is an accountant. As such, the prudent consultant or expert witness will adhere to these standards in rendering his or her expert services. Expert testimony is usually necessary to establish a breach of the duty of care. Through expert testimony, the plaintiff must establish both the requisite standard of care 11 and the accountant's departure from that standard of care. In order to establish a breach of duty, the plaintiff's expert must do more than merely state a conclusion that the accountant had not met applicable professional standards and that the accountant should have investigated further. Rather, the expert must define the applicable standard of care that the accountant breached and must specify the steps the accountant should have taken, for example, the documents or other evidence the 29 accountant should have investigated. With respect to the element of proximate causation, expert testimony is usually necessary in an accountant malpractice case to establish the causal link between the plaintiff’s damages and the accountant’s negligence.30 As such, counsel for the plaintiffs will often seek an opinion from an accounting expert causally relating the defendant accountant’s failure to adhere to the standards of the profession to the damages the plaintiff is claiming. For example, the plaintiff’s expert will be asked to opine how the embezzlement by the bookkeeper would have been detected if the accountant conducted a proper audit, how the accountant’s failure to properly advise a taxpayer of an appropriate deduction or the accountant’s misinterpretation of tax regulations caused the taxpayer to incur a higher tax liability and similar theories. Conversely, defense counsel will normally seek an opinion from the defense accounting expert that the negligent conduct or omission of the defendant accountant was not the proximate cause of the losses claimed by the plaintiff, but rather were due to other factors, such as market forces, a recession, a downturn in the plaintiff’s 29 See generally, Seaward Int'l., Inc. v. Price Waterhouse, 239 Va. 585, 391 S. E. 2d 283 (1990) (plaintiff's expert testimony failed to create a jury question regarding negligence of accounting firm). 30 See Board of Trustees of Fire and Police Retiree Health Fund v. Towers, Perrin, Forster & Crosby, Inc., 191 S.W. 3d 185 (Tex. App. San Antonio 2005); reh’g overruled, (Feb. 2, 2006) and review denied, (May 19, 2006) 12 industry, the conduct of other parties unrelated to the negligence of the accountant and/or showing that the plaintiff did not rely upon the negligent advice of the accountant. Indeed, a number of negligent suits against accountants have been successfully defended on the grounds of lack of proximate cause.31 In those cases, the accountant has prevailed because it was not shown that the alleged negligence of the accountant substantially contributed to the plaintiff’s losses. Instead, the losses resulted from the acts of other parties, from specific business decisions made by the client, from the general or usual manner in which the client operated its business, or from general business or economic conditions.32 With respect to the element of damages, a plaintiff must show that it has actually incurred damages resulting from the defendant accountant’s negligence even though the amount of the damages may be subject to uncertainty. The most common types of damages available in accounting malpractice cases are compensatory damages, which are damages awarded to a party as compensation for harm sustained by the part.33 The purpose of compensatory damages is to place a party “in a position substantially equivalent in a pecuniary way to that which he would have occupied had no tort been 31 See, e.g., D.D. Hamilton Textiles, Inc. v. Estate of Mate, 703 N.Y.S. 2d 451, 453 (2000) (reversing denial of summary judgment, finding that sole proximate cause of plaintiff’s injury “was its severe financial distress and inability to meet tax obligations”); Imprimis Investors, LLC v. KPMG Peat Marwick LLP, 19 Mass. L. Rptr. 51(Mass. App. 2005) (there could be no transaction causation where plaintiff did not actually read and rely on the accountant’s report). 32 See E.F. Hutton Mortgage Corp. v. Pappas, 690 F. Supp. 1465, 1473-75 (D. Md. 1988) (loss is resulted from plaintiff’s business decision to continue very profitable and very risky business relationship, from plaintiff’s lack of diligence in enforcing contractual provisions, and from fraudulent conduct of officer of party with whom plaintiff dealt); Gerber Trade Fin., Inc. v. Skwiersky, Alpert & Bressler, LLP, 786 N.Y.S. 2d 9 (App. Div., 1st Dept. D 2004) (negligence and negligent misrepresentation claim; evidence showed business failed because K-Mart, its biggest customer, canceled two large purchase orders; summary judgment affirmed), leave to appeal denied, 829 N.E. 2d (N.Y. 2005). 33 Restatement (Second) of Torts § 903 (1979). 13 committed.”34 In determining the amount of damages that will restore a party to his or her original position, a court may need to take into account any benefits the plaintiff received as a result of a transaction about which he or she is complaining.35 One area of damages commonly sought in accounting malpractice cases that almost always requires expert evidence is a claim of loss of earnings or profits resulting from the negligent conduct of the accountant. In order to recover most lost profits, the plaintiff must be able to prove the lost profits with reasonable certainty.36 Generally, this area of damages presents the most fertile ground for defense counsel to attack the plaintiff’s expert’s methodology and analysis on lost earnings or profits in an effort to render the plaintiff’s expert opinion inadmissible at trial. As such, accounting experts providing opinions on lost profits should perform an independent investigation of the books and records of the client to sufficiently provide objective support for their opinion 37 on lost earnings or profits. 34 Id. § 903 cmt. a. 35 Dan L. Goldwasser, N. Thomas Arnold, John H, Eichmeyer Accountants’ Liability Practicing Law Institute, § 4:2.5 (Release No. 11, November 2008)(Citing Lien v McGladrey & Pullen, 590 N.W. 2d 421, 425-26 (S.D. 1993) (negligence action against accountant based upon alleged negligent advice regarding stock redemption; trial court erred in precluding expert testimony and cross-examination on issue of benefits received by plaintiff). 36 Restatement (Second) of Torts § 912 cont. d. While the requirement of reasonable certainty does not require absolute certainty, the plaintiff must introduce evidence which permits an inference of definite lost profits and which takes the matter outside the realm of speculation. World Radio Labs, Inc. v. Coopers & Lybrand, 251 Neb. 261, 557 N.W. 2d 1, 13-15 (1996) (plaintiff’s evidence on lost profits were speculative as a matter of law). 37 See, e.g., Lyman v. Saint Jude Medical S.C., Inc., 580 F. Supp. 2d 719, 726 (E.D. Wis. 2008) (expert should have independently verified data concerning future sales rather than accepting word of counsel, and should have interviewed employees of party); Crowley v. Chait, 322 F. Supp. 2d 530 (D. N.J. 2004) (accountant improperly relied on material selected by counsel in rendering opinion); Chemipal Ltd. V. Slim-Fast Nutritional Foods Intern. Inc., 350 F. Supp. 2d 582, 66 Fed. R. Evid. Serv. 71 (D. Del. 2004) (excluding lost profits expert who did not conduct independent analysis of assumption but accepted secondary source without any attempt at verification); Otis v. Doctor’s Associates, Inc., 1998 WL 673595 (N.D. Ill. 1998) (CPA expert did not perform any independent analysis of the reliability or factual accuracy of figures provided by plaintiff to prove lost future profits). 14 Other items of damages commonly sought in accounting malpractice cases include money lost or stolen resulting from the accountant’s negligence in failing to discover the embezzlement of funds during an audit or is found negligent for failing to disclose suspicious circumstances discovered by the accountant during his or her engagement38, fines and penalties for the erroneous preparation of tax returns39, and the cost of restating financial statements or tax returns or the cost of conducting a proper audit40, adverse tax consequences and interest.41 Generally, the plaintiff’s expert’s task in calculating damages in cases seeking these types of damages is simpler as the presence of damage is usually more apparent. In several cases, plaintiffs have sought to recover from accountants the losses they suffered by remaining in business. In this type of case, the claim is that the client would not have continued in business had it known the true financial condition of the business. In an appropriate case, a court might permit the recovery of losses suffered by a client who continued in business as a result of his or her accountant’s negligence. 38 See e.g., Mortgage Corp. v. Coopers & Lybrand, 142 Mich. App. 531, 369 N.W. 2d 922 (1985) (accountants found negligent for failure to discover embezzlement); 1136 Tenants’ Corp. v. Max Rothenberg & Co., 36 A.D. 2d 804, 319 N.Y.S. 2d 1007 (1971), aff’d, 30 N.Y. 2d 585, 281 N.E. 2d 846 (1972) (affirming jury verdict against accountants for failure to disclose suspicious circumstances discovered during engagement). 39 See e.g., Bick v. Peat Marwick & Main, 14 Kan. App. 2d 699, 799 P. 2d 94 (1990) affirming jury verdict awarding plaintiff $170,250.00 in accounting malpractice case involving erroneous preparation of tax returns). 40 See Restatement (Second) of Torts § 919 (1979); World Radio Laboratories, Inc. v. Coopers & Lybrand, 251 Neb. 261, 557 N.W. 2d 1 (1996) (fines and penalty usually for the erroneous preparation of tax returns). 41 Ronson v. Talesnick, 33 F. Supp. 2d 347, 355 (D.N.J. 1999) (penalties and interests are a recoverable element of damages in an accountant’s malpractice case although the defendant should be permitted to come forward with evidence of benefit from the malpractice that could be applied to reduce a plaintiff’s recovery); Compare Frank v. Lockwood, 275 Neb. 735, 749 N.W. 2d 443 (Neb. 2008)(holding that “interest paid to the IRS represents a payment for use of money and, therefore, a person who has use of the money is not generally damaged by the payment of interest.”); Alpert v. Shea Gould Climenko & Casey, 160 A.D. 2d 67, 559 N.Y.S. 2d 312 (1990)(interest on the taxes paid does not constitute damages sustained by plaintiff but represents merely a payment to the IRS for his use of the money during the period of time when he was not entitled to it”); accord Gaslow v. KPMG LLP, 19 A.D. 3d 264, 797 N.Y.S. 2d 472 (2005) 15 However, to recover such damages, it must be shown that the accountant’s negligence was the proximate cause of the client’s continued losses.42 Expert witnesses opining on this element of damages on behalf of the plaintiff should exercise caution as, in a good portion of the cases, the claimed losses are effectively defended on the basis that the accountant’s errors were not the proximate cause of the plaintiff’s continued losses. Rather, the losses were due to a recession, a downturn in the client’s industry or the client’s own contributory negligence in the management and conduct of its business 43 operations. IV. QUALIFYING AS AN EXPERT WITNESS IN ACCOUNTING MALPRACTICE CASES. Admissibility of expert opinion in federal courts is determined by Federal Rule of Evidence 702, which provides: 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 on 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. Moreover Federal Rule of Evidence 70344 compliments Rule of Evidence 702 by requiring that experts base their testimony on reliable facts and data which requires that the court “make an independent evaluation of the reliability of the data ” underlying the 42 See Askanase v. Fatjo, 130 F. 3d 657, 676 (5th Cir. 1997). 43 I d. 44 Federal Rule of Evidence 703 provides: 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 the expert 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 may not be admissible in evidence in order for the opinion or inference to be 16 expert’s opinion.45 The assessment of whether proffered expert testimony is admissible is a preliminary question for the Court under Federal Rule of Evidence 104(a), which provides that “[p]reliminary questions concerning the qualification of a person to be a witness, --- or the admissibility of evidence shall be determined by the court. . .” The accounting expert need not have experience in a particular industry at issue in order to qualify as an expert.46 In most instances, an accountant’s familiarity with accounting principles and experience with accounting methodologies is sufficient background.47 Indeed, one commentator has noted that some courts have virtually rejected gate-keeping of accounting experts based on qualifications on the reasoning that accounting is not “scientific”.48 However, if the business at issue is particularly specialized, an accountant’s qualifications may be questioned.49 An accountant also may be excluded as unqualified if he or she attempts to offer testimony outside the area of accounting principles.50 admitted. Facts or data that are otherwise inadmissible shall not be disclosed to the jury by the proponent of the opinion or inference unless the court determines that their probative value in assisting the jury to evaluate the expert’s opinion substantially outweighs their prejudicial effect. 45 See In re: Paoli R.R .Yard PCB Litigation, 35 F.3d 717, 40 Fed. R. Evid. Serv. 379, 30 Fed. R. Serv. 3d 644 (3d Cir. 1994); Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S. Ct. 2786, 125 L. Ed. 2d 469 (1993). 46 See generally, C. Hutchinson, Expert Witnesses: Business and Economy Cases § 1:4 (2009 ed.) and references cited at n. 12. 47 Id. 48 Id. and references cited at n. 13. 49 Id. (Citing In re: Med Diversified, Inc., 334 B. R. 89 (Bankr. E. D. N.Y. 2005)(an accountant with 20 years experience was held not qualified to address a business valuation in the “unique and highly regulated business of inhome healthcare services.”) 50 Id. (Citing Marco Island Cable, Inc. v. Comcast Cable of the South, Inc., 2006-2 Trade Cas. (CCH) ¶ 75342, 2006 WL 1722342 (M. D. Fla. 2006) (CPA not qualified to testify regarding anti-trust issues or to franchisees and business practices of defendant); Vigortone AG Products, Inc. v. PM AG Products, Inc., Comm. Fut. L. Rep. (CCH) 17 Most state jurisdictions will have local evidence rules for admissibility of expert evidence similar to Federal Rules of Evidence 702 and 70351 and rely upon the factors for admissibility enunciated by the Supreme Court in Daubert v. Merrell Dow Pharmaceuticals,52 and the Court of Appeals of the District of Columbia, Court of Appeals in Frye v. U.S.53 Although by no means completely exhaustive, counsel will usually consider the following factors in selecting an expert witness for an accounting malpractice case: 1. Educational background; 2. An active license as a Certified Public Accountant with no disciplinary proceedings; 3. Knowledge of current authoritative accounting and auditing literature; 4. Authorship of publications for the profession; 5. Membership on various committees in professional organizations; 6. Experience in specialized field of accountancy at issue in the case; P 29684, 2004 WL 783075 (N.D. Ill. 2004) (accountant and damages expert not qualified to opine re: management of pig raising operation). 51 See 90 A.L.R. 5th 459 (2009) for a thorough all state analysis of the factors for admissibility of expert evidence post Daubert. 52 509 U.S. 579, 113 S. Ct 2786, 1256 L. Ed. 2d. 469 (1993). In Daubert, the Supreme Court set forth a nonexclusive checklist for trial courts to use in assessing the reliability of scientific expert testimony. The factors include: (1) whether the expert’s technique or theory can be or has been tested–that is, whether the expert’s theory can be challenged in some objective sense, or whether it is instead simply a subjective, conclusory approach that cannot reasonably be assessed for reliability; (2) whether the technique or theory has been subject to peer review or publication; (3) the known potential rule of error of the technique or theory when applied; (4) the existence and maintenance of standards and controls; and (5) whether the technique or theory has been generally accepted in the scientific community . 53 54 App. D.C. 46, 293 F. 1013 (1923). The Frye test required the proponent of scientific evidence to establish that the theory and method used by the expert witness were generally accepted within the relevant scientific community. In Daubert, the Supreme Court determined that Federal Rule of Evidence 702 had superceded the Frye test for determining for scientific evidence. 18 7. 8. Strong knowledge of GAAP and GAAS; 9. Knowledge of the facts and allegations of the opposing party; 10. Particular certifications that may be applicable to the case, such as Certified Forensic Accountant awarded by the American College of Forensic Examiners or a Certified Fraud Examiner awarded by the Association of Certified Fraud Examiners; 11. Non-litigation experience with particular emphasis on the industry and the engagement at issue in the case; 12. Experience in litigation as expert or consultant for both plaintiff and defense cases, as well as the results of any admissibility or Daubert-type challenges; 13. Ability to communicate complex and abstract ideas clearly; 14. Personality and demeanor; and 15. V. Strong knowledge of the specific procedures employed in the audit in question; Cost and availability. STRUCTURE AND CONTENT OF THE EXPERT REPORT . A written expert report is required by the Federal Rules of Civil Procedure and by many state rules.54 Some states have adopted expert witness disclosure and discovery rules that parallel the federal rule, including the requirement that the expert witness provide a written report or a summary of the expert’s testimony. The expert should consult with counsel retaining him or her early in the case to determine whether the applicable jurisdiction requires a written report and, if so, whether the local rule expressly provides for the scope and specific content of the report. 54 See e.g., Adler v Shelton, 343 N.J. Super. 511, 521 (Law Div. 2001); Gall ex rel. Gall v. Jamison 44 P.3d 233, 234-235 (Colo. 2002); Compare State ex rel State of West Virginia Dept. of Transportation, Division of Highways v. Cookman, 219 W. Va. 601, n.6, 639 S.E. 2d 693 (W. Va. 2006) (West Virginia Rules of Civil Procedure do not provide for automatic disclosure of experts reports, although materials relied upon by an expert witness in formulating an opinion are discoverable). 19 The purpose of the report requirement is to eliminate unfair surprise and to conserve resources,55 such as potentially avoiding the need for a discovery deposition of the expert. However, in the majority of accounting malpractice cases, defense counsel will generally seek a discovery deposition of plaintiff’s expert in an effort to develop weaknesses in the expert’s analysis, methodology and conclusions to attempt to exclude the expert’s testimony at trial as unreliable and inadmissible. Federal Rule of Civil Procedure 26(a)(2)(B) provides that, unless otherwise stipulated or directed by the court, the expert must provide a written report, prepared and signed by the witness. Federal Rule of Court Procedure 26 (a)(2)(B) mandates the following be included in the report: (i) A complete statement of all opinions to be expressed and the basis and reasons therefore; (ii) The data or other information considered by the witness in forming the opinions; (iii) Any exhibits to be used as a summary of or support for the opinions; (iv) The qualifications of the witness, including a list of all publications authored by the witness within the preceding ten years; (v) The compensation to be paid for the study and testimony; and (vi) A listing of any other cases in which the witness has testified as an expert at trial or by deposition within the preceding four years. Subsection (c) of the Rule requires that the expert disclosure and written report be served at least 90 days before the date set for trial in order for the case to be ready 55 C. Hutchinson, Expert Witnesses: Business and Economy Cases, §1:6 (2009)(Citing Reed v. Binder, 165 F.R,D 424, 429, 34 Fed.R. Serv. 3d.1511(D.N.J. 1996). 20 for trial or, if the evidence is intended solely to contradict or rebut evidence on the same subject matter identified by another party’s expert, then within 30 days after the other party’s disclosure, unless the parties agree otherwise by stipulation or there is a court order providing a different timeline for service of expert reports. The expert report is not admissible into evidence but, where required, it is used primarily by defense counsel for cross-examination and for potential limitation of the expert’s testimony. Accordingly, the expert working for the plaintiff should exercise caution in preparing the expert report so that it meets the minimum requirements of the federal rule, if the case is in federal court, or the particular state rule in the jurisdiction in which the case is venued, but not be overly expansive to provide defense counsel multiple avenues for cross-examining the credibility of the witness, the integrity of the methodologies employed and the conclusions reached. The expert report should, however, fully explain and list how the expert calculated his or her opinion rather than simply setting out a conclusory amount.56 As such, the plaintiff’s expert witness report should contain all of the essential opinions relating to all of the elements upon which the expert was asked to opine to establish each and every element of an accounting malpractice case. Conversely, the focus of the defense expert report will be to rebut the methodologies, opinions and conclusions reached by the plaintiff’s expert. Consequently, defense counsel will often collaborate with the defense expert to narrow the scope of the issues that require rebuttal opinions. 56 C. Hutchinson, Expert Witnesses: Business & Economy Cases § 1:6 (2009 ed.) (Citing Great White Bear, LLC v. Mervyns LLC, 2008 WL2220662 (S.B.M.Y. 2008) (Where the court precluded plaintiff’s expert from testifying about five elements of damages because the expert failed to set out detailed and complete information used to calculate his figures). 21 Although the extent and scope of an expert’s report is always dependent upon the nature and issues involved in the particular case, and whether the expert is providing an opinion on behalf of the plaintiff or the defense, the expert report should at least cover the following outline: 1. Provide a statement of the scope of the engagement; 2. Provide a listing of all of the documents and records relied upon in rendering the expert opinion; 3. Provide a concise summary of the facts relevant to the opinions expressed with citation to the factual record; 4. As an expert for the plaintiff, outline and explain, with sufficient specificity, the standards that are applicable to the engagement at issue and specifically how the standard was violated based on the factual record reviewed and relied upon. Conversely, as an expert for the defense, outline and specify the applicable standards and explain specifically why there was no deviation from the applicable standard of care. Cite to the factual record and accounting literature whenever possible; 5. If acting as an expert for the plaintiff, explain how the breach of the professional standard caused some or all of the damages claimed. If providing an expert opinion for the defense, explain with sufficient specificity the reasons why the defendant accountant did not cause some or all the damages claimed by the plaintiff, including a discussion of other factors that caused some or all of plaintiff’s claimed damages. Cite to the factual record and accounting literature whenever possible; 22 6. If providing an opinion on behalf of the plaintiff, explain the manner in which you calculate the damages that were caused by the breach of the professional standard, citing to the factual record and accounting literature that demonstrates acceptance of the methodology employed. If providing an opinion for the defense, explain specifically how and why the plaintiff’s expert damage calculation is not credible or reliable based on the factual record and accepted methodologies; and 7. Provide a conclusion of your opinions for ease of reference by you, counsel, the court and the jury. Experts are allowed some leeway to address topics not specifically set out in their report, absent surprise or bad faith.57 However, there are limitations to supplementing the expert’s report, especially when the supplementation is well after the end of discovery and without justification.58 The opposing counsel may raise objections to any expert testimony that diverges from or adds to the precise language in the 57 C. Hutchinson, Expert Witnesses: Business & Economy Cases § 1:6 (2009 ed.) (Citing Hein v. Cuprum, S.A., De C.V., 53 Fed. App. 134 (2d Cir. 2002) (no abuse of discretion for trial court to allow testimony outside expert’s report, when court allowed re-examination of the topic and allowed opponent to recall its expert to respond); Wachtel v. Guardian Life Insurance Company, 239 F.R.D. 376, 388, 67 Fed. R. Serv. 3d 1 (D.N.J. 2006) (following discovery abuse by opponent, expert would be allowed to supplement report) 58 Id. (Citing Avance v. Kerr-McGee Chemical LLC, 2006 WL 3484246 (E.D. Tex. 2006) (expert affidavits filed after expert discovery deadlines disallowed in connection with Daubert and summary judgment motions); contra Bowers Field v. Suzuki Motor Corp. 151 F. Supp. 2d 625, 631 (E.D. Pa. 2001) (Testimony of expert on matters within their expertise but outside the expert’s report is not only permissible at trial, but the exclusion of such testimony may be reversible error). 23 report,59 so the proponent should attempt to cover in the report all matters that the expert may address.60 In most accounting malpractice cases, it is virtually impossible for counsel not to assist the expert in the preparation of the final version of the report to be issued. While some interaction with counsel is appropriate and necessary, too much participation however can render the report inadmissible and cause the expert to be excluded.61 Further, the cautious expert should keep in mind that in many jurisdictions,62 as well as under the federal rules, most, if not all, of the communications between the expert and counsel are discoverable. However, some jurisdictions do protect from disclosure communications between the expert and counsel constituting the collaborative process in preparation of the expert report, including all preliminary and draft reports.63 It should be noted that the United States Supreme Court’s Advisory 59 Id. (Citing Honeywell Intern, Inc. v. Universal Avionics Systems Corp., 289 F. Supp. 2d 493, 500 (D. Del. 2003), decision aff’d, 488 F. 3d 982 (Fed. Cir. 2007) (expert did not mention doctrine of equivalents in report, so deposition testimony on the topic was inadmissible at summary judgment hearing). 60 I d. 61 Id. at § 1:7 (2009 ed.) (Citing Keystone Mfg. Co., Inc. v. Jaccard Corp., 394 F. Supp. 2d 543, 568 (W.D.N.Y. 2005) (“attorneys are not precluded from assisting expert witness in the preparation of their report so long as the witness remains substantially involved”); Trowley v. Chait, 322 F. Supp. 2d 530 (D.N.J. 2004) (expert not excluded, though first draft of report was prepared by counsel based upon information obtained through interview of expert). 62 Id. at § 1:8 (2009 ed.) 63 See e.g. New Jersey Court Rule 4:10-2(d)(1) limiting discovery of communications between an attorney and any expert retained or specifically employed by that attorney occurring before the service of an expert’s report to “facts and data considered by the expert in rendering the report.” Moreover the New Jersey Court Rule provides that “all other communications between counsel and the expert constituting the collaborative process in preparation of the report, including all preliminary or draft reports produced during this process,” are deemed trial preparation materials not generally subject to disclosure except only upon a showing that the party seeking discovery has substantial need for the materials and the preparation of the case and is unable without undue hardship to obtain the substantial equivalent of the materials by other means. Even if the proponent of the argument seeking disclosure establishes that standard, the New Jersey rule will still protect against disclosure the “mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.” Generally, the practice such in the practice in New Jersey is to insulate from discovery any and all draft reports and communication between the expert and counsel as well as the exchange of any and all drafts of the expert’s report. 24 Committee has recommended the adoption of amendments to Federal Rule of Civil Procedure Rule 26 dealing with expert discovery which, among other things, would protect from disclosure drafts of expert reports and communication with counsel, other than those providing facts, data or substance considered or relied upon by the expert.64 The proposed rule will be forwarded to the Standing Committee on Rules of Practice and Procedure for consideration in June 2009 and is scheduled to go to the Supreme Court for consideration in the October session.65 If accepted by the Court and Congress, the new rule could take effect by December 2010.66 Accordingly, the expert should consult with counsel retaining him or her early in the engagement to determine the state of the law and the applicable rule in the jurisdiction at issue so the expert can gauge how much caution is necessary in communicating with counsel. VI. HELPFUL TIPS FOR DEPOSITION AND TRIAL TESTIMONY. Although the strategies for deposing an accounting expert pre-trial or cross- examining an accounting expert at trial vary as widely as the range of topics an accounting expert may address, the following points and guidance provide a general framework for experts in preparing for deposition and trial testimony: 1. Be prepared. The accounting expert should assume that the attorney questioning him or her at deposition or trial has spent substantial time preparing for the deposition or cross-examination, including communicating with his client’s own expert or consultant, and has thoroughly researched and reviewed all of the available material about the expert, the applicable accounting standards at issue, the relevant publications 64 C. Hutchinson, Expert Witnesses: Business & Economy Cases § 1:8 (2009 ed.) 65 I d. 66 I d. 25 by the expert, the transcripts of the expert’s testimony in other cases and, if available, reviewed the cases in which the expert’s opinion was criticized or determined to be inadmissible. The expert should meet with counsel in advance of the deposition or trial testimony so that counsel can update the expert on the status of the case and relevant evidence discovered subsequent to the issuance of the expert’s written report or, in the case of trial testimony, evidence discovered subsequent to the expert’s pretrial deposition. The meeting with counsel will also provide the expert with information on specific factual or legal issues that may have been stipulated for purposes of trial and alert the expert of the legal and factual issues that are in dispute so that the expert can more narrowly focus his or her preparation and testimony. If the expert’s testimony has been criticized or held inadmissible in another case, the expert and counsel should thoroughly discuss the prior testimony and opinion and develop an effective rebuttal response or explanation so that the expert’s credibility is not adversely affected at deposition or trial. 2. Review your file and be sure the file is complete. Although the advice may be self-evident, often times the expert’s files are put together by an associate of the expert who has assisted the expert in researching and preparing the expert report, and the file may not be entirely complete. All too often, experts make the mistake of not fully reviewing their file until the morning of the deposition or the morning of the trial testimony. Review your file well in advance of the deposition or the trial testimony to make sure that all of the records and references relied upon and material to the opinions and conclusions are contained in the file. Be prepared to effortlessly navigate 26 through the file when opposing counsel interrogates you on the factual record and specific accounting literature relied upon. 3. Know the facts of the case. During your preparation meeting with counsel prior to your deposition or trial testimony, be sure you have a complete and accurate understanding of the facts and evidence relevant to your opinions and conclusions. Too often, counsel will initially provide an expert with selected documents and an outline of facts counsel believes are relevant to the expert’s engagement, which may not be all inclusive of the facts and evidence the expert may ultimately rely upon or find material in analyzing and rendering his or her opinions and conclusions. Accordingly, the expert should develop an outline early in the engagement of all of the factual information and supporting documents relevant and material to the expert’s scope of engagement and review all such records and information prior to issuing an expert opinion. Similarly, in advance of the expert providing deposition or trial testimony, the expert should obtain an update from counsel on the development of all of the facts relevant and material to the expert’s scope of opinion and conclusions, and review relevant documents, developed in the case after the expert provided his or her opinion and prepare rebuttal responses. 4. Listen carefully, answer the questions truthfully and make concessions when necessary to maintain credibility. While this advice may also seem self-evident, all too often experts will answer too quickly without fully thinking about the question and an accurate response. Especially so when responding to questions addressing weaknesses in the facts of the case or the expert’s conclusions in an effort to avoid a concession at all costs. Indeed, the weaknesses in the facts or the 27 conclusions reached may not be fatal to the admissibility or reliability of the expert’s opinions, yet the expert feels compelled to resist the attempt by adverse counsel to obtain a concession or admission. While you may see yourself as an advocate for the attorney and/or client retaining you, more often than not, your credibility is adversely affected by failing to concede weaknesses in the facts of the case or the conclusions reached or otherwise becoming combative with counsel in effort to avoid making a concession. The more effective expert testimony is that which is factual, honest and complete and recognizes weaknesses in the facts or conclusions reached. In the end, adverse counsel, the court and the jury will find you more credible when a concession is made or weakness recognized and properly rebutted. 5. Mind your manners; notes on general demeanor and behavior. Under a system of dueling expert witnesses, the jury’s decision as to whether to believe one expert over another, and counsel and the court’s assessment of the overall credibility of the expert, may be predicated on the general demeanor of the expert as reflected by his or her personality, politeness, manner and speaking ability. Generally, the expert witness should present himself or herself with overall dignity. The expert witness who does not overstate his or her qualifications or does not present his or her qualifications with an air of over confidence or arrogance, who listens attentively to the probing questions of fully prepared adversary counsel and answers them responsibly with quiet confidence and composure, is more likely to win over every listener with respect and admiration. The expert’s demeanor should indicate that he or she is appreciating the vital role of cross-examination and the litigation process. 28 Moreover, the expert should not personally attack the opposing expert’s opinions, nor be sarcastic to the cross-examiner. Condescension, irritation and personal attacks on the part of the expert witness will usually serve no other purpose than to provide benefits for the cross-examiner and his or her witness before a jury. Further, the expert should not equivocate. If a question demands an answer favorable to the other side, it should be answered truthfully, but not with any particular emphasis on that point. Finally, never lose your temper, even when the cross-examining attorney tries to arouse your anger. An angry witness makes a poor witness. 6. Stay focused on your role in the case. Particularly during trial testimony, stay focused on why you are called by a party to be an expert witness: to assist the trier of fact “to understand the evidence or to determine a fact in issue.”67 By their very nature, accounting malpractice cases require experts to analyze, discuss and present to the jury complex and technical accounting standards and procedures. Moreover, the expert’s explanation of the methodology in calculating damages or rebutting an opposing expert’s opinion on damages similarly may be complex and, therefore, incomprehensible. The expert should attempt to deliver his expert testimony and explain his methodology and conclusions in the simplest language possible so that the jury may understand what the expert’s conclusions are and how he or she arrived at such conclusions. If the expert’s testimony becomes overly technical and complex, it will most likely be incomprehensible to most of the jurors, causing them to loose interest in the expert’s testimony. Therefore, the expert should try to be concise and explain the technical standards and the methodology in a straightforward, simple manner. 67 Federal Rule of Evidence 702. 29 VII. CONCLUSION. As previously noted, all engagements, including expert witness engagements, undertaken by accountants are required to proceed in an orderly and scientific manner, consistent with the four general standards of practice enumerated in AICPA Rule 201 (professional competence, due professional care, planning and supervision, and sufficient relevant data). While undoubtedly each accountants’ malpractice case will have its own nuance and not all general rules and guidance outlined in this article may be applicable, the expert who undertakes and completes the expert engagement with due professional care, who plans and properly supervises the engagement, who relies upon sufficient relevant data and, where applicable, expresses his or her opinions in a well organized written report with citations to the factual record and applicable accounting literature will effectively aid the trier of fact to understand the evidence or a fact in issue and will find that opposing counsel will have a difficult task in discrediting his or her opinions and conclusions. 30 ...
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