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Use of Financial Professionals as Consulting and Testifying Experts

By David P. Hoffman

Introduction

A Certified Public Accountant (CPA) or other financial experts are often called upon to assist counsel either as a consultant or expert witness. These professionals assist counsel in a variety of types of disputes assisting to help them better understand complicated accounting, financial or business issues. A litigation consultant or an expert witness is someone who possesses specialized skills, knowledge, education, experience or training. If retained to provide expert witness testimony, such person is critical in assisting counsel by providing unbiased opinions that help a judge, jury, or arbiter to understand complicated business issues pertinent to the dispute. This article focuses on the rules and professional guidance applicable to CPA serving as a consulting or testifying witness.

The rules governing the form and admissibility of a CPA’s expert testimony are codified in the Federal Rules of Civil Procedure and Evidence. The American Institute of Certified Public Accountants (AICPA) sets forth certain professional standards applicable to all CPAs providing professional services, and supplies guidance to CPAs who provide litigation services.

The US court system includes the federal court system, fifty State courts and the District of Columbia courts. The intricacies of the differences between the federal system and the state systems are beyond the scope of this article. However, it is worth noting that many states have adopted rules pertaining to expert witnesses in line with the federal rules while others continue to apply a different perspective when deciding on the admissibility of expert testimony.

The remainder of this article will discuss the role of a consulting expert versus a testifying expert, the form and content of an expert report submitted in the federal court system, the evolution of the courts’ evaluation of expert witness opinions, the case law that has led to the codification of certain US Federal Rules of Evidence, and the professional standards governing a CPA who serves as an expert witness. Finally, it will discuss recent developments pertaining to a CPA serving as an expert witness on behalf of clients audited by the firm in which the CPA is employed.

Consultant vs. Expert Witness

It is common for a CPA first to be retained in a consulting capacity before being named as a testifying expert. As a consultant, he/she evaluates the facts of a case prior to a determination of whether Counsel will want the CPA to provide expert testimony before a trier of fact. Generally, a consultant’s work product may remain privileged and not be shared with the opponent in the dispute. However, all the work of a testifying expert witness, including communications with counsel, may be subject to discovery by the opponent in the dispute. It is typically best practice even at the consultant stage to assume that all of the CPA’s work and correspondence will one day be so discovered.

Rule 26 of Federal Rules of Civil Procedure

Prior to the introduction of Rule 26(a)(2)(B) in 1993, parties to disputes often engaged in what was known as expert witness testimony by ambush. There were limited guidelines governing what a party needed to disclose to the other side of a dispute prior to the expert appearing at trial. The ability to take a discovery deposition of an expert witness was an option, but often counsel would not identify such a witness until shortly before trial. This would prevent the other side from understanding the nature of the opinions the expert would offer, or the methodologies followed in reaching his/her conclusions.

With the advent of Rule 26(a)(2)(B), a party to a federal lawsuit would need to provide its opponent with a written report signed by the expert setting forth a statement of opinions he/she expects to offer at trial and the basis for each of those opinions. The expert must also disclose the information he/she considered in reaching those opinions, the qualifications of the expert, other cases in which the expert has testified at either deposition or trial in the last 4 years, and all publications authored in the last 10 years. Finally, the expert must disclose his/her remuneration. Generally, a report issued subject to Rule 26 is produced to the opposition within 90 days of trial, but this time frame can be modified by agreement of the parties or by judicial order.

Admissibility of Expert Testimony

The mere submission of an expert report does not guarantee that a CPA will be allowed to testify at trial or that his/her opinions will be considered by the court. First, under Rule 702 of the Federal Rules of Evidence, the expert must demonstrate that he/she possesses specialized skills, knowledge, experience, education and training that will assist the trier of fact via analysis of complicated issues in their appointed field. Second, Federal judges are granted great latitude in determining whether an expert’s opinions are reliable and relevant, and whether the expert will assist the court in understanding complicated or specialized issues. Because of this “gate- keeping” duty, many experts have had their opinions excluded by courts because it was determined that their opinions were not based on a reliable methodology or that the expert failed to properly consider the facts of the case relevant to the opinions, thereby making his/her opinions not relevant or reliable. In certain cases, courts have ruled that an expert’s opinions could actually be misleading.

The codification of Rule 702 is the result of a trilogy of cases that have dealt with the testimony of experts. The first case, Daubert v. Merrell Dow Pharmaceuticals, Inc. [509 US 579 (1993)] dealt with expert witness testimony provided by a scientific expert. The US Supreme Court found that the expert for the plaintiff had not followed acceptable methodologies in reaching his conclusions and that the opinions offered were not reliable. Consequently, the expert’s testimony was disallowed. In the second case, General Electric v. Joiner [522 US 136 (1997)], the court ruled that it was appropriate to evaluate the reliability of the expert’s reasoning and process but also noted that a court was not precluded from omitting the opinion or opinions that are connected to the expert’s conclusion based only on the ipse dixit (mere statement) of the expert. In other words, something is not fact just because an expert says it is fact. Experts have also been precluded from testifying at trial because the analytical gap between the evidence and the expert’s conclusions was too great to justify the opinion.

Finally, in Kumho Tire Co. v. Carmichael [526 US 137 (1999)], the courts’ gate keeping function as set out in Daubert was extended to experts in other fields, including accounting and valuation. Professionals considering accepting an engagement to serve as an expert should become familiar with the intricacies of each of these cases as well as other cases that have addressed the admissibility of expert testimony.

At present, it is difficult to estimate for certain how many State courts have adopted some or all of the related guidelines impacting the admissibility of expert testimony. Consequently, if a CPA is working for counsel in a state action, it is imperative that he/she discusses with counsel the rules that will impact his/her ultimate acceptance or exclusion as an expert.

Professional Standards and Guidance

All practicing CPAs are subject to certain professional standards regardless of the type of service they are providing. Litigation services are considered by the AICPA to be consulting services. When performing consulting services, the CPA must adhere to the Statement on Standards for Consulting Services (SSCS) as well as the AICPA Code of Professional Conduct. This Code includes certain general standards and other rules which cover the CPAs integrity and objectivity, professional competence, reliance on sufficient relevant data, compliance with standards and adherence to any relevant accounting principles.

Finally, the AICPA has not established standards or rules specifically related to CPAs who provide litigation services. However, it has issued guidance that the CPA should consider when serving as an expert. Divergence from this guidance should be carefully evaluated by the CPA and, when appropriate, documented.

Current Developments – Sarbanes-Oxley Legislation and AICPA Rule 101-3

Following the enactment of Sarbanes-Oxley legislation, a CPA is no longer permitted to provide expert services for audit clients that are considered registrants of US securities exchanges. This prohibition extends to certain affiliates, subsidiaries and related parties of the audit client and has far-reaching implications. A CPA who violates this rule could impact his/her firm’s audit independence related to that client and impair the firm’s ability to serve as the company’s independent auditor. In 2007 the AICPA enacted Rule 101-3 also making it impermissible for a CPA to serve as an expert witness for a privately held audit client. The reason is that a CPA who serves as an expert witness could be perceived to be an advocate for the client, thus possibly impacting the firm’s perceived ability to remain independent for audit purposes.

Conclusion

It is important for a CPA who serves as an expert to be aware of the legal rules governing his/her work as well as related professional standards and guidance. Not understanding the rules can result in a court excluding an expert from testifying at trial, thus putting counsel’s case at risk by not allowing him/her to offer evidence of the damages allegedly suffered by the client. In addition, not understanding the recent rules of Sarbanes- Oxley and the AICPA could impact the firm’s independence relating to an audit client.


 
 
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