Presenting expert forensic accounting testimony (And keeping everyone awake while you do!)

Issue August 2010 By Steven Dane

If there ever was an image that lacks excitement and inspiration, it's that of a forensic accountant submitting a report or providing testimony at trial. The mere thought of it can put you to sleep! But there are times when a forensic accountant can be crucial to the presentation of your case and your ability to make that case to the judge and/or jury.

This article will outline how to best present the expert witness testimony (and/or report) of a forensic accountant who is serving as your expert. We'll look into what a forensic accountant is, what they do, how they can provide support for your case, and how to get their analysis and findings into evidence as clearly and concisely as possible.

Forensic Accounting 101

Often a misunderstood term, forensic accounting involves providing an accounting/financial analysis, suitable to a litigation setting, which provides the basis for understanding and ultimately, resolving, the financial aspects of the matter being litigated.

As such a broadly defined field implies, there are numerous situations and applications for forensic accounting. I mention some of these applications below because one of the most common forensic accounting mistakes I notice is not hiring one in the first place because the litigator does not realize that a forensic accountant could have been helpful in a particular situation.

A forensic accountant can investigate and analyze almost any type of financial evidence. In doing so, to mention just a few examples, such a person can:

  • assist the authorities (or business) in determining the amount of financial fraud or theft that has occurred,
  • review and analyze company records in a shareholder/partner dispute,
  • quantify the economic losses in a personal injury or employment claim,
  • ascertain the economic losses in a business interruption or other type of insurance claim, or
  • identify unreported income or assets in a divorce.

How Best to Present Results

Rather than address how a forensic accountant does their work in terms of identifying and calculating the damages, let's focus on how the results can best be presented. First, be aware that while many forensic accounting experts are knowledgeable about litigation reporting requirements, you should ascertain that up front. For example, if the reporting requirements of the federal rule of civil or criminal procedure are applicable, make sure the expert is aware and formats the report accordingly. Ditto for any state or local rules that apply. This point may seem obvious, but it can't hurt to be sure.

Another area to work on with your expert is to make sure the report/testimony to be provided lines up with the legal claim you are making (or defending against). For example, this includes making sure the timeframe for measuring damages matches the timeframe in which you are claiming the fraud occurred.

Also, make sure the forensic accountant has an exact understanding of the assets in question. For example, a 50 percent interest in a property is not the same as a 50 percent interest in a partnership that might own the property, even if the partnership has no other assets. This is because the legal and financial rights of a direct owner in a property are not the same as a 50 percent owner in a partnership, as the partnership agreement may have terms in it that would cause the subject interest to have a different value.

Meeting a Daubert Challenge

It is important that the forensic accounting expert's testimony or report be able to withstand a Daubert challenge should one be made. As you probably are aware, the Daubert case established case law standards for the acceptability and admissibility of expert witness reports and testimony.  Therefore, the forensic expert's testimony and/or report generally must follow a methodology that is testable, is subject to peer review and publication, has a known or potential error rate, and is generally accepted in the profession. In addition, the testimony needs to be based upon sufficient facts or data, be the product of reliable principles and methods, and these methods need to have been reliably applied to the facts of the case.

While a forensic accountant's work is often very situation specific, there are generally accepted methodologies to the determination of financial damages that should be considered to stay within Daubert guidelines. The three most common are:

  • The "before and after" method - a computation of damages by comparing the results before and after the discernable event (e.g., the fraud) took place.
  • The "yardstick" method - a calculation of damages derived by comparing the subject business to very similar type and size businesses that have not been subject to the damages in question.
  • The "but for" method - a computation of damages by determining what the likely results would have been "but for" the fraud or other issue(s) being examined.

If, however, the facts and circumstances of the case call for an alteration of these common methods or use of different methods, it is important for the expert to state the appropriate reasons for the alternative approaches being used. As noted above, the situation specific nature of forensic accounting work often requires adjusting the approach for the specific circumstances at hand.

Persuading Judge and Jury

Both in discussing the report preparation with your expert and preparing for testimony, it is important to have the forensic accounting expert focus on getting to the point as directly as possible. Focus on what happened (or is alleged), how it resulted in financial damages and how the damages were computed.

While sufficient detail is needed to show that a thorough job in calculating the damages was done, eliminate details or elaboration that is extraneous.  Put another way, urge your forensic accounting expert to resist the temptation to discuss every little nuance or show off how smart he/she is. In my experience, if you show the judge and/or jury a clear path to the goal line, they will follow it.

Steven Dane, CPA/ABV, is a member of the firm and heads the valuation and litigation support services group at Kostin, Ruffkess & Company LLC, a certified public accounting and business advisory firm committed to helping clients succeed.   He has testified as an expert witness in numerous cases in Connecticut, Florida and Massachusetts, and he has valued more than 200 businesses. He can be reached by phone at (413) 233-2313.