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.