Transcript Forensic Accounting Update Exam II Copyrighted 2002 D

© D.L. Crumbley
The Litigation Side of Forensic Accounting
Copyrighted 2001
D. Larry Crumbley, CPA, Cr.FA, CFD
KPMG Endowed Professor
Department of Accounting
Louisiana State University
Baton Rouge, LA 70803
225-578-6231
225-578-6201 Fax
[email protected]
Dr. Crumbley is the editor of the Journal of Forensic
Accounting: Auditing, Fraud, & Risk, former chair of
the Executive Board of Accounting Advisors of the
American Board of Forensic Accountants, member of
the NACVA’s Fraud Deterrence Board, and on the
AICPA’s Fraud Task Force (2002-2004). A frequent
contributor to the Forensic Examiner, Professor
Crumbley is a co-author of CCH Master Auditing
Guide, along with more than 50 other books and 350
articles. His latest book entitled Forensic and
Investigative Accounting is published by Commerce
Clearing House (800-224-7477). Some of his 12
educational novels have as the main character a
forensic accountant. His goal is to create a television
series based upon the exciting life of a forensic
accountant and litigation consultant.
I am not engaged in rendering legal services or legal opinions. If legal
advice or assistance is required, the services of a competent attorney
should be sought.
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Forensic Accounting Areas
Investigative Auditing
Litigation Support
Forensic: Latin for “forum,”
referring to a public place or court.
Black’s Law Dictionary: Forensic,
belonging to the courts of justice.
Note: Corporate spooks are used to check on
competitors.
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Definition of Forensic
Accounting Litigation Service
Forensic accounting litigation services are the
professional assistance accountants provide related to
the litigation process. These services may involve
accounting, financial, auditing, tax, quantitative
analysis, and investigative and research skills, as
well as an understanding of the legal process to
provide assistance for actual, pending, or potential
legal or regulatory proceedings before a trier of fact in
connection with the resolution of a dispute between
parties.
-------------------------------------------------------“Briefly, forensic accounting is a science that deals
with the relation and application of facts to business
and social problems.” Lenny smiled and turned
toward the jury. “As I tell my students, a forensic
accountant is like the Columbo or Quincy character of
yesteryear, except he uses accounting records and
facts to uncover fraud, missing assets, insiders’
trading, and other white-collar crimes.” Lenny turned
back to the pinstriped lawyer.
I.W. Collett & M. Smith, Trap Doors and Trojan Horses, Thomas Horton & Daughters, p. 76
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Forensic Auditing
Forensic auditing is a type of auditing that
specifically looks for financial misconduct, and
abusive or wasteful activity.
It is most commonly associated with
gathering evidence that will be presented in a
court of law as part of a financial crime or a fraud
investigation.
Source: B.L. Derby, “Data Mining for Improper Payments,” Journal of
Government Financial Management, Winter, 2003, pp. 10-13
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Life is good, the grass is green
The good Lord smilin’ on you and me
Sweet sunshine everywhere I look
You love me like no one could
Life is good
Kenny Chesney
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Open Job Orders
© D.L. Crumbley
• Valuation Partner for NJ Forensic Firm - Roseland, NJ...up to
$250K base. Key words - Matrimonial, business valuation, expert
testimony, litigation support, forensic.
• Forensic Partner for NY firm - up to $300's base. Key words Bankruptcy, forensic, litigation support, expert
testimony,insolvency CPA a must and solid public acct.
experience.
• Audit Partner, Houston, Texas- up to $120k base first 12 months,
60% of collection between 12&17month, 70% of collection
between 17&36 month-client prefers a manager or director level
candidate with good business development skills. They rather
mold. No book of business required. SEC exp. a must. CPA a
must. The firm ranks among the top 10 nationally in "number of
public companies audited." Currently, they have 4 audit partners
and will be looking to add a 5th one this fall. Revenues last year
were $1.3 million and for 2003 they estimate $1.7 million.
• Litigation Support Manager - NY office up to $115K. One CPA
firm has 5 offices, 300+ staff. CPA a must and mid size firm
experience. Big 4 experience not a good fit. (Valuation, Audit and
Tax Senior/Managers from big 4 and CPA, always welcomed with
this client.)
• Forensic Senior for Southern NJ firm - up to $80K...Forensic
firm has three 3 office in NJ, 7 partners, 60+ staff. CPA a plus.
Audit professional from big 4 or top firm okay.
• Litigation Support Senior - up to $70K plus bonus...Woodbury
NY (LI).The firm has 24 Partners, 230 staff, 4 offices....Forensic
and litigation support and CPA firm experience a must. CPA a
plus.
• Jessica Cardona, Executive Recruiter
218 North Wood Ave. Suite # 3Linden, NJ 07036main: 908-4869500direct: 908-486-9023
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Consulting Fees
• Forensic accountants work with attorneys,
private investigators, law enforcement
officers, corporate security specialists, the
IRS, and the FBI.
• In 1999, Kessler International stated that the
firm charges about $300 per hour for
forensic consultations.
• Salaries start around $30,000
• Senior-level government employees can
earn between $75,000 to $90,000
• In the private sector, one can earn between
$125,000 to $150,000
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A Forensic Accounting Expert
Witness
• Harvey R. Kelly led the investigation and testified
against CEO Richard M. Scrushy (HealthSouth).
•He acknowledged turning up “nothing that had Mr.
Scrushy’s name on it,” that connected the former CEO
to the fraud at HealthSouth. That inflated earnings by
$2.7 billion.
•“Our job wasn’t to figure out who all the bad guys
were. Our job was to help the company get the right
numbers and figure out how much the fraud was.”
• He and his investigators sifted through millions of
documents during their 23,000-hours fraud
investigation. PWC was paid about $9 million to
conduct the forensic audit in 2003.
• HealthSouth deleted old e-mails every 60 days.
• Now with the NYC office of Alix Partners LLC, he
was being paid about $700 an hour by the
government for his testimony
Source: Evelina Shmukler, “Scrushy Team Cross-Examines Forensic-Accounting
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Witness,” WSJ, February 1, 2005, C-4
© D.L. Crumbley
Top Niche Services
1. Business Valuations
2. SOX Compliance
3. Litigation Support
4. Attest Services
5. Estate/Trust/Gift
9. Forensics/fraud
89%
77%
69%
67%
66%
56%
Source: Accounting Today.
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Six Areas of Litigation Services
1)
Damages
*
*
*
*
*
*
*
*
2)
Antitrust Analysis
*
*
*
*
*
*
3)
Lost profits
Lost value
Lost cash flow
Lost revenue
Extra cost
Mitigation
Personal Injury
Environmental
Price-fixing
Market share, market
definition
Pricing below cost
Dumping and other price
distribution
Anti-competition actions
Monopolization
Accounting
4)
Valuation
* Business and professional
practices
* Pension
* Intangibles/intelligent
property
* Property
5)
General Consulting
*
*
*
*
*
*
*
*
*
*
*
Arbitration
Mediation
Actuarial analyses
Statistical analyses
Projections
Industrial engineering
Market analyses
Computer consulting
Industry practices
Merger/acquisitions
Document management
* CPA malpractice
6) Analyses
* Bankruptcy/ reorganization
* Tax bases
* Tracing
* Cost allocations
* Contract cost and claims
* Tax treatment of specific
transactions
* Regulated industries
* Frauds (civil and criminal)
* Historical analyses
* Family law
Source: Management Advisory Services Technical Consulting Practice Aid 7:
Litigation Services, (AICPA, 1986);
http://www.aicpa.org/innovation/fp/overview_litigat_disput.htm
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Definition
A forensic accountant has extensive
experience in investigations to determine
solutions to disputed accounting matters, to
write expert reports on their investigation,
and to appear in court as expert witnesses.
Zeph Telpner and Michael Mostek
------------------------------------------------------A normal accountant is like a guarddog
(e.g., a bulldog); a forensic accountant is
like a bloodhound; an internal auditor is
like a seeing-and-eye dog (e.g., monitoring
and guiding management), a corporate
accountant is a mix breed, and a
governmental accountant is an afghan.
D. Larry Crumbley
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Forensic Accountant’s
Knowledge Base
Law
Criminology
Investigative
Forensic
Auditing
Accountant
© Hugh M. Christensen
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Quotes
“A lawsuit is like a parachute
jump; you have to get it right
the first time.”
- Hal Rosenthal
“The party who has command
of the paper trail most often
controls in the courtroom.”
- D. Larry Crumbley
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Foreign Language
“Accounting concepts are a foreign
language to some lawyers in almost
all cases, and to almost all lawyers in
some cases.”
U.S. v. Kovel., 296 F.2d 922 (CA-2, 1961)
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Three Branches of Government
Executive (regulations)
Legislative law [takes precedence]
Judicial law [a referee]
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U.S. Tort Costs
Climbing
© D.L. Crumbley
•U.S. tort system cost $246 billion in 2003,
which is $845 per U.S. citizen ($12 in 1950).
•U.S. tort costs accounted for 2.23% of GDP,
(similar to 2002).
• In 2002, the increasingly inefficient U.S. tort
system returns less than 50 cents on the dollar
to people it is designed to help; only 22 cents
to compensate for actual loss.
•Medical malpractice costs totaled nearly $27
billion in 2003, or $91 per person (compared
to $5 per person in 1975).
•Tort costs increased by a total of 33.5% in
past three years.
Tillinghast-Tower Perrin, U.S. Tort Costs: 2004 Update, December 10,
2004.
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Camico August 2003 Survey
 62% of the prospective jurors agreed that a
professional accounting firm would “look the other
way” if a client violated the law in order to maintain
the client relationship.
 57% of prospective jurors agreed with the
statement “Accountants often manipulate their
numbers and opinions to say what their clients want
them to say.” 17% were neutral and 26% disagreed.
 74% of prospective jurors agreed that an auditor
“should easily detect fraud.”10% were neutral and
16% disagreed.
 Who is responsible for the legal and/or ethical
problems facing corporate America?
CEO, 70%
Board of Directors, 55%
Senior Executives, 68%
Inside Accountants, 53%
CFO, 62%
External Accountants, 42%
Inside lawyer, 58%
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Civil Procedure
Body of rules and practices by
which justice is handed out by
the legal system.
Federal Rules of Civil
Procedure (FRCP): governs
U.S. district courts.*
Federal Rules of Criminal
Procedure.
Federal Rules of Evidence.
* Find at www.law.cornell.edu/rules/frcp/overview.htm
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Hard To Convict
You have to remember one
thing, and that is the fact that our
laws aren’t designed to punish guilty
people; they’re intended to protect
innocent people.
E.J. McMillan, The Audit, Churchton, MD: Harwood
Publishing, 2000, p. 259.
-------------------------------------------------------------
Robert Durst in Galveston, Texas
admitted killing his neighbor, cutting up
the body, and tossing the pieces in trash
bags in the Gulf. He was found innocent.
---------------------------------------------Deanna Laney claimed God ordered
her to bash in the heads of her two sons.
She was acquitted in April 2004 by a Tyler,
Texas jury.
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Hard To Convict
I have never come to terms with a
system based on the principle that
it is better to let a hundred guilty
people go free rather than
wrongly convict one innocent
person. It’s okay for people to
be victimized again and again
as long as no one is mistakenly
locked up.
Clinton McKinzie, The Edge of Justice, New
York: Bantam Dell, 2002.
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Tim McGraw’s
Position
© D.L. Crumbley
“Well you do what you do, and
you pay for your sins.”
Tim McGraw’s “Red Ragtop”
------------------------------------------------------------------------
“
It’s a Great Day to Be Alive”
Travis Tritt
And it’s a great day to be alive
I know the sun’s still shinin’ when I close my eyes
There’s some hard times in the neighborhood
But why can’t every day be just this good?
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Miscellaneous Ideas
•A lawyer’s job is ultimately to avoid trial.
•Largely uncontrollable variables such as
individual juror predisposition, judicial
bias and even the skill and acumen of
opposing counsel make all trips before the
bar of justice a veritable crapshoot.
•Therefore, opt for pre-trial settlement.
•As an investigator, your role in avoiding
the cost and uncertainty of trial can not be
overestimated.
Source: H. Silverstone and M. Sheetz, Forensic Accounting and Fraud
Investigation, Hoboken, N.J.: John Wiley & Sons, 2004, p. 233
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Knowledge of Legal Concepts Necessary
Since forensic accounting is
often used in legal forums, forensic
accountants must be familiar with
legal concepts and procedures.
Nothing spoils a great case
quicker than the lack of evidence.
Expert opinions are evidence. FRE 702.
Source: D.W. Squires, “Problems Solved With Forensic
Accounting: A Legal Perspective,” Journal of Forensic
Accounting, Vol. IV, 2003, p. 132.
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Five Major Phases of Litigation
• Pleadings
•Discovery [Most of our work occurs here].
• Trial
• Outcome
• Possible Appeal
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Pleadings
Complaint – Plaintiff files.
Service of Process – served on
defendant.
Answer – Defendant must
admit or deny allegations.
 Demurrer- No cause of action
exists.
Possible cross-complaint
Sharp v. U.S., 199 F. Supp. 743 (D.Del
1961), aff’d 203 F.2d 783 (3rd Cir. 1962).
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Major Ways to Sue
© D.L. Crumbley
Two major methods are 1) by ambush, and
2) by serve and volley.
• With the ambush, we would prepare the skeletal
framework of our allegation, run to the courthouse,
file the suit, leak it to the press, and hope we could
prove what we thought we knew. The advantage was
surprise, and embarrassment for the defendants, and,
hopefully, public opinion. The downside was the legal
equivalent of jumping off a cliff with the strong, but
unconfirmed, belief that there was a net down there
somewhere.
• The serve and volley would begin with a letter to the
defendants, in which we made the same allegations,
but rather than sue we would invite them to discuss
the matter. The letters would go back and forth with
each side generally able to predict what the other
might do. If liability could be proved, then a quiet
settlement would probably occur. Litigation could be
avoided.
Source: John Grisham, The Street Lawyer, New York: Bantam Dell, 1998, p. 27425
© D.L. Crumbley
Expert Witnessing
Our purpose: Assist the trier of
the facts.
Question of Facts v. Question of
Law [not always clear].
Negligence may be either.
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Frequent Terms (1)
Appellant (Petitioner)
(Plaintiff): Person filing suit.
Respondent (Defendant):
Person sued.
Stare decisis: case once
decided, will control.
Doctrine of precedential
authority: follow prior case
only where issues/facts are
essentially the same.
Judge not required to follow
judicial precedent beyond own
jurisdiction.
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Frequent Terms (2)
 Res judicata (collateral estoppel):
Once case or issue resolved, matter
precluded from being litigated again.
 Law of the case: Once an issue
decided one way, if not properly
challenged, will not be reconsidered.
 Full Faith and Credit Clause:
Court in one state must honor and
enforce judgment of another state.
 Venue: The appropriate court to
bring a dispute (cause of action
occurs or where crime committed).
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Frequent Terms (3)
Pro se: Party representing himself or
herself.
Per curiam: Decision of the whole
court.
en banc: decision rendered by full
court.
Concurring opinion: Agrees with
court’s conclusion, but…
Dissenting opinion: Disagrees with
majority.
Dicta (Dictum): incidental facts; not
binding on future cases.
 30 (b) (6): names a public or private
organization for deposition.
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Frequent Terms (4)
Affirmed (aff’d; aff’g): agrees
with lower court.
Reversed (rev’d; rev’g): disagrees
with lower court.
Writ of Certiorari: Asks Supreme
Court to hear your case.
Cert. Granted
Cert. Den.
Remand: Vacate the lower court
decision and send back for further
considerations
Overruling: Does not impact
either party in the earlier case.
Overrules a previous case
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Frequent Terms (5)
Ad hoc: for one particular or special
purpose (e.g., an Ad hoc committee)
Ad valorem: According to value
(e.g., in tax, assessment of taxes
based on property value).
Bona fide: in good faith and without
fraud or deceit.
Covenant: an agreement or promise
to do or not to do something.
Dejure: in law or lawful; legitimate.
Deposition: A written statement of a
witness under oath, often
question/answer
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Frequent Terms (6)
Enjoin: to command or instruct with
authority (e.g., judge can enjoin
someone to do or not to do
something).
Habeas corpus (writ of): procedure
to determine if authorities can hold a
person in custody.
Nolo contendere: a party does not
wish to fight or continue; person will
not fight a charge.
Parol evidence: renders any
evidence of a prior understanding of
a party to a contract invalid if it
contradicts the term of a written
document.
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Frequent Terms (7)
© D.L. Crumbley
 Brief – written arguments supported by
citations of court decisions, statutes, and
other authorities.
 Stipulation – voluntary agreement before
trial between opposing parties concerning
the disposition of certain facts or points.
 Amicus-curiae – a brief filed by a party not
directly related to a lawsuit.
 Habeas corpus – a writ which permits a
prisoner to challenge a conviction on
constitutional grounds.
 Executor/executrix – one appointed by a
will to execute the provisions.
 Ex parte hearing – court hears only one
side of an issue.
 Special Master – appointed by a court or
judge to decide certain facts, etc.
 Pro bono- providing a professional service
without compensation.
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Frequent Terms (8)
 Subpoena ad testificandum – command to
appear and testify as a witness.
 Default judgment – judgment won by the
plaintiff because the defendant failed to
respond to a summons or appear at trial.
 De novo – new; a new proceeding without
regard to prior legal actions.
 Double jeopardy – prohibition in the U.S.
Constitution, 5th amendment, against trying
a citizen twice for the same crime.
 Enabling act – legislation by which an
administrative agency is created and powers
are delegated to it.
 Jurisdiction – power of a court to hear and
decide the issues in a case and to bind the
parties.
 Long-arm statute – a state law extending
personal jurisdiction over out-of-state
persons (including corporations).
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Frequent Terms (9)
 Pleadings – papers in court, with copies to
other parties, in preparation for bringing or
defending a lawsuit.
 Scienter – with intent to deceive; with
guilty knowledge.
 Voir dire – jury selection process; lawyers
and judges ask.
 Actus reus – brought about the criminal act.
 Mens rea – caused the criminal act with
guilty knowledge; state of mind indicating
culpability. Staples v. U.S., 511 U.S. 600
(1994).
 Preponderance of the evidence – greater
than 50%. Civil trial.
 Clear and convincing evidence – ca 70%.
 Beyond a reasonable doubt – greater than
95%. Criminal trial.
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Voir Dire
The concept of voir dire- the
questioning and selection of jurors has
undergone a sea of change in California since
the passage in June 1991of Proposition 115.
Before that time attorneys on both sides of a
case were given a wide latitude in questions
they could ask prospective jurors. What did
they do for a living? How many brothers and
sisters did they have? What are their hobbies?
Favorite books and/or movies? Feelings about
puppies? Cats? Gold-fish? Almost anything
went if it might serve to bring out a
prospective juror’s character. Often the
questions were thinly disguised speeches
designed to sway prospective jurors. And
because of this, jury selection in a capital case
such as this one could easily take as long as
two months and in some cases longer.
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Voir Dire
Since Proposition 115, however, voir dire was
conducted by the judge and –as the
proposition had contemplated- tended to go
much more quickly. Attorneys could supply
the judge with a list of questions they wanted
to see asked, but often these were ignored
Lawyers for the prosecution and the defense
still had their twenty peremptory challengesthe right to dismiss a prospective juror for any
reason whatsoever or no reason at all- but the
empaneling of the jury was now much more
outside the perceived control of either counsel.
It was the judge’s show.
Source: J.T. Lescroart, The 13th Juror, New York: Dell Publishing, 1994,
pp. 237-238.
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Frequent Terms (10)
Preponderance of the evidence –
greater than 50%. Civil trial.
Clear and convincing evidence – ca
70%.
Beyond a reasonable doubt – greater
than 95%. Criminal trial.
Bates numbers - a numerical or
alphanumeric system placed on
documents retrieved during the
discovery process.
Stipulations – before trial the parties
agree to certain facts to simplify the
trial.
Ipse Dixit- thing speaks for itself.
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Frequent Terms (11)
Chain of custody – accounting for evidence and
documents from the time obtained until the end
of the trial.
Capias – a court writ directed an officer to arrest
a person.
Ad damnum – the damages claimed by a
plaintiff.
Demurrer – plea for a dismissal of a dispute on
the grounds that even though the plaintiff’s
arguments are true, they are insufficient to
sustain a claim.
Intestate – one dies without a will.
Stay – delay a legal order (e.g., an execution).
Sidebar – discussion between judge and lawyers
at the bench, outside the hearing of the jurors.
Soddit- Some Other Dude Did It!
Vacatur- a decision is set aside, annulled, or
vacated.
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Bates Numbers
Unpublished- some federal appellate opinions are
not published in the Federal Reporter, but after
January 1, 2001 now appear in West publication
known as the Federal Appendix. Sometimes called
non-precedential, they are not binding. About 40%
of Federal appellate Daubert decision are
unpublished.
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Attorney: Walking Away
You got to know when to hold
‘em, know when to fold ‘em,
know when to walk away, know
when to run. You never count
your money when you’re sitting
at the table. There’s be enough
time for counting them when the
dealing’s done.
The Gambler
by Kenny Rogers
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That First Telephone Conversation
1. Answer all the questions and keep the
conversation simple and to the point; avoid
hesitation and long pauses. The attorney is well
experienced is asking questions; in a sense, you
are being cross-examined.
2. Let the attorney explain fully the case, in his way
at his pace. Be a good listener ( attorneys like
that).
3. Ask as many questions as necessary in order for
you to understand the case. Show that you know
what you need to know in order to evaluate the
situation.
4. If you have been contacted by the opposing party
in this particular matter, immediately disclose that
to the caller. Some courts do not allow an expert
to testify for one side if he has been contacted
previously by the opposing side.
5. When asked your expertise and experience,
especially in the particular area of interest, be
succinct. Say, “ I have given expert testimony in 42
© D.L. Crumbley
The First Telephone Conversation
ten or twelve such cases over the past four or five
years,” instead of trying to enumerate each case.
Avoid arrogance.
6. Show your desire to meet with him soon at a time
and place most convenient for him. He may
simply ask you to mail, e-mail or fax your CV
and fee schedule, and later may retain you on basis
of this material- and the phone conversation.
(What’s more likely, however, is that the attorney
will want to meet with you to personally evaluate
your demeanor and dress.)
7. Be firm and direct so that the attorney will feel
confident in retaining you.
If the conversation goes on at length or otherwise
appears that the attorney is serious about engaging
your services, you might want to ask some
questions:
8.
Is he a one-man operation or part of a large law
firm? How large is his staff? What back-up does
he have (e.g., how many paralegals)?
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The First Telephone Conversation
9. What is his experience in using experts in general
and experts in your particular field?
10. How did he get your name?
Source: Jesse E. Dines, Expert Witness Manual, Irvine, CA: Pantex International,
2004, Ch.12.
The attorneys each acted in the role of opposing
movie directors--calling witnesses and
orchestrating carefully timed presentations. All of
it designed to sway the jury’s disposition in favor
of their respective client’s position. Civil cases,
like this one, are decided based only on which side
has the greatest preponderance of evidence in its
favor. Evidence of guilt or innocence beyond a
reasonable doubt is the criterion for deciding
criminal cases only, and therefore did not apply to
this case. It turned out my role was relatively
small in this case, but the per diem fees were
quite substantial.
I.W. Collett and D. Forgione, Costly Reflections in a Midas Mirror, Thomas
Horton and Daughters, p.131
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Finding Information About Attorneys
1. Search on Internet ( e.g., Legal
Database, Legal Match, Thompson
FindLaw)
2. American Bar Association
3. Martindale- Hubbell, paper and internet
4. Prentice-Hall Directory
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The Federal Judicial System
SUPREME COURT
9 Judges
U.S. COURT OF APPEALS
Federal Circuit
U.S. COURT OF
APPEALS
12 Circuits
(Created in 1982 by a congressional
statute; formed by merging the Court
of Claims and the Court of Custom
and Patent Appeals; sit in panels of
three on cases involving customs,
copyright, trademarks, and patents.)
U.S. Tax Court
19 judges, with 1 judge
hearing most tax cases
U.S. COURT OF
INTERNATIONALT
RADE
(Created in 1980,
formerly the U.S.
District Court, instead
of the circuit courts.)
(Three-judge panels, not the
entire circuit court, hear most
cases.)
ADMINISTRATIVE
AGENCIES
(In some cases,
appeals to a U.S.
District Court, instead
of the circuit courts.)
U.S. Court of
Federal Claims and
some special
agencies (e.g.,
Board of Contract
Appeals,
Patent/Trademark
Boards, and Merit
Systems Board)
U.S. DISTRICT
COURTS
50 States
Washington, D.C.,
Puerto Rico, Virgin
Islands, Guam*
U.S.
BANKRUPTCY
COURTS
U.S.
MAGISTRATES
* Patent disputes go from the district courts to the Federal Circuit.
46
© D.L. Crumbley
Some Judicial Facts
• Have right to jury trial in district court, but jurors
can only determine facts (not law).
• No jury trial in probate, family law, estate issues
equitable issues, Tax Court, and Court of Federal
Claims
• Automatic right to appeal from trial court to the first
level of the appellate process.
• But higher court (e.g., Supreme Court) must decide
whether to hear dispute.
• To get to Federal court, must raise the question of a
federal law or diversity of citizenship (e.g., different
state)
• For Federal court, controversy must exceed $50,000.
• State courts have trial courts, appeals courts, and
supreme court.
47
© D.L. Crumbley
Facts Determination
The Seventh Circuit had this to say
about a trial court’s right to determine
facts:
The trial court … has ‘the best
opportunity to observe the verbal and
nonverbal behavior of the witnesses
focusing on the subject[s]’ reactions and
responses to the interrogatories, their
facial expressions, attitudes, tone of
voice, eye contact, posture and body
movements, as well as confused and
nervous speech patterns in contrast with
merely looking at the cold pages of an
appellate record.
Source: United States v. Duarte, 1 F.3d 644, 651 (CA-7,
1993), cert. denied, 510 U.S. 1058, 126 L.Ed. 2d 688,
114 S. Ct. 724 (1994).
48
© D.L. Crumbley
Helpfulness
Helpfulness to the trier of the facts is
the ultimate touchstone for the
admissibility of expert testimony. To be
helpful the (1) witness must be
qualified as an expert, (2) expert must
have a reasonable factual basis for the
testimony, (3) testimony must be
based upon reliable methods, and (4)
testimony must be relevant to the facts
in dispute. Accounting testimony can
be the subject of expert testimony.
Sources: In Re Paoli Railroad Yard PCB Litigation, 916 F.2d
857 (CA-3, 1990).
Fed. Rul. Evidence 702 and 703; General Electric Co. v.
Joiner, 522 U.S. 136 (1997).
Computer Systems Engineering, Inc. v. Qantel Corp., 740
F.2d 67 (CA-1 1984).
49
© D.L. Crumbley
The Judge Controls
A 2000 dispute involved an alleged Ponzi scheme where a
defendant sold airline tickets procured by debtors using
frequent flier miles purchased by brokers. The defendant
relied on an expert who was a CPA, a bankruptcy trustee, an
insolvency accountant, and a fraud investigator with
substantial experience and impressive qualifications and
credentials. The judge, Herbert A. Ross, was not impressed
with this expert, F. Wayne Elggren, employed by Arthur
Andersen.
At trial Mr. E questioned the experts of the trustee
and the expert of the plaintiff (who had no CPA or
certification). Mr. E found numerous faults with the
methodology and analysis of the trustee and the plaintiff’s
expert, E. Jayne MacPhee. Mr. E concluded his argument by
stating there was too much unaccounted for cash and profits
from the ticket business to claim it was a sham or Ponzi
scheme. He relied on a “smoking gun” of $9 million in ticket
revenues. Ms. MacPhee found only $6 million and the trustee
only $4.8 million.
The judge said that Mr. E had misunderstood or had
been misadvised about the context of the $9 million of ticket
sales “He [Elggren] is hoisted on his own petard when he
uses it to analyze the debtors’ business history.” The rest of
his criticisms are of “such small size or consequence, or so
speculative or inclusive, that they are akin to straining at
gnats.”
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The Judge Controls
The judge had this to say about MacPhee’s lack of a CPA
degree or certification in certain accounting fraud detection
professional organizations and Mr. E’s criticism of her:
The type of expertise truly needed in this case is someone
who can take poorly kept, incomplete records, involving
commingled funds, and reconstruct the business out of them.
MacPhee has training in accounting matters and experience
in forensic accounting situations. She has worked as an
accounting analyst reconstructing what really happened in
the M&L Business Machine case, one of the major Ponzi
schemes to reach the bankruptcy courts. Experience and
training, despite the lack of a specific degree or designation,
qualify her to render an expert opinion on accounting matters
related to the reconstruction or analysis of business records,
especially when a Ponzi-type business, with commingling of
funds, is suspected.
While she does not have the credentials of belonging to all
the professional groups that Mr. E does, she has accounting
training and experience in working on Ponzi cases, and has
done an admirable job in assisting the court in understanding
debtors’ operations - - a much more intellectually honest job
than Mr. E at that. She qualifies as an expert in reconstructive
accounting in a situation where the books and records are
incomplete and not up to standards, and the funds of the
debtors are commingled.
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The Judge Controls
Likewise, the trustee, even though he is a party, may
qualify as an expert, even though his bias can be
challenged. He is a CPA and a panel trustee in Alaska,
which have given him on-the-job experience in
understanding and reconstructing financial
transactions.
Judge Ross concluded as follows:
In short, I find that Mr. E’s report is based on
substantial factual mistakes, speculation, innuendo,
and inferences which are not supported by full
explanations and analysis. It is not worthy of an expert
of his caliber, nor worthy of admission as evidence in
this case. His expert opinion will be excluded.
Source: In re Bonham, 55 Fed. Rul. Evidence Serv. (Callaghan)
419; 2000 Bankr. Lexis 727.
52
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Miscellaneous Decisions
• Admissibility affirmed. Exxon complains that
expert had no specialized knowledge of petroleum
pricing and employed flawed methodology. But
district court conducted six-day Daubert hearing
exhaustively canvassing reliability issues, and expert
was fully subject to cross-examination. No abuse of
discretion.
Allapattah Servs v. Exxon Corp., 333 F.3d 1248
(11th Cir. 2003)
• Exclusion affirmed. Expert exhibited “utter lack of
any familiarity, knowledge, or experience with
damage analysis;” his methods were “misleading, not
reliable, and unsupported by use in any other
comparable setting” and did not fit facts of case, and
his testimony would have confused jury rather than
assisting it.
Lifewise Master Funding v. Telebank, No. 03-4086 (10th Cir. June 29, 2004)
• On trial for filing false tax returns, defendants offers
“tax expert” to testify that she was not required to
report certain income on personal return. District court
excludes testimony. Exclusion affirmed. Proposed
testimony represented legal conclusion, and it is
judge’s role to instruct jury on law.
United States v. Rosales, No. 00-50272 (9th Cir. Apr. 12, 2001) (unpublished).
53
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Miscellaneous Decisions (Cont.)
• Admissibility reversed. Courts have permitted
owners and officers of businesses to offer lay opinion
on damages, based on their familiarity with enterprise.
But plaintiff’s witness was neither owner nor officer,
and his testimony therefore should have been
evaluated for admissibility as expert opinion under
Fed. R. Evid 702. Remanded for new trail on
damages.
JGR. Inc. v. Thomasville Furniture Indus., Inc., 370 F.3d 519 (6th Cir. 2004).
• Admissibility affirmed. Defendants complain that
experts incorrectly accounted for effects of theater
size and stadium-style seating on revenues, and also
that Greenwald had no specific experience with movie
theaters. But Greenwald is CPA who has testified in
fifty court cases, and defendants’ other arguments
amount to methodological quibbles, which were fully
explored before jury. No abuse of discretion.
Regal Cinema, Inc. v. W & M Properties, No. 02-3450 (6th Cir. Jan. 27, 2004)
(unpublished).
• Admissibility reversed. It is true that lay opinion on
lost profits is sometimes permitted, when offered by
present or former officers or employees. But despite
her experience and advanced degree, this witness was
neither of those things, nor was she otherwise
54
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Miscellaneous Decisions (Cont.)
sufficiently acquainted with company’s affairs to
ground any lay opinion on lost profits. Remanded for
new trial on damages.
Dijo, Inc. v. Hilton Hotel Corp., 351 F. 3d 679 (5th Cir 2003).
• Admissibility affirmed. Defendant argues auditor
should have followed “net worth method” applicable
in tax prosecutions under Holland v. United States,
348 U.S. 121 (1954). But Holland need not be
followed in non-tax cases. Unlike tax prosecutions,
narcotics conspiracy charges do not involve financial
gain as necessary element of offense, so less stringent
standard are permissible.
United States v. Cuervo, 354 F. 3d 969 (8th Cir. 2004), cert. denied, 73 U.S.L.W.
3210 (Oct. 4, 2004)
• If the expert “could or would not explain how his
conclusions met the Rule’s requirements, he was not
entitled to give expert testimony. As we so often
reiterate: “An expert who supplies nothing but a
bottom line supplies nothing of value to the judicial
process.”
Zenith Elecs. Corp. v. WH-TV Broad. Corp., No. 04-1635 (7th Cir. Jan. 20,
2005).
55
Motions
© D.L. Crumbley
Motion: Requests a rule or order in favor of the applicant
Motion to dismiss: The moving party is requesting that a cause of action be
dismissed because the alleged facts, even if proven, do not constitute a valid
legal claim.
Motion for a directed verdict: The moving party requests at trial that a
cause of action be dismissed because the party with the burden of proof has
failed to establish sufficient facts so that a reasonable fact finder (e.g., the
jury) could find in the claimant’s favor. For example, in a complex toxic tort
case, the plaintiff’s only expert witness is barred from testifying as to
causation under the Daubert rule. After the plaintiff rests, the defense moves
for a directed verdict on the grounds that the plaintiff has not submitted
sufficient proof of causation through an expert witness.
Motion for judgment notwithstanding the verdict: This motion is made by
the losing party after an adverse jury verdict. The moving party is asking that
the judge reverse the verdict of the jury. These motions may be granted if the
judge determines that the jury verdict had no reasonable support in fact or
was contrary to law.
Motion for a continuance: The moving party is requesting that a scheduled
event, for example a hearing or trial, be postponed or continued to a later
date.
Motion in limine: The moving party is requesting that evidence it expects
the opposing side to offer be held inadmissible. For example, a party may
make a motion in limine to exclude the testimony of an expert for failure to
comply with the Daubert rule.
Motion for summary judgment: The moving party is requesting, prior to
trial, and based solely on documentary evidence (including expert deposition
transcripts, reports, and affidavits), that the court grant judgment in its favor
because no material facts are in dispute. This device is used to throw a case
out of court without it ever getting to the jury. Many times a lawyer with a
weak case will seek to survive summary judgment in order to be able to settle
the case on favorable terms over the threat of a jury trial.
Source: Babitsky et. al, The Comprehensive Forensic Manual, Seak, Inc.,
www.seak.com
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Discovery: process of getting
information from the other party
Fed. R. Civ. Pro. 26(b)(1).
Parties may obtain discovery regarding
any matter, not privileged, which is
relevant to the subject matter involved in
the pending action, whether it relates to the
claim or defense of the party seeking
discovery or to the claim or defense of any
other party, including the existence,
description, nature, custody, condition, and
location of any books, documents, or other
tangible things and the identity and location
of any persons having knowledge of any
discoverable matter. The information sought
need not be admissible at trial if the
information sought appears reasonably
calculated to lead to the discovery of
admissible evidence.
57
Judge Admonishes Medco
© D.L. Crumbley
• A federal judge admonished Medco Health
Solutions, Inc., for violating his order to turn over
documents in the company’s legal battle with the
Justice Department.
• Medico, one of the country’s largest pharmacybenefit managers, has been “dilatory” in its disclosure
of certain documents that were supposed to be turned
over and “any further violations of this court’s orders
may result in sanctions.”
• If a judge or jury agrees with the Justice Department,
Medco could technically be liable for an $11,000 fine
on each of the millions of prescriptions Medco
processed for government employees.
• In his order, the judge said Medco has turned over
documents on disks that have technical defects, and
that the plaintiffs have complained about the defects to
Medco. “Medco argues that it has not been made
aware of any defects in electronic document
production,” the judge wrote. Clearly, this is
disingenuous.”
Source: Barbara Martinez, “Judge Admonishes Medco On Case Documents,” WSJ, February
58
4, 2005, p. A-5.
© D.L. Crumbley
Privilege: discovery may not
be made of privileged matters
 Attorney – client
 Husband – wife
 Physician – patient
 Government secrets
 Ordained clergyman-parishioner
 Attorney work product [FRCP 26 (b)(3)]
[But not experts who will testify]
----------------------------------------------------------------“Something is happening here, but you don’t know what it is, do
you, Mister Jones?”
Ballard of a Thin Man
Bob Dylan (1965)
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Elements of the Attorney-Client
Privilege
 Communication.
 Between attorney and client.
 For obtaining legal advice or
services.
 Intended to be confidential.
 Privilege is not waived.
[Be careful with e-mails and cell
phones.]
U.S. v. United Shoe Machine Corp., 89 F. Supp. 358 (D.
Mass. 1950)
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Protecting Work Product Privilege
 Attorney should directly retain the
consultant.
 Agreement should be between attorney
and expert.
 Expert should obtain facts through, or
at direction of the attorney.
 Investigation should be done at the
direction of attorney.
 Attorney included when meeting with
client.
Source: Zeph Telpner and Michael Mostek, Expert Witnessing in
Forensic Accounting, Boca Raton, FL: CRC Press, pp. 209 – 237.
 If opinion work product is shared with a
testifying expert, it is discoverable (e.g.,
Lamonds v. General Motors Corp., 180
F.R.D. 302 (W.D. Va. 1998)
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SAMPLE AGREEMENT
Our understanding is that you have
retained us as consulting experts. If
you decide to change our status to
that of testifying experts, we will
return all documents, records and
any work product to you and
request from you only those
documents and records necessary
for our testimony.
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Accountant Privilege
(§7525)
• Taxpayer’s communications made
to federally authorized tax
practitioners (e.g., lawyers, CPAs,
enrolled agents)
• Applies only to tax advice: given
by an individual regarding a matter
that is within that individual’s
authority to practice as a federally
authorized tax practitioner under
Treasury Circular 230.
I.R.C. §7525(a)(3)(B)
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Accountant Privilege
(§7525)
• Contains many exceptions, either
poorly or not at all defined, thus
limiting the privilege’s
effectiveness in protecting the
confidentiality of taxpayer
communication.
• Can not be asserted in (1) criminal
tax matters, (2) investigations by
regulatory agencies, and (3) tax
advice regarding the promotion of
corporate tax shelters.
Source: R.J. Buchanan, “Corporate Tax Shelter
Exception to the Accounting Client Privilege,”
Tax Notes, September 16, 2002, p. 1619.
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Accountant Privilege contd …
• Tax practitioners are not entitled to
privilege when they are doing other than
lawyers’ work.
• Information provided to a practitioner
for purposes of preparing a client’s tax
return is not privileged. U.S. v.
Frederick, 182 F.3d 496 (CA-7,1999)
• Federal District Court: Most tax advice
falls into the category of return
preparation for which there is no
privilege [U.S. v. KPMG, No. 02-0259
(D. D.C. Dec.20, 2002)]
• The practice of tax is not the practice of
law (U.S. v. KPMG).
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Bureau of Prison’s Rule
• A new Bureau of Prison’s (BOP) rule
which permits federal law enforcement
agencies to eavesdrop on confidential
attorney-client communications of
persons in custody of the Department of
Justice (DOJ) under certain
circumstances, without federal judicial
oversight.
• This rule means that forensic
accountants and others hired by
attorneys to assist in providing legal
services must be on their guard to avoid
disclosure of confidential information.
•
Source: Carl Pacini, “Privileged Communications Between Forensic
Accountants, Attorney, and Clients Threatened by Federal Rule.” 28
C.F.R. §§ 500, 501 (2002): Prevention of Acts of Violence and
Terrorism, 66 Fed. Reg. 55,062 (Oct. 31, 2001).
66
E-mail Evidence
© D.L. Crumbley
• KPMG is fighting clients about questionable
tax-shelter products.
• The IRS disclosed e-mails dated March 14,
1998, in a Tax Court case involving an estate in
litigation against the IRS.
• The e-mails document discussions among high
level KPMG executives about a product known
as FLIP. One of the e-mails referred to the
product’s “troublesome issues.”
• E-mails created on a company’s system
belongs to the company.
• E-mail evidence has been used in cases
involving accounting fraud, harassment,
antitrust, discrimination, retaliation, whistleblowing, insider trading, trade secrets, and
more.
• Discovery is broad: instant messages, web
visit logs, hard drives, PDA’s, pagers, voice
mail, laptops, back up tapes, and cell phones
call records.
Source: Rita Risser, “E-mail = Evidence: How to Protect
Yourself,” Fair Measures.
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E-mail Evidence (cont.)
• In October, 2003, a special master
recommended to federal court that
KPMG does not have to produce many
tax-shelter documents.
• In mid-October 2003, a federal judge
blocked prosecutors from using an email that Martha Stewart wrote to her
attorney as evidence in her upcoming
trial. She had forwarded the same email to her daughter the next day after
sending it to her attorney.
Source: Rita Risser, “E-mail = Evidence: How to Protect
Yourself,” Fair Measures.
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Best Practices
• Know and follow employer
policies.
• Assume a boss or judge is reading
your e-mail.
• Don’t send e-mails in anger.
• Do not be sarcastic.
• Don’t send or receive jokes from
work.
• Insure mail lists are current for
confidential information limit
copies.
• Do not mark ‘Attorney-Client’
unless authorized.
• Don’t mark ‘Company
Confidential’ unless authorized.
Source: Rita Risser, “E-mail = Evidence: How to Protect
Yourself,” Fair Measures.
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E-mail Dangers
Aiding and abetting is a favorite phrase on cop
shows and courtroom dramas. For Motorola Inc.
and Scientific-Atlanta Inc., the phrase is hitting
close to home these days.
The names of both companies have
surfaced frequently in the federal fraud trial of
four former executives of Adelphia
Communications Corp., most recently in an email message read aloud in court earlier this week
that indicated top Scientific-Atlanta executives
approved a transaction that allegedly helped
Adelphia cook its books.
The electronic message, read by a defense
attorney, comes on top of earlier testimony about
the same set of transactions by the government’s
star witness, former Adelphia finance executive
James R. Brown.
Source: Jesse Drucker and Mark Maremont, “An E-Mail Casts Two Key Suppliers As
Adelphia Abettors,” WSJ, June 1, 2004, p. C-1.
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IRS Summons
Accountants have very little
protection under federal law from
the enforcement of IRS Summons.
Couch v. U.S., 409 U.S. 322 (1973).
U.S. v. Arthur Young & Co., 465 U.S. 805 (1984).
71
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Methods of Discovery
 Interrogatories: Written questions
[FRCP 33(a) – max. 25 / 30 days].
 Requests for Production of
Documents.
 Depositions [FRCP 30(a): limits each
side to 10].
 Subpoenas duces tecum: request for
specified documents for inspection and
copying (especially from people not
parties to a lawsuit, e.g., expert
witnesses).
 Physical examination.
 Production of tangible things and
entry upon land.
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Experts’ Depositions
• Covered by FRCP 26 (b) (4) (A).
• Can not occur until attorney has disclosed
the required written report.
•Have no right to attend another expert’s
deposition.
------------------------------------------------------Some beach somewhere,
There’s a beautiful sunset burnin’ up the
atmosphere.
Blake Shelton
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Civil Trial
 Jury selection and Pre-Trial Motions.
 Opening Statements.
 Burden of Proof: In Civil trial,
preponderance of evidence – 51% or
greater.
 Sometimes, higher clear and
convincing evidence.
 For the opinion of an expert to be
admissible, it must meet the 51%
test:
“My opinion is based upon a reasonable
degree of scientific (or medical or
economic or accounting) certainty.”
 Otherwise, opinion may be stricken
from evidence.
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Getting Paid
The other side schedules a deposition,
deposes you, and does not pay you a
reasonable fee. Who is required to
pay you?
Fed. R. Civ. Pro. 26(b)(4)(c): The party
seeking discovery pays the expert a
reasonable fee for time spent in
responding to discovery.
75
Incentive Test
© D.L. Crumbley
1. A(n) stipulation is a device used by courts
to have disputing parties to agree in advance
of a trial to facts, evidence, etc.
2. A(n) amicus curiae brief is filed by a party
not directly related to a lawsuit.
3. The stare decisis doctrine states that a case
once decided will control.
4. The appropriate court to bring a dispute is
called venue .
5. Dicta is opinions of a judge which goes
beyond the facts before the court and are not
binding on future courts as precedent.
6. A higher court remands a lower court
decision and sends it back for further
consideration.
7. You file a writ of certiorari to ask the
Supreme Court to hear your dispute.
8. En banc refers to a decision of the full
court.
9. A deposition is a written statement of a
witness under oath, often in a
question/answer format.
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© D.L. Crumbley
Incentive Test
10. The voir dire is preliminary questioning by
the court (or lawyer) of jurors to determine
competency.
11. A motion in limine is a request before trial
that evidence (or expert) of opposing side is
inadmissible.
12. The complaint and answer would be called
the pleadings .
13. The respondent is the person sued
(defendant).
14. A subpoena duces tecum is a command to
produce documents to a court that become
evidence.
15. A subpoena ad testificandum is a command
to appear and testify as a witness.
16. A(n) special master is appointed by a court
or judge to decide certain facts, etc.
17. Models, forms, and exhibits would be
considered demonstrative evidence.
18. Pro se means a party is representing himself.
77
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Evidence
“Anything perceivable by the five
senses, and any proof such as
testimony of witnesses, records,
documents, facts, data, or tangible
objects legally presented at trial to
prove a contention and induce a belief
in the minds of a jury.”
Black’s Law Dictionary
----------------------------------------------A trial is too important to put in the
hands of the jury.
Runaway Jury.
78
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Gobbledygook
“Documents” is used herein in the broadest
sense and includes all written, printed, typed,
graphic or otherwise recorded matter, however
produced or reproduced, including nonidentical copies, preliminary, intermediate, and
final drafts, writings, records, and recordings
of every kind and description, whether
inscribed by hand or by mechanical,
electronic, microfilm, photographic or other
means, as well as phonic (such as tape
recordings) or visual reproductions of all
statements, conversations or events, and
including without limitation, abstracts; address
books; advertising material; agreements;
analysis of any kind; appointment books;
brochures; calendars; charts; circulars;
computer cards; contracts; correspondence;
data books; desk calendars; diagrams; diaries;
directories; discs; drawings of any type;
79
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Gobbledygook
Estimates; evaluation; financial statements or
calculations; graphs; guidelines; house organs
or publications; instructions; inter-office or
intra-office communications; invoices; job
descriptions; ledgers; letters; licenses; lists;
manual; maps; memoranda of any type;
microfilm; minutes; movies; notes; notebooks;
opinions; organization; charts; pamphlets;
permits; photographs; pictures; plans;
projections; promotional materials;
publications; purchase orders; schedules;
specifications; standards; statistical analyses;
stenographers’ notebook; studies of any kind;
summaries; tabulations; tapes; telegrams;
teletype messages; videotapes; vouchers; and
working drawings, papers and files.
Source: J.T. Lescoart, The 13th Juror, New York: Dell Publishing, 1994,
p. 102
80
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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.
81
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Two Types of Evidence
Direct evidence: directly proves a
fact at issue, without the need for
an inference or presumption (e.g.,
testimony of a witness).
Circumstantial: a fact or issue
may be proved indirectly (e.g., a
perp was present at the time of the
theft).
Law does not value circumstantial
evidence any less than direct
evidence.
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Ensuring Admissibility
 Assume that documents or other
evidence one handles may be used in a
legal proceeding.
 Do not mark, staple, or otherwise alter
the document.
 Record how you obtained the evidence
and who handled it.
 Keep evidence in a secure location –
fireproof safes or locked cabinets.
 If possible, avoid putting your or other
investigators fingerprints on the
document.
 Use see-through holders.
 Internal auditors at WorldCom worked at
night and put much of the records on
personal CD ROMS (e.g., bought own
CD burner).
83
Ink Analysis
© D.L. Crumbley
 Martha Stewart was undone by a blue
ballpoint pen.
 Stockbroker belatedly inserted a note to
help cover up Ms. Stewart’s improper
stock trading. Blue ballpoint ink used is
different from ink elsewhere on the
trading worksheet.
 Prosecutors used forensic ink analysis in
Rite Aid case to show that certain
documents were backdated (ink used to
sign letter was not commercially available
until 3 months after the letter was dated).
 Xerox laser printers now encode the serial
number of each machine in tiny yellow
dots in every printout, nestled within the
printed words and margins. It tracks back
to you like a license plate.
 Fraudsters: use pencil.
Source: Mark Maremont, “In Corporate Crimes, Paper Trail
Often Leads to Ink Analysts’ Door,” Wall Street J., July 1,
2003, p. A-1.
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Deductive vs. Inductive
 Deductive: one goes from general to
specific; fairly simple and economical.
 Inductive: one starts with specific
experiences and then draws inferences.
Deductive Approach
Inductive Approach
Generic data mining
Custom data mining
Digital analysis
Analysis of all data
Discovery sampling
Generic software
Custom software
For smaller organizations
For larger organizations
Basic features
Sophisticated features
Easy to learn
Requires advanced skills
Relatively inexpensive
More expensive
Source: W.S. Albrecht and C.C. Albrecht, “Root Out Financial
Deception,” Journal of Accountancy (April 2002), p. 33.
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Benford’s Law
• Distribution of initial digits in natural numbers is not
random
• Predictable pattern:
1= 30.1%
2= 17.6%
3= 12.5%
4= 9.7%
5= 7.9%
6= 6.7%
7= 5.8%
8= 5.1%
9= 4.6%
There is software to detect potentially invented
numbers in many situations
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Benford’s Law Uses
•
•
•
•
•
•
•
•
•
•
Investments sales/purchases
Check register.
Sales history/Price history.
401 contributions.
Inventory unit costs.
Expenses accounts.
Wire transfer information.
Life insurance policy values.
Bad debt expenses.
Asset/liability accounts.
Source: Richard Lanza, “Digital Analysis- Real World
Example,” IT Audit, July 1, 1999,pp. 1-9.
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When Benford Analysis Is or Is
Not Likely Useful
When Benford Analysis is Likely Useful
Examples
Sets of numbers that result from
mathematical combination of numbersResult comes from two distributions.
Accounts receivable (number
sold times price). Accounts
payable (number bought
times price).
Transaction-level data – No need to sample.
Disbursements, sales,
expenses.
On large data sets – The more observations,
the better.
Full year’s transactions.
Accounts that appear to conform – When
the mean of a set of numbers is greater than
the median and the skewness is positive.
Most sets of accounting
numbers.
When Benford Analysis Is Not Likely Useful
Examples
Data set is comprised of assigned numbers
Check numbers, invoice
numbers, zip codes.
Numbers that are influenced by human
thought.
Prices set at psychological
thresholds ($1.99), ATM
withdrawals.
Accounts with a large number of firmspecific numbers.
An account specifically set up
to record $100 refunds.
Accounts with a built in minimum or
maximum.
Set of assets that must meet a
threshold to be recorded.
Where no transaction is recorded.
Thefts, kickbacks, contract
rigging.
Source: Durtschi, Hillison, and Pacini, p. 24.
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Computer Forensics Important
Joan Feldman: “Within three years, I’m sure all
evidence collected in discovery will be
electronic-based.” President of Computer
Forensic, Inc. (Seattle).
Players from three areas:
1. Accounting-forensic units of big CPA firms.
2. Data-recovery and computer-repair specialists,
3. Litigation support services.
“Corporate investigations used to mean following
a paper trial, but these days many follow an
electronic one. Increasing demand for the skill
and technology necessary to unearth digital
secrets has led to the birth of a small but
growing industry: computer forensics.”
“They can dig up e-mail and documents that
seemingly have been deleted, determine what
web sites were visited and which key words
were used to get there.”
Source: Ellen Byron, “Computer Forensics Sleuths: Help in
Rooting Out Fraud,” Career Journal, Wall Street J., reviewed
June 16, 2003.
www.careerjournal.com/industries/computers/20030320byron.html
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Computer Forensics Primer
• Defined: acquiring and analyzing digital
evidence in a manner that protects the
integrity of the evidence to investigate a
potential fraud.
• Currently only 5% of fraud investigations
use electronic data in investigations.
• This low percentage is likely because much
of the collected digital evidence is
forensically unusable.
• SAS No. 99: In an IT environment, it may
be necessary for the auditor to employ
computer-assisted audit techniques (for
example, report writers, software or data
extraction tool, or other system-based
techniques) to identify the journal entries
and other adjustments to be tested. [par. 61].
Source: G.S. Smith, “Computer Forensic: Helping to Achieve The Auditors
Mission,” Working Paper, December 2003.
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Digital Evidence: Today’s
Fingerprints
• “The sight of hard drives, Internet files, and
e-mail as courtroom evidence is increasingly
common.”
• “In the wired world almost every crime
intersects with the digital realm at one time or
another.”
• “Laptops, digital cameras, phones and hard
drives provide mountains of raw data for
experts to sift through, part of the expanding
field of computer forensics.”
• “A single file, credit card purchase or stray email messages can provide the proof that
clinches a case.”
Source: Michael Coren, “Digital Evidence: Today’s fingerprints,”
http://cnn.law.printthis.clickability.com/pt/cpt?action=cpt&title=CNN.com+
Digital+evi…
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Data Extraction v. Data
Investigation
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• There is a difference between the procedures used
for traditional data extraction (i.e., data mining)
and data investigation for evidentiary purpose.
• With traditional data extraction, tools such as
Interactive Data Extraction and Analysis (IDEA)
or ACL software are used to interactively extract,
sample, and analyze data.
• Yet simply checking a client’s files or cross
comparing data, files for forensic investigations are
damaged. Such actions are similar to sending a
housekeeper in to tidy up a murder crime scene
before the forensic investigative team is allowed to
start analyzing the evidence.
• For forensic purposes, software tools collect
digital data without changing it. After the data is
collected, it is analyzed.
• Examples of forensic software tools are Encase,
SafeBack, or Ontrack’s Easy Recovery software.
• Increasing the time lag between initial fraud
suspicions and the recovery of the related digital
data makes the evidence less valuable.
Source: G.S. Smith, “Computer Forensics: Helping to Achieve The
Auditor’s Mission,” Working Paper, December 2003.
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Data Mining
• Data mining is an information extraction
technique designed to discover hidden facts
or red flags that may indicate previously
undetected fraud, abuse, waste, or
mismanagement.
• Using a combination of statistical analysis
algorithms, exploratory analyses, modeling
techniques and data base technology, data
mining finds patterns and subtle
relationships in data.
• One can not push a button and expect the
software to pick the one bad apple out of the
panel.
Source: B.L. Derby, “Data Mining for Improper Payments,” Journal of
Government Financial Management, Winter, 2003 Vol. 52, No. 4, p. 11.
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Gene Morse Used Data Mining
at WorldCom
The beauty of the new [software] system,
from Mr. Morse’s perspective, was that it
enabled him to scrutinize the debit and credit
side of transactions. By clicking on a number
for an expense on a spreadsheet, he could
follow it back to the original journal entry –
such as an invoice for a purchase or expense
report submitted by an employee, to see how
it had been justified …. By the first week in
June, Mr. Morse had turned up a total of $2
billion in questionable accounting entries.
Mr. Morse grew increasingly concerned
that others in the company would discover
what he had learned and try to destroy the
evidence, he says. With his own money he
went out and bought a CD burner and copied
all the incriminating data onto a CD-ROM. He
told no one outside of internal audit what he
had found.
Source: Pulliam Susan, Deborah Solomon, “Uncooking the Books – How Three
Unlikely Sleuths Discovered Fraud at WorldCom,” Wall Street Journal, 30
October 2002.
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Some Data Mining Application
1. Human resources – Employees earning
salaries inconsistent with their title;
employees not availing themselves of
benefit programs (perhaps to maintain as
much anonymity as possible); employees
whose household address matches an
address from the vendor file; employees
appearing more than once on umbrella
security files.
2. Financial applications – Structured
transactions (clients who make
cash/travelers check/money order
contributions to annuities, single premium
life insurance, IRAs, mutual funds, etc.) in
aggregate amounts that exceed the U.S.
$10,000 reporting threshold; clients
making contributions to investment
vehicles that are disproportionate to their
income.
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Some Data Mining Application
3. Medical/dental applications – Patient
substitutions; over-utilizations of specific
diagnoses inconsistent with the patient
population; excessive number of patients
traveling great distances to a provider
open seven days a week for
disproportionate number of nonemergency procedures (could indicate
provider is filing false claims and is
spreading out the submissions to divert
suspicion).
4. Assistance in due diligence testing – By
revealing the business rules, data mining
tools can be used to train new auditors
and, for new areas or new systems that are
being audited for the first time, they are
the ideal application to be used for due
diligence testing.
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Some Data Mining Application
5. Construction and purchasing – Payments
made earlier than the contract
specification date; invoices for large
purchases made at the end of fiscal
accounting period; price of goods
inconsistent with industry costs.
Source: Bob Denker, “Data Mining and the Auditor’s Responsibility,”
Information Systems Audit and Control Association InfoBytes.
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Evidence (varies)
All relevant evidence is admissible,
unless inadmissible due to another
rule of evidence.
Rule 403: probative value is
substantially outweighed by the
danger of unfair prejudice,
confusion of the issues, misleading
the jury, or by considerations of
undue delay, waste of time, or
needless presentation of cumulative
evidence.
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Fingerprints Are Needed
Legal experts say it remains far easier to
prosecute those directly involved in disputed
transactions because they leave a paper trail that can
be easy for prosecutors to follow.
“The government has been relatively
successful against lower-level people in accounting
cases,” said Howard Schiffman.
Top brass are much tougher to prosecute
because they rarely come out and say “go cook the
books” and are hardly ever directly involved in the
details of individual transactions, particularly
smaller ones, legal experts say. Instead, bosses tell
subordinates more-ambiguous things about not
disappointing Wall Street. Employees who
extrapolate that as a code for “cheat” are at great
risk since “their fingerprints are all over the
documents,” Mr. Schiffman said.
--------------------------------------------------------------The Quest executives were acquitted in mid-April,
2004.
Source: Shawn Young, “Quest Case Shows Underlings Vulnerabilities,” WSJ,
April 2, 2004, p. C-1.
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Rule 701. Opinion Testimony by
Lay Witnesses
If the witness is not testifying as an
expert, the witness, testimony in the
form of opinions or inferences is
limited to those opinions or inferences
which are (a) rationally based on the
perception of the witness, and (b)
helpful to a clear understanding of the
witness’ testimony or the determination
of a fact in issue, and (c) not based on
scientific, technical, or other
specialized knowledge within the
scope of Rule 702.
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Federal Rules of Evidence 702 – 705
(deal with expert witnesses)
Rule 702 - Testimony by Experts
a) "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 upon 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.” (amendment in
bold)
b) Fed.R.Evid. Rule 702 requires the Trial
Court to perform the gatekeeper role
described in Daubert regarding all expert
testimony
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Federal Rules of Evidence
Section 702
Comparative Analysis
Source: AICPA Proposed Statement on Responsibilities for
Litigation Services No. 1, December 1, 2001.
Generally, if you meet the applicable AICPA professional
standards, you probably meet Rule 702.
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Rule 703 - Basis of Opinion Testimony by Ex
a) “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 him 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 need not be admissible in
evidence.”
b) Sources of information an expert may use
include:
1) Firsthand knowledge
2) Information admitted into evidence
during the trial
3) Information made known to the expert
before the trial
4) The facts themselves need not be
admissible as evidence if they are “of a
type reasonably relied upon by experts
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Rule 704 - Opinion on Ultimate Issue© D.L. Crumbley
a) "Testimony in the form of an opinion or
inference otherwise admissible is not
objectionable because it embraces an
ultimate issue to be decided by the trier of
fact."
1) The ultimate issue is that which is pivotal for
the defendant or the plaintiff and determines
the -outcome.
Rule 705
Disclosure of Facts or Data
Underlying Expert Opinion
a) "In civil cases, the expert may testify in
terms of an opinion or inference and give
his reasons therefore without prior
disclosure of the underlying facts or data,
unless the court rules otherwise. The expert
may in any event be required to disclose the
underlying facts or data on crossexamination.”
1) Experts are, generally, allowed to testify
about their opinions or give reasons for their
opinions without first testifying about the
underlying facts or data.
2) The court may require the expert to disclose
the underlying facts or data during cross- 104
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Rule 706 – Court-Appointed Experts
a) The Court has the authority to appoint an
expert whom all parties may cross-examine
when:
1) The Court believes the experts for the
litigants are “hired guns,” and their testimony
is unreliable or prejudicial.
2) The proffered expert opinions have failed to
adequately explain the complex issues upon
which the Court must decide.
b) The Court has ultimate discretion regarding
the admissibility of all expert testimony
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Special Master and Court Appointed
Experts
 A court may appoint someone (e.g., a
financial expert) to determine certain
facts in a dispute.
 They may be appointed pre-trial,
during trial, or post-trial to oversee
one or more aspects of a dispute.
 Appellate courts generally hold that
special masters are reserved for
special or unique circumstances.
 Special Masters can be subject to
Daubert challenges.
Source: See W.A. Lagraize and D. L. Crumbley, “Special Masters and Court
Appointed Experts,” Journal of Forensic Accounting, Vol. V(2004), pp.
237-242.
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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.
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What Is Evidence?
• 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 (e.g., copy of a check
that has been altered).
• Circumstantial evidence is evidence
from which a fact at issue may be
proved indirectly (e.g., bank records
show a deposit of unknown origin).
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Relevancy and its limits
(evidence)
Rule 401 – Definition of “Relevant Evidence”
a) Evidence is relevant if it tends to prove or
disprove an alleged fact.
Rule 402 – Relevant Evidence Generally
Admissible; Irrelevant Evidence
Inadmissible
1) It is the attorney’s responsibility to insure
that sufficient evidence is admitted at trial
to support the expert’s opinion.
Rule 403 – Exclusion of Relevant Evidence on
Grounds of Prejudice, Confusion, or Waste of
Time
1) Relevant evidence may be excluded if it is
prejudicial, needlessly cumulative,
threatens to confuse or mislead the jury, or
causes an unnecessary delay or waste of
time.
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Fed. Rules of Evidence (more)
Rule 615. Exclusion of witnesses.
Witnesses may be excluded so that they
cannot hear testimony of other witnesses.
Rule 802. Hearsay Rule.
Hearsay, is generally not admissible. Many
exceptions.
Rule 1002. Requirement of Original
Rule 1003. Admissibility of Duplicates
Allowable.
Rule 1004. Admissibility of Other Evidence of
Contents.
Rule 1005. Public Records.
Certified copy.
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Fed. Rules of Evidence (more)
Rule 1006. Summaries.
Voluminous material may be summarized
(e.g., charts, summary, calculations)
Rule 1008. Functions of Court and Jury.
In case of dispute, trier of the fact determines.
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Evidence
Prima facie evidence: unless
overcome by other evidence,
suffices as proof of a fact in a
dispute.
Probative evidence: testimony
which establishes or contributes
toward truth.
Parol evidence rule: an agreement
in writing can not be modified by
oral evidence.
Secondary evidence: copies of
instruments or oral evidence.
Chain of custody: a log of
evidence obtained and who had
access to such evidence.
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Hearsay (evidence)
Rule 803 – Hearsay Exceptions; Availability of
Declarant Immaterial
a)
b)
Generally, hearsay is not admissible as evidence.
Exceptions relating to expert testimony
1.
Business records such as memoranda, reports, records,
or data compilations kept on a regular basis by a person
with knowledge
2.
Public records; such as records, reports, statements, or
data compilations kept by public offices or agencies
3.
Market reports and commercial publications; such as
market quotations, lists, directories, etc. relied on by the
public
4.
Learned treatises; such as almanacs of business
information and technical literature
5.
Missing business records; reports normally prepared
daily or the fact that they were not prepared is
admissible
c)
Business records, such as computer printouts, may be
entered into evidence without the testimony of the
employee who actually prepared the records as long
as the court considers the source of the information
and the method of preparation trustworthy
d)
Experts are not required to prove that the information
upon which they have relied is trustworthy
a)
May be grounds for a Daubert/Kumho challenge if
confirmation is required or recommended by standards
of practice.
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Hearsay evidence: a statement made outside
the court to prove the truth of the matter
stated
You, Larry, try to state in the courtroom that
Joe said “Paul is a crook.”
 Hearsay may be offered to prove a
nonhearsay purpose.
Trustworthiness.
Unavailability of declarant.
Practical considerations.
Exemptions to Fed. Rules of Evidence.
 Major exceptions
Excited utterances.
Business records.
Official records.
Dying declarations.
Learned treatises.
Commercial publications.
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Top 10 Risks During Electronic
Evidence Discovery in Litigation
 Lack of a central corporate
repository. Information is spread
across servers, backup tapes, and
individual user-maintained archives,
usually resulting in considerable
overlap. If this information needs to be
reviewed (e.g., as part of legal
proceedings), a company faces
increased time and higher costs to filter
through layers of information and
duplication.
 Lack of a corporate document
management policy. Employees save
any and all documents, with no
organizing principle, significantly
magnifying the cost
and complexity of sifting through
information.
FTI consulting (www.nysscpa.org/cpajournal/2003/1003/nylny11).
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Top 10 Risks During Electronic
Evidence Discovery in Litigation
 Intermingling critical and less critical
documents. Little distinction is made
between the relative importance of
stored information, making it difficult for
attorneys to determine what is
considered privileged information.
Consequently, computer forensics
teams are often forced to sift through
information to ensure no privileged
information is inadvertently disclosed.
 Intermingling business and private
use. Employees often use business
computers for private use, forcing
corporations facing litigation to spend
resources separating company data
from employees’ private data.
FTI consulting (www.nysscpa.org/cpajournal/2003/1003/nylny11).
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Top 10 Risks During Electronic
Evidence Discovery in Litigation
 Lack of distinction between disasterrecovery backup and business archiving.
Corporations save too much unnecessary
information for too long, adding to
inefficiencies during information restoration
and review. Most corporations save absolutely
everything in preparation for disaster recovery
and rely on the same store of information as a
long-term business archive; in fact, different
information is needed for each.
 Backup systems that cannot easily be
restored. Corporations regularly update
software and hardware with little regard to
their existing backup collection. When faced
with litigation, a corporation is obligated to pay
for restoring or recreating data from a legacy
system. Accomplishing this can often take
several months and millions of dollars.
FTI consulting (www.nysscpa.org/cpajournal/2003/1003/nylny11).
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Top 10 Risks During Electronic
Evidence Discovery in Litigation
 Ad hoc caches of backup or
miscellaneous information. Most
companies have ad hoc stores of
information and usually are unsure of
whether they contain new or duplicate
information. If backup data exists, a
corporation has a legal obligation to
review the content for relevance.
 Insufficient recognition of laptops.
Laptop computers can represent a
significant proportion of a corporation’s
information. In addition to the ongoing
risk of loss and theft, laptops typically
are ineffective at deleting information.
During litigation, “forensic copies” of
laptops can be requested to recapture
deleted information, adding another
layer of complexity and cost.
FTI consulting (www.nysscpa.org/cpajournal/2003/1003/nylny11).
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Top 10 Risks During Electronic
Evidence Discovery in Litigation
 Automated processes. Companies are
unsystematic about what information they
automatically save and delete. When companies
enter into litigation, they are under strict legal
obligation to ensure that they preserve all relevant
information. Upon determining that a loss of
information (spoliation) has occurred, a judge can
automatically instruct the jury to assume the worst;
for example, that inadvertently deleted records
contained unfavorable information. Depending upon
the seriousness of the infraction, this can even lead
to a directed verdict.
 Manual systems. Despite great advances in
integration and enterprise resource planning (ERP)
systems, many companies use a mix of automated
and manual processes (e.g., the spreadsheet used to
transform data from the inventory system before
loading it into the general ledger). Such manual
processes often suffer from a lack of documentation,
lack of retention, and a lack of systematic application.
This inevitably makes reconstructing what happened
more difficult and costly.
FTI consulting (www.nysscpa.org/cpajournal/2003/1003/nylny11).
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Most trials boil down to one
issue: Credibility
Expect the other side to present
evidence that you are biased (to
throw out your testimony).
Prior Inconsistent Statements.
You are an advocate for the
truth.
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Entertainer
As strange as it may be, an attorney
wishes to present an expert who is
“guaranteed to entertain and interest
the jury - - the hallmarks of an expert
who will be able to persuade.”
Experts are now in the television and
entertainment business.
Source: D.M. Malone and P.J. Zwier, Effective Expert
Testimony, Notre Dame, IN: NITA, 2000, p. 93.
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The Expert’s Paradox
• You are an advocate hired by one
party in an adversarial dispute.
• However, you will only be
persuasive if the jurors or judge
believe that you are a neutral and
objective expert (like a scientist),
with an opinion that has not been
influenced by the adversarial nature
of the forum.
Source: Sarah E. Murray, “Standing At The Crossroads of Truth and
Advocacy,” NACVA Conference, Miami, June 3, 2004.
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Six Ways to Discredit Testimony
1. If an expert, the witness is not qualified.
2. The witness did not consider all the
facts.
3. The witness relied on erroneous facts.
4. If an expert, the witness’s conclusions
do not follow from a correct analysis of
the facts.
5. The witness’s testimony is inconsistent
with prior testimony.
6. The witness was biased or prejudiced
and therefore shaded his or her
perceptions or conclusions.
A fact witness employed by the defrauded
party generally will be grilled more than
an expert witness about bias or
prejudice.
Source: D.R. Carmichael, et. al, Fraud Detection, 5th, Fort
Worth: Practitioners Publishing, 2002, p. 8 – 39.
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Avoid Conflicts of Interest
You must not have present or past
relationships with individuals on
either side of the dispute which
will prevent or interfere with
objective testimony.
Checking your firm’s files and
records for professional conflicts
early is extremely important.
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Side-Taking
• A trial judge may dismiss an expert witness who is
influenced by side-taking.
• Hints at a lawyer’s line of arguments provided
before reviewing evidence can influence an
accounting expert’s decision about an auditor’s
compliance with GAAS.
• The degree of certainty in an expert’s report can
affect a mock judge’s decisions in settlement
rulings.
• Jury trials in auditor-liability disputes are
uncommon.
D.N. Ricchiute, “Effects of an Attorney’s Line of Argument on
Accountants’ Expert Witness Testimony,” Accounting Review,
January 2004, pp. 221-245.
--------------------------------------------------------------------------
Expert testimony is not useful when the expert
is merely an advocate for the position argued by
one of the parties.
Estate of Jameson, T.C. Memo 1999-43
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Result-Oriented Work
Estate of Bessie I. Mueller v. Commissioner,
T.C. Memo. 1992-284, Doc 92-4343 (57 pages), the
issue was the valuation of stock of the Mueller Co.
The IRS produced as its expert on the valuation
questions Dr. Shannon Pratt, managing director of
Willamette Management Associates and the
acknowledged dean of business appraisers. Tax
Court Judge Renato Beghe nevertheless concluded
that “Willametie’s report was result-oriented and
this was reflected in Dr. Pratt’s testimony.” The
Judge noted that appraisers “have third-party
responsibilities – just as certified public accountants
do – to those who rely on their opinions, and their
determinations must be independent and
objective….”
Dr. Pratt strayed from the standard of
objectivity and cast aside his scholar’s mantle and
became ‘a shill’ for respondent.” In Mueller, as a
result, Judge Beghe rejected most of both the
Willamette report and Dr. Pratt’s testimony, but did
take account of Dr. Pratt’s criticism of the taxpayer’s
expert’s reports and testimony.
Source: B.J. Raby and W.L. Raby, “Reasonable Compensation, Expert
Witnesses, and the Tax Practitioner,” Tax Notes, September 15, 2003
p. 1417.
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Defensible Investigative Process
The five-step process we use in this study
entails:
1. Defining the question(s) of interest. A
forensic accountant hired as an expert
must segment a broad legal question
(e.g., has fraud occurred?) into inquiries
that can be objectively measured (i.e.,
has lapping occurred in accounts
receivable?).
2. Employing benchmarks that are
commonly accepted to address the
question(s). Commonly accepted
standards are selected for measuring the
objective inquiries (i.e., industry
average for accounts receivable turnover
ratio).
Source: Waldrup, Capriotti, and Anderson, Forensic Accounting Techniques: For
Litigation Purposes, Journal of Forensic Accounting, June 2004, p. 5.
127
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Defensible Investigative Process
3. Cleaning data in a methodical fashion,
which objectively allows the database to
be compared to the benchmarks set forth.
Data are purged of unreliable and
unrepresentative observations in order to
minimize the effects of data-entry error
and increase the reliability of results (i.e.,
credit sales are isolated from cash sales).
4. Comparing the data to the benchmarks.
The forensic accountant complies
observations into a format in order to
compare the data set to the commonly
accepted standards (i.e., accounts
receivable are aged, turnover ratios are
computed, and these are compared to
industry averages).
Source: Forensic Accounting Techniques: For Litigation Purposes, p. 5.
128
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Defensible Investigative Process
5. Providing conclusions that link
question(s) to the benchmarks and
then to the data. Finally, conclusions
are drawn which relate to the forensic
techniques employed to the questions of
interest (i.e., fraud, manifested through
an accounts receivable lapping scheme,
appears to have taken place as
evidenced by comparisons with
historical and industry turnover ratios).
Such a conclusion precedes those steps
where specific proof is demonstrated.
Source: Forensic Accounting Techniques: For Litigation Purposes, p. 5.
129
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Alternative Dispute Resolution
Mediation: appointment of an
agreed-upon third party to facilitate
settlement negotiations.
before or after suit is filed
parties control the outcome and all
resolutions are voluntary.
Arbitration: parties submit the
dispute for resolution to an agreedupon arbitrator or panel.
rules less formal
faster and cheaper
can be binding or non-binding.
Example: Arthur Andersen and Andersen Consulting.
 When testifying, remember
arbitrator more sophisticated than
the average juror.
130
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Written Agreement
The written agreement should cover the following
matters:
• The name of the attorney’s client.
• The litigants’ names and place for the legal
proceeding.
• The nature of the litigation services to be
performed.
• Whether the practitioner will be asked to testify
as an expert witness.
• What restrictions will be imposed on use and
disclosure of the practitioner’s work.
• Whether the practitioner has any conflicts of
interest with the litigants and/or their attorneys.
• Whether the practitioner’s work will be
protected by the attorney work product
privilege.
• Circumstances under which the practitioner may
terminate his or her engagement.
• Stress the independence of the expert.
• Fee (including payment arrangements).
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Motions To Exclude Expert Testimony
1. Daubert challenges.
2. Frye challenges.
3. Does not qualify as an expert by knowledge, skill,
experience, training, or education.
4. Requires a valid connection to the pertinent inquiry
as a precondition to admission.
5. Courts remain vigilant against the admission of legal
conclusions.
6. In re Paoli Railroad Yard PCB Litigation, 35 F.3d
717 (3rd Cir. 1994) lists others.
a. Relationships of technique to methods already
established to be reliable.
b. Existence and maintenance of standards controlling
technique’s operation.
c. Expert witness’ qualifications and non-judicial uses
to which method has been put.
7. Side-taking or result –oriented work.
8. Conflict of interest.
9. Ghost-written report.
10. Spoliation.
11. Name not disclosed within time limit.
12. Improper expert witness designation.
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Admissibility Of Experts
• Daubert for federal courts.
• 27 states apply Daubert or similar
standards (e.g., Louisiana, Texas,
Arkansas, Connecticut).
• 16 states still follow Frye (e.g.,
California, Colorado, Florida, Illinois,
New York, Pennsylvania).
• 6 states have not rejected Frye but apply
Daubert factors (Alabama, Hawaii,
Massachusetts, Nevada, New
Hampshire).
• 4 states have developed their own tests
(e.g., Georgia, Utah, Virginia,
Wisconsin).
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Qualifying as an Expert
Witness
Under the older 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
134
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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
135
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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.
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Qualifying as an Expert
Witness
“Thus, in our view, the Court’s emphasis on
reliability as well as on relevancy embraces within its
standard the credibility of the witness proffering
expert opinion. This is particularly true where, as here,
it is the district court judge sitting as a finder of fact
who must rule on issues is evidence.
In the instant case, the District Court ruled that
Dr. Gotteimer’s testimony would not be admissible for
three reasons. First, the court found that Dr.
Gotteimer’s educational credentials were not of the
highest caliber. Second, during voir dire, the District
Court found Dr. Gottheimer not to be credible because
he had made statements about his credentials that
were inconsistent with his deposition testimony.
Finally, the District Court found that Dr. Gottheimer’s
experience was in property casualty insurance, not life
insurance, and that Gottheimer had admitted in his
deposition that there are “fundamental” differences in
evaluating the two types of insurances….
Source: In re Unisys Shavings Plan Litigation, 173 F.3d 145, 156-57 (CA-3, 1999), cert.
denied, 528 U.S. 950 (1999).
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Daubert’s Five Factors
 Whether the theory or technique used
by the expert can be, and has been,
tested;
 Whether the theory or technique has
been subjected to peer review and
publication;
 The known or potential rate of error of
the method used; and
 The degree of the method’s or
conclusion’s acceptance within the
relevant community.
 Did theory exist before litigation
began.
(on remand, CA-9 adds 5th factor)
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Kumho Tire Co. Ltd. v. Carmichael, 119
S.Ct. 1167 (1999).
• Daubert factors apply to nonscientific
testimony as well as scientific expert
testimony
• Court will probably not exclude
testimony on the basis of one factor
alone.
• Frye rule: general acceptance rule may
still apply, especially in certain state
courts.
• Daubert challenges generally occur after
the deadline for naming experts. Thus,
disaster if disqualified.
• Can open expert up to a malpractice
claim.
139
Kumho Tire
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Supreme Court said:
“The objective of that requirement is [Daubert] to
ensure the reliability and relevancy of expert
testimony. It is to make certain that an expert,
whether basing testimony upon professional studies
or personal experience, employs in the courtroom
the same level of intellectual rigor that
characterizes the practice of an expert in the
relevant field.
-------------------------------------------------------------My job would be to provide credible expert opinion
on complex accounting issues. The opposing
attorney’s job would be to make me look like a
lying idiot. Any anger, loss of confidence, or other
emotional lapse he can drive or insult me into, will
inure to his purpose. My experience as a professor
would work to my favor, since my career centers
around explaining complex accounting issues in
clear understandable terms.
What I need to guard against, is treating the
jury like my students. The opposing lawyer will
accuse me of grandstanding and thinking I’m back
in my ivory tower. He’ll try to make me look like a
fool. The judge owns the courtroom. The witness is
just a guest, and one that not every party
appreciates.
I.W. Collett & M.Smith, Trap Doors and Trojan Horses, Thomas Horton & Daughters,
140
p.127
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Daubert Challenges
Simple Daubert Challenge
• Motion of limine.
• Motion of summary judgment.
• Documents filed.
• Hearing with judge and lawyers.
• Motion for summary judgment may or
may not be granted.
Complex Daubert Challenge
• Multiple day hearing.
• Live Witnesses.
Challenged Expert
Rebuttal Expert
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A Hired Gun?
• On January 6, 2005, Andrea Yates’ capital murder
conviction for drowning her children was
overturned by an appeals court because of Dr. Park
Dietz’s erroneous testimony about a nonexistent
TV episode on Law & Order.
• His photo was shown on Fox News, and the talking
heads called him a “hired gun” and a “whore.”
• One talking head said that “he’s dead.”
Dr. Park Dietz during the 2002 Houston court case
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Qualifying as an Expert
In an infringement of
trademark and misappropriation of
trade secrets, plaintiff offered an
expert with 15 years’ experience
with the marine crane industry to
testify about profits. Excluded
because so-called expert had no
formal training in accounting and
conducted no independent
examination of defendant’s gross
sales figures, which were supplied
to expert by plaintiff’s counsel.
Seatrax. Inc. v. Sonbeck Int’l. Inc., 200 F.3d 358 (CA-5, 2000).
143
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Qualifying as an Expert
In an antitrust dispute a District Court
excluded an economist and awarded summary
judgment to plaintiff. Fourth Circuit affirmed the
exclusion, saying that the expert had an MBA and
significant executive experience in the relevant
industry, but he subscribes to no economics
journals, could identify no economics journals, had
published no economics-related articles, was
unfamiliar with basic terms employed by
economists in antitrust analysis, had never
conducted any relevant market analysis, and had
read only materials provided to him by counsel.
Berlyn, Inc. v. Gazette Newspapers. Inc., No. 02-2152 (CA-$.
Aug. 18, 2003) (unpublished).
--------------------------------------------------------------Just because the expert has a MD degree is not enough
to qualify him to give an opinion on every conceivable
question.
Christopherson v. Allied Signal Corp., 939 F.2d 1106
(CA-5, 1991)
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Qualifying as an Expert
In a franchise termination suit,
Seventh Circuit said that the CPA was
not doing science, he was doing
accounting. Based on financial
information furnished by plaintiff and
assumptions supplied by counsel, he
calculated discounted present value of
lost future earnings. Accountants are
qualified to do that.
Zelinski v. Columbia 300, Inc., 335 F. 3d 633 (CA-7, 2003)
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The Courts’ Opinion
• Valuation testimony that considers no other
independent variables than the sequences of
events will be rejected as a matter of law.
Blue Dane Simmental Corp. v. American Simmental Association 178 F. 3d 1035 (CA-8, Cir. 1999).
• Unbelievable valuation testimony will be
rejected as a matter of law.
Frymire-Brinati v. KMPG Peat Marwick, 2 F. 3d 183 (CA-7, 1993).
• An expert may base opinion on business records
reviewed even though records were not in
evidence.
Carter v . Steverson & Co., 106 S. W. 3rd 161 (Tex. App. 2003).
• “When a litigant is knocked out after tying both
its hands behind its back, a court may properly
refuse to heed the litigant’s plea to be given a
second chance for a fair fight.”
• There is no second chances where defendant
presents no independent damages evidence or
contrary expert testimony.
Century 21 Real Estate Corp. v. Meraj International Investment Corp., 315 F. 3d 1271 (CA-10, 2003).
• The NACVA certification was mentioned as
element in support of qualifications for business
appraiser doing bank valuation.
First Western Bank v. Olsen, 621 N.W. 2d 611 (S.D. 2001).
146
Rejecting Experts
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In Frank J. Laureys, Jr., 92 T.C. 101 (1989),
the IRS offered the testimony of Dr. Bradford
Cornell, a professor of finance and economics at
UCLA, to demonstrate that taxpayer was never
“at risk” as to his option trading activities.
About his proffered testimony, Tax Court Judge
Mary Ann Cohen commented:
We agree with petitioner that the factual
premises of Dr. Cornell’s report are unreliable
and that neither his testimony nor his
qualifications assist in determining petitioner’s
purpose in engaging in the transactions in
issue….
[W]e do not believe that the type of
economic analysis set forth in Dr. Cornell’s
report is relevant to the type of risk covered by
section 465(b)…. Dr. Cornell’s testimony is
tainted by his perception that, from an economic
standpoint, wash sales are not legitimate.
Source: B.J. Raby and W.L. Raby, “Reasonable Compensation, Expert Witnesses,
and the Tax Practitioner,” Tax Notes, September 15, 2003, pp. 1417-1418.
147
Rejecting Experts
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Second, his isolation of data as to
certain transactions, on certain dates,
chosen from a few transactions
selected by respondent among
hundreds engaged in by petitioner, is
not reasonably representative. It is
also inconsistent with his own
statement that his analysis must
consider “the investor’s overall
strategy.”
Third, his assumption of
predictability of stock prices is
inconsistent with reality and with the
existence of an active national options
exchange in which differing views of
the future create buyers and sellers at
different prices.
Source: B.J. Raby and W.L. Raby, “Reasonable Compensation, Expert
Witnesses, and the Tax Practitioner,” Tax Notes, September 15, 2003,
pp. 1417-1418.
148
Weight v. Admissibility
•
© D.L. Crumbley
Daubert analysis should not replace trial
on merits, but any defects in an expert’s
methods should be addressed through
cross-examination.
Mathis v. Exxon Corp., 302 F.3d 448 (CA-5, 2002).
•
Defendant did not argue that the expert
fails to comport with Daubert factors,
but rather argues that his calculations do
not support his conclusion. This attack is
not a true Daubert challenge, but rather
goes to weight.
TFWS v. Schaefer, 325 F. 3d 234 (CA-4, 2003).
•
Duty of district court is to ensure that
basis of expert’s opinion is not so
fatally flawed as to render his opinion
inadmissible as matter of law.
Inre Visa Check, 280 F.3d 124 (CA-2, 2001), cert.den. 122 S.Ct. 2382 (2002).
149
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Weight v. Admissibility (Continued)
• Admissibility affirmed. Defendants did not object
at trial court level and so review is for plain error.
Defendants say expert is unqualified, but he spent 33
years as IRS agent, mostly investigating financial
fraud. Defendants also fault expert for basing analysis
solely on bank records supplied by plaintiffs, rather
than broader array of transactions, but this objection
goes to weight, not admissibility.
Microfinancial, Inc. v. Premier Holidays Int’l, Inc., No.04-1493 (1st Cir. Oct 5,
2004).
• Exclusion affirmed. Creditors argue that company’s
quarrels with expert’s approach went to weight, not
admissibility, but district court identified no fewer
than eighteen deficiencies, and testimony was
riddled with implausible and unexplained
assumptions. No abuse of discretion.
Lippe v. Bairnco Corp., 288 B.R. 678 (S.D. N.Y. 2003), aff.d No. 03-7360 (2nd
Cir. Apr. 9, 2004) (unpublished)
150
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Weight v. Admissibility (Continued)
• Admissibility affirmed. Exxon did not waive appeal
of pretrial evidentiary ruling by failure to renew
objections at trial, such renewal being unnecessary
under Fed. R. Evid. 103(a), as amended in 2000, when
the district court has made definitive pretrial rulings
on motions to strike. But expert was qualified and his
opinion were admissible. Exxon says expert’s method
were unsophisticated and that he should have
concluded “competitive impact analysis” for each
station to show that Exxon’s price caused it to loose
business. But purpose of expert’s testimony was not to
isolate precise economic effect for each station, but
rather to show that Exxon had set commercially
unreasonable price. Daubert analysis should not
supplant trial on merits, and any defects in expert’s
method could be addressed through crossexamination.
Mathis v. Exxon Corp., 302 F. 3d 448 (5th Cir. 2002).
• Admissibility affirmed. Plaintiff’s expert was
qualified, and used mathematical extrapolation,
straight line linear progression, and averaging to
arrive at his figures. Defendants attacked none of
these methodologies, and their objections go to
weight, not reliability.
CDM Mfg. v. Complete Sales Representation, Inc. No. 01-56138 (9th Cir. Oct.
29, 2002) (unpublished).
151
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Searchable Databases of Daubert Decisions
1. Daubert Tracker (launched August 2002)
• 93 accounting decisions (mid-February 2003).
• [46 accounting experts admitted, 38 denied,
9 admitted/denied in part]
• 14,000 trial and appellate opinions.
• 16,000 expert reports.
• Composed of five distinct services.
The searchable database of all reported cases.
Core documents – docket sheets, briefs and
transcripts – for each case.
An e-mail update of new cases from the previous
week.
A quarterly journal with articles by trial attorneys,
law professors, judges and experts.
A series of “Web lectures” delivered by authorities
on Daubert and scientific evidence.
• www.mdexonline.com. A year subscription is
$295.
152
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Searchable Databases of Daubert Decisions
(contd …)
2. “Daubert on the Web”
•
•
•
•
Online free tracking service.
www.daubertontheweb.com.
In January, 2005, 67 cases were under
the field “Accountants and
Economists” with an admissibility
rate of .627.
There are a total of 25 fields with
various “admissibility rate,” such as
Computer experts,
Criminologists,
Marketing experts,
Polygraphers,
Toxicologists,
0.667
0.828
0.400
0.138
0.333
In Louisiana, there have been at least 33 Daubert
challenges with a 60% admission rate.
153
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Successful Daubert Challenges
•
Accountant failed to incorporate into his
opinion (without explanation) some of his
findings that contradicted his testimony
[similar to Kumho Tire engineering expert’s
testimony]. Target Marketing Pub., Inc. v.
ADVD, Inc., 136 F.3d 1139 (CA-7, 1998).
•
Accountant testified from un-audited financial
reports, did not analyze data covering the entire
period of time in question, did not compare
revenue to budget projections of revenue, and
allowed his opinion to be influenced by
subjective statements of an interested party.
SEC v. Lipson, 46 F.Supp.2d 758 (N.D. Ill.1998).
•
In comparing hosiery made by different
manufacturers, expert relied upon an
inadequate sample and destroyed the records
of his methodology.
Lithuania Commerce Corp. v. Sara Lee Hosiery, 179
F.R.D. 450 (D.N.J. 1998)
154
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Testifying at a Deposition
Expert witnesses can expect to be asked about the
following at a deposition:
• The scope of their
assignment
• Their current
employment (job title,
duties)
• Their educational
background
• Licenses
• Work experience
• Memberships in
professional
organizations
• Publication and
lectures
• Fields in which they
are qualified as an
expert
• 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 opinions they
have formed
• The bases for their
opinions
Source: Crumbley, Heitger & Smith, Forensic and Investigative
Accounting, 2003, p. 8-13
155
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Almost Unlimited
Almost any question can be
asked during a deposition.
----------------------------------------------------------------
In the fraud-related trial of Worldcom
Chief Executive Bernard Ebbers, the
judge ruled that the defense could
question the prosecution’s star witness
[CFO Scott Sullivan] about his ‘marital
infidelities’ because it reflects on his
truthfulness.
U.S. District Court Judge Barbara S.
Jones said that “the defense is entitled
to wide latitude.”
Source: A.Latour, S. Pulliam, and S. Young, “Ebbers Defense Rings Up a Win
Over Testimony,” WSJ, January 19, 2005, pp. C-1 and C-4
156
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Clause In Written Report
I have not attempted to set forth
verbatim every detail of my expected
testimony and every fact that supports
my opinion. Thus, I may provide
additional facts and address additional
topics in response to arguments or
assertions offered during the course of
deposition and testimony.
157
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Preparing to Testify as an
Expert Witness
• Maintain independence from the
client
• Evidence upon which experts may
rely
• Use of confidential client
information
• Expert reports
• Working papers
• Evaluation of other experts
• Exhibits and other demonstrative
evidence
Source: Crumbley, Heitger & Smith, Forensic and
Investigative Accounting, 2003, p. 8-13
158
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Differences Between Fact and Expert Witness
FACT
EXPERT
Purpose of
testimony
To provide the court with
relevant facts relating to the
case.
To help the court or trier-of-fact
understand technical issues.
Training
No specialized training is
necessary, unless the
witness undertakes a factual
investigation.
The witness must qualify as an expert.
Therefore, he or she must have
specialized knowledge, training,
experience, or other qualifications (for
example, writings) in a subject outside
the average person’s understanding.
What determines
whether the
witness will
testify?
The witness will be allowed
to testify if he or she has
information relevant to the
case, and the testimony is
not prejudicial or
unnecessarily duplicative of
evidence already presented.
The judge must determine whether the
witness has the qualifications needed
to testify in the case. The testimony
also must be relevant and must not be
unnecessarily duplicative or
prejudicial.
Testimony
Facts and observations
based on the witness’s
perceptions and everyday
common information.
Facts and opinions based on the
witness’s knowledge, training, and
experience and the fraud procedures
performed by him or her.
Evidence and
exhibits
All documents referred by
the witness must already be
in evidence.
The witness can testify about
documents that have not been entered
into evidence if they are of the type
normally relied on by experts in that
field to form an opinion.
Can the witness
testify about
hearsay
evidence?
No.
Yes, as long as it is something that is
normally relied upon by experts in the
field.
Payment of fees
The witness is only entitled
to the statutory daily fee
(which is very small in
most jurisdictions).
The witness is entitled to a reasonable
hourly rate.
Source: D.R. Carmichael, et. al, Fraud Detection, 5th, Fort Worth:
Practitioners Publishing, 2002, p. 8-3.
159
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Four Phases of Interrogation at Trial
 Direct Examination – friendly
attorney – no leading questions.
 Cross-examination – opposing
attorney – credibility of the witness
and generally what was covered in
direct. Leading questions O.K.
 Redirect examination – friendly
attorney gives expert opportunity to
clear up confusion.
 Recross-examination – not required.
New matters subject to re-cross
exam. Own attorney has right for last
words with expert.
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Direct Examination
“ Trial rules permitted direct examination by
the side giving its case-in-chief, then crossexamination by the opposition, then another
round of questioning should they be required
by the side that had called the witness in the
first place. This last round was the redirect,
and Powell was up and rolling before Freeman
got back to the defense table.”
Source: J.T. Lescroart, The 13th Juror, New York: Dell Publishing, 1994,
pp. 337-338.
161
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Leading Questions
 Didn’t the defendant appear to you to
be stealing money from the cash
register?
 A question that suggests a desired
answer (e.g., yes or no).
 Leading questions can be directed to
opposing parties and adverse
witnesses during examination.
 Better questions:
How much money was the defendant
taking from the cash register?
How can you estimate that amount?
How was she taking the money?
162
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Leading Witness
“ Did you hear her? Was she, for example,
singing in the shower or something like that?
Moving furniture around?” Freeman was
taking advantage of the rules that allowed
defense in cross-examination to lead witness,
and Freeman was also using this bantering
tone to get back into a more relaxed mode
with Fred, showing him what a regular Joe he
could be.”
Source: J.T. Lescroart, The 13th Juror, New York: Dell Publishing, 1994,
p. 310.
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Some Research Findings
 65% of surveyed jurors were
influenced by expert testimony.
 Merely referring to a witness as an
“expert” affords the witness credibility.
 Jurors assign more credibility to
government rather AICPA standards.
 Jurors hold auditors to higher standards
of care when the audit failure is severe.
 Juror decision making is not
independent of the use and reliability
of decision aids.
Source: D.N. Ricchiute, “Effects of an Attorney’s Line of
Argument on Accountant’s Expert Witness Testimony,”
Accounting Review, January 2004, pp. 221-245.
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High Tech Is Best
 Studies show that the average person
retains as much as 87% of information
presented visually and as little as 10%
for information given orally.
 Computer animations are even more
persuasive.
 Both types of delivery impact the weight
given to evidence by jurors (or judges).
 Use visual aids, computer animations,
and other visual help whenever possible
while on the stand.
Source: David Yale, “Computers on the Witness Stand,” Univ. of
Conn. Law School, Fall 1996,
www.dcyale.com/law_papers/daubert.html
Moral: A picture is worth a thousand words.
165
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Important Visual Rules
 Storyboard your testimony (series of
sketches).
 Do not overdo it.
 Design illustration so jurors can take
away the message in 5 seconds. Title
should give your conclusion.
 Color is important.
 Put the most important information in
the top right-hand corner of the chart.
 Do not simply enlarge document.
Highlight important stuff.
 Practice with your exhibits.
Source: D.S. Scott and R. Laguzza, “Communication With The
Jury,“ Litigation Services Handbook, John Wiley, 2001, pp.15-2
and 15-3.
Give your exhibits to the jurors in a
plastic protective folder.
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Technology Captures Jurors: Smart
Courts
• “Judge Mary Lisi of the U.S. District Court in Rhode
Island keeps her eyes glued to two flat-screen panels
on the bench. One displays evidence. The other
displays testimony translated from the court reporter’s
shorthand into English in real time. With an optical
mouse, the judge flags key testimony and makes
notes on the screen.
•Both counsel tables are equipped with a flat-screen
monitor, and the jury box is equipped--one for every
two jurors--with monitors as well. The courtroom has
at its disposal a digital camera that projects the image
of documents or objects onto each monitor in the
courtroom. Lisi affectionately refers to it as ELMO,
the manufacturer’s name.
• A self-described technological dinosaur, Lisi
presides in a fossil of a courthouse, built during the
Theodore Roosevelt administration. The courthouse
recently went through rehabilitation and restoration
that included state-of-the –art technology which was
carefully integrated to avoid sacrificing the
courthouse’s historic feel.
Source: Jim Mckay, “Show & Tell,” Government Technology, January,
167
2005, p.16.
Smart Courts (Cont.)
© D.L. Crumbley
“Our system went down a couple of weeks
ago,”Lisi recalled. “I tried a relatively short case, but
when the lawyer had a photograph to show to each
individual juror, it felt like the world was standing
still. It felt like an eternity as each one of them
looked at it because you can’t do anything while
they’re passing that photograph around.”
With flat-panel monitors in the jury box, at the
judge’s bench and at the lawyers’ tables everyone can
see the evidence at the same time, rather than having
to pass around a piece of evidence, which could take
10 or 15 minutes. “With an evidence presentation
system, especially in document intensive trials, you
put it up and everybody is looking at the document at
the same time while the attorney is speaking.”
Goldenberg said. “If you have 100 document--you do
the math.”
Source: Jim Mckay, “Show & Tell,” Government Technology, January,
2005, p.5
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Smart Courts (Cont.)
“Presenting evidence electronically-PowerPoint slides and scanned material--and showing
it to jurors on their monitors makes for a more
powerful presentation, and jurors appreciate the
efficiency,” said Judge E. Dana Winslow of the New
York State Supreme Court.
“If you have records of 1,000 pages or 2,000
pages and you want to get to page 134, electronically
it will take you about three to five seconds,” Winslow
said. “If you try to do the same thing with massive
documents through the witness and through the
attorneys, it will take you a substantial amount of
time. I’ve seen it take 10 minutes.”
“Having monitors at the counsel tables also
saves time by cutting down on objections because
lawyers have the precise language in front of them,”
Winslow said.
Source: Jim Mckay, “Show & Tell,” Government Technology, January,
2005, pp. 18-20.
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Smart Courts (cont.)
“Technology enhances understanding and
retention, and establishes a greater degree of
credibility, Winslow said. “There is always some
reticence on the part of jurors to accept everything the
attorneys or witnesses are saying. If they don’t have to
be concerned that something they are hearing is
something other than what is [real], it reduces the
skepticism in the courtroom.”
“It’s very powerful when the jury can see that
instead of having to rely on the witness just jabbering
on about it and having this tiny projectile in his hand
that they are going to have wait and see afterwards.”
Lawyers do get carried away with technology, making
it incumbent on the judge and adverse counsel to call
them on it. “The lawyers overuse it,” Lisi said.
Source: Jim Mckay, “Show & Tell,” Government Technology, January,
170
2005, pp. 20-21.
© D.L. Crumbley
Types of Witnesses
Percipient witness – one with direct
personal knowledge of the facts,
circumstances, and events
surrounding the dispute (e.g., fraud,
the robbed bank teller).
Peripheral witness – may be able to
provide background information.
Hostile – normally unfriendly to the
forensic accountant or to the lawyer.
Friendly – friendly toward your
position.
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Dines’ Exhibits Hints
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1. Keep the number of exhibits to a
minimum to prevent confusion. Refer to
only the most important issues of the case.
In fact, do not use more than ten minutes to
explain a chart, as this is about the average
attention span of most juries.
2. Provide only one message per exhibit.
3. Make sure that your exhibit supports and
explains your opinion and conclusions.
4. Make sure that your exhibit is accurate and
relevant, not misleading or difficult to
understand.
5. Keep the contents of the exhibit simple and
clearly organized in order that people
viewing it can easily identify and
understand what they are seeing.
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Dines’Exhibits Hints
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6. Attach a copy of the source to the reverse
of each exhibit and make it available to
the court. Sign and date each exhibit for
court reference.
7. Keep your exhibits in a dry cool place,
even after the court has returned them to
you, for possible future use, such as in an
appeal.
8. Cover your exhibit up if it is set up in the
courtroom before you identify it. You
don’t want to distract the jury from other
evidence being presented, and you do
want to build up the jury’s curiosity.
9. Keep in mind that the opposing attorney
will be constantly looking for ways to
discredit your exhibit.
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Dines’ Exhibits Hints
10.Tests made to produce the exhibit must be
done under the same or at least under very
similar conditions in which the event
occurred.
11. Do not over do the making of a
demonstrative exhibit by, for example
making it over dramatic.
12.An excellent exhibit is one that is selfexplanatory. Standing by itself, it should
tell a story, prove a point, or substantiate an
opinion. It should leave an indelible
impression with the jury after the evidence
is removed.
13.Make sure you assign your own in-house
number to each exhibit. This number
should be placed on the back of the exhibit.
Once accepted, the court will assign its
own exhibit number as well.
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Dines’ Exhibits Hints
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14.Have your attorney provide the assigned
court exhibit numbers to you so that you
can cross-reference them with your inhouse numbers. This will enable the judge,
jury and attorneys to quickly identify your
exhibit, saving time and enhance your
efficiency, a plus.
15.A rushed impromptu exhibit should not be
considered. The lack of time needed to
reason it out carefully and completely can
result in inconsistencies or mistakes. If
you’re lucky, the court will not let such an
exhibit to be entered as evidence.
16.If possible, fax or mail copies of the
exhibits to your attorney as soon as you
finish them. If there are problems from the
attorney’s standpoint, you want to hear
about them as soon as possible.
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Dines’ Exhibits Hints
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17.Stand to the side of the exhibit when
explaining it in order not to block it from
the judge’s view. When speaking, speak
directly to the jury, letting your eyes roam
to several of them and never only to one.
18.Encourage the jury to continually look at
the exhibit while you focus your attention
towards them at the same time.
19.Leave your demonstrative evidence
uncovered while the opposing side is
presenting its case or during crossexamination so that it will make a
continuing impression on the judge and
jury.
Source: Jesse E. Dines, Expert Witness Manual, Irvine, CA: Pantex
International, Ch. 8.
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Four Conditions
An expert witness can state an opinion or
conclusion if four conditions are satisfied:
 The validity of the opinion or conclusion
depends on special knowledge,
experience, skill, or training not ordinarily
found in lay jurors;
 The witness must be qualified as an expert
in the pertinent field;
 She must possess a reasonable degree of
certainty (probability) about her opinion or
conclusion; and
 Generally, in common law jurisdictions an
expert must first describe the data on
which her conclusion is based, or she must
testify in response to a hypothetical
question that sets forth such data.
Source: J.R. Waltz, Evidence, New York: Foundation Press,
1999, p. 15.
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Three Approaches to Testifying
1.Express opinion based upon facts
personally observed, or facts
communicated to him by another
expert.
2.Be present in courtroom and express
opinion on such evidence (that is not
in dispute).
3.Base an opinion on a hypothetical
question embracing evidence in the
record.
Source: J.R. Waltz, Evidence, New York:
Foundation Press, 1999, p. 15.
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Written Reports
An expert should never draft a
written report of any kind unless
he or she has been expressly
directed to do so by hiring
counsel.
Federal Rules of Civil Procedure
26(a)(2)(B) requires a written
report.
Keep a diary of interview dates,
etc.
Do not destroy interview notes.
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Written Report Contents
(FRCP 26(a)(2)(B))
 All opinions to be expressed and the
bases for them.
 Data or other information considered
in forming the opinions.
 Any exhibits to be used as a summary
of or support for opinions.
 Witness qualifications, including a list
of all publications authored within the
last 10 years.
 Witness compensation.
 List of other disputes in which the
witness has testified at deposition or
trial during the last 4 years.
 Signature of the expert testifying.
Note: Federal Rule of Civil Procedure
27(e)(1) indicates that an expert must
update a written report or disposition.
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Types of Expert Reports
Fact-oriented report – gathers and
evaluates facts and uses them to
prepare a report. Check and recheck the numbers and the facts.
Opinion report (e.g., valuation
report) – more subjective and rely
more on the professional judgment
of the expert.
Combination of above types.
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Ghost-Writing Reports
In a district court case in 2001, the
plaintiff’s attorney argued that the
government’s litigation consultants were
ghost-writing expert reports, and the
experts were destroying documents in
order to prevent discovery.
The court refused to allow the expert
to participate in the dispute.
“The more involvement the client’s
attorney has with the expert’s report the
more likely this involvement will be
disclosed on cross-examination and
result in the court discounting the
expert’s testimony as lacking objectivity.
Source: Jon Almeras, “Judges Offer Advice On
Expert Testimony,” Tax Notes (March 18,
2002), p. 1438.
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Ghostwriting Reports (Cont.)
• An expert report must be prepared by the
expert and not by his or her attorney. An
expert report prepared mostly from
interrogatory answers prepared by the
party’s lawyers is not sufficient.
Source: FRCP 26(a) (2) (B)Smith v. State Farm Fire & Cas. Co., 164 FRD 49
(SD VA 1995)
• An attorney may provide assistance to an
expert in preparing a report. Here the
lawyers provided assistance in retyping and
incorporating changes authorized by the
expert
Source: Marek v. Moore, FRD 302 (DKS 1997)
• Oh, I know there’s be hell to pay. But that
crossed my mind a little too late! Well I
know what I was feeling, but what was I
thinking?
From “What Was I Thinking” by Dierks Bentley
183
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Ghostwriting Reports (Cont.)
• Although an attorney actually wrote the
report, the attached opinions and work
papers were those of the expert, and he
testified at deposition that the report
reflected his opinions.
Source: Indiana Ins. Co. v. Hussey Seating Co., 176
FRD 293(D. IN 1997)
• “Trial counsel may well have legitimate
cause to give assistance to an expert
witness in the preparation of the report.”
But “the court also emphasizes that in no
way does it suggest the attorneys have
license to change the opinions and report
of the expert witnesses.”
Source: Marek v. Moore, FRD 298 (DKS 1997)
184
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Ghostwriting Reports (Cont.)
• The court found “significant evidence of
teamwork and collaboration between
ATE
(a
government
litigation
consultant) and the U.S.’s testifying
expert”.
There
was
“extensive
substantive assistance in drafting the
expert’s report.”
Source:Trigon Insurance Co., 88 AFTR 2d 2001-6883
(DC Va.2001)
• A report was “substantially derived”
from a prior case, which was
“substantially similar” to a different
expert’s report in another dispute. Since
there was “substantially similarity
among the three expert witness reports
derived from the authorship of this
common language by plaintiff’s counsel,
the court struck an expert’s report
because it had “not been prepared by
the expert” in violation of FRCP 26 (a)
(2).
Source: In re Jackson Natl. Life Ins. Co. Premium Litigation,
1999 WL 33510008 (DC Mich, 1999)
185
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Ghostwriting Reports (Cont.)
• “Certain kinds of help are clearly in tune
with the concept of assisting the expert.”
“Specifically, an attorney’s assistance
with the preparation of documents
required by Rule 26, such as a list of
cases in which the expert has testified, or
fine-tuning a disclosure with expert’s
input to insure that it compiles with the
rules, is permissible.” Preparing expert’s
opinion “from whole cloth and then
asking the expert to sign it if he or she
wishes to adopt it conflicts with Rule
26(a)(2)(B)’s requirements that the
expert ‘prepare the report.’ Preparation
implies involvement other than pursuing
a report drafted by someone else and
signify one’s name at the bottom to
signify agreement. In other words, the
assistance of counsel contemplated by
Rule 26(a)(2)(B) is not synonymous with
ghost-writing.”
•
Source: Bank One Corp., 120 T.C. 174 ( 2003)
186
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Ghostwriting Reports (Cont.)
 
The Tax Court rejected a jointly
prepared 20- page expert rebuttal report
on the behalf of two experts since
prepared primarily by only one expert
and by taxpayer’s counsel. The report
went through 12 revisions.
• The witness never explained to our
satisfaction that the words, analysis, and
opinions in that report were his own
work and a reflection of his own
expertise…[W]e are unpersuaded that
[the expert] played any meaningful role
in composing the contents of the
…rebuttal report. He was vague,
uncertain, and unfamiliar with the
contents of the report, and he was
uncomfortable and evasive, and he was
uncomfortable about his role in its
preparation.”
Source: Bank One Corp., 120 TC 174 (2003): Judge Laro’s
Order dated 1/15/03, page 29.
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Ghostwriting Reports (Cont.)
• “Rule 26(a) (2) (B) does not preclude
counsel from providing assistance to
experts in preparing the reports , and
indeed, with experts such as automobile
mechanics, this assistance may be
needed. Nevertheless, the report, which
is intended to set forth the substance of
direct examination, should be written in
a manner that reflects the testimony to
be given by the witness and it must be
signed by the witness.”
Source: Advisory Committee notes to FRCP 26
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Ghostwriting Reports (Cont.)
• Permissible assistance certainly should
include familiarizing an expert with the
requirements of Tax Court Rule 143(f)
(1) and helping the expert understand
what information must be included in
the expert report for it to be admissible
into evidence. By contrast, an expert’s
report written entirely by counsel is
automatically suspect. Behavior falling
between these two extremes poses the
more troubling question.
Source: S.M. Hurwitz and R. Carpenter, “ Can An Attorney
Participate in the Writing of an ‘Expert Witness’
Report in the Tax Court?” Journal of Taxation,
June 2004, pp.358-362
189
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Ghostwriting Reports (Cont.)
• ‘ It appears likely that the U.S. Tax
Court will allow an expert to serve as a
scribe only when the expert is not
capable of articulating his or her
thoughts in the form of a written report.’
Source: S.M. Hurwitz and R. Carpenter, “ Can An Attorney
Participate in the Writing of an ‘Expert Witness’
Report in the Tax Court?” Journal of Taxation, June
2004, pp.358-362
190
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Ghostwriting Reports (Cont.)
Tax Court Sanctions:
• Denying admission of the expert’s report
• Denying the witness the opportunity to
testify
• Disqualifying the expert.
• Disregarding all or portion of the
testimony
• Imposing monetary sanctions against the
faulty party and its counsel
• Granting a new trial
• Dismissing the petition
• Entering a default judgment
• Contempt
Source: S.M. Hurwitz and R. Carpenter, “ Can An Attorney
Participate in the Writing of an ‘Expert Witness’
Report in the Tax Court?” Journal of Taxation, June
2004, pp.358-362
191
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Citators
Commerce Clearing House
Citator (taxation)
Research Institute of America
(PH) Citator and Citator 2nd
Series (taxation only)
Shepard’s (for virtually every
case reporter series and
specialized areas, e.g., taxation)
RIA and Shepard’s give a
notation why the case was cited.
CCH does not.
192
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Citators (cont.)
 Shepard’s
 Oldest.
 Greater breadth.
 Must know court reporter citation (not just
name).
 Go through LEXIS or Westlaw.
 Does not furnish name of cited case.
 Gives references to selective law review
articles.
 Gives citations to Federal Statutes and
Regulations.
 CCH Citator (2 volumes)
 lists cited cases for each court decision in
reverse chronological order
 Missing most current cases (two or three
months).
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Things to do
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• Only use theories or techniques that have been
tested and passed.
• Use theories or techniques that are objective.
• Specify the known error rate or potential error
rate for the method.
• Use methods with acceptable error rates.
• Produce peer-review literature (i.e., journal
studies, reports, and treatises supporting the
expert’s conclusions and opinions).
• Produce reliable scientific data to prove that
her methods and conclusions are generally
accepted in the scientific community.
• Demonstrate that her theories existed prior to
the commencement of the litigation.
• Not develop novel theories to support
conclusions for specific litigation.
• Demonstrate that she maintained standards and
controls (for example, good laboratory
practices and simultaneous blinded controls).
Source: Babitsky et. al, The Comprehensive Forensic Manual,
Seak, Inc., www.seak.com
194
Things to do …
© D.L. Crumbley
• Demonstrate that findings can and have been
replicated by others.
• Demonstrate that her methodology followed
the scientific method as it is practiced by at
least a recognized minority of scientists in the
expert’s field.
• Offer testimony that is sufficiently tied to the
facts of the case to help the jury to resolve a
factual dispute.
• Avoid relying on coincidence.
• Avoid extrapolating unjustifiably from an
accepted premise to an unfounded conclusion.
• Adequately account for obvious alternative
explanations.
• Demonstrate the same care and accuracy as in
the regular professional work.
• Use the real-world methodology of her field.
• Use an appropriate methodology to ensure that
her opinion derives from and constitutes a form
of specialized knowledge.
Source: Babitsky et. al, The Comprehensive Forensic Manual,
Seak, Inc., www.seak.com
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Judges Can Be Mean
Judges can hurt an expert witness’
reputation by making negative comments
about the expert in open courtroom. A
judge in Florida’s Fourth District Court of
Appeal said the following about an expert
when a defense attorney asked why he
excluded the expert:
“Dr. ____ is an insidious perjurer
who wouldn’t know the truth if it leapt up
and bit him on the ***.”
The expert is a doctor since 1963 and
has testified for 25 years.
On appeal the appellate court upheld
the judge’s ruling that the expert’s claim
lacked merit.
196
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Risk Management
There is an emerging trend of increased expert
witness liability.
General Rule: Immunity to a witness from civil
liability from testimony / communication made
in the course of litigation.
Exceptions:
 Spoliation of evidence – losing or destroying
evidence.
 Lying under oath.
 Defamation lawsuits against opponent's
witnesses.
 Negligence (disappointed clients).
 $42M Mattco Forge decision (Acct. malpractice). Arthur
Young [reversed on appeal on technicality]
 Court appointed expert can be liable for negligence.
[e.g., Accountant in a divorce case: Levine v Wiss & Co,
478 F.2d 397 (N.J. 1984)]
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Lying Under Oath Deadly
• Prosecutors said that ink expert Larry F.
Stewart committed perjury on the stand
during the obstruction-of justice trial of
Martha Stewart.
• Mr. Stewart, laboratory director for the U.S.
Secret Service, was charged with two counts
of perjury, facing five years in prison if
convicted.
• Prosecutors said that Mr. Stewart lied when
he said he participated in the testing of ink on
a worksheet supposedly showing a preexisting agreement with Martha Stewart to sell
her shares of Imclone stock.
Source: Chad Bary, “Stewart Ink-Test Trial Starts,
“WSJ, September 24, 2004, p. C-4
198
Acquitted
© D.L. Crumbley
Larry Stewart was acquitted on October 5,
2004. He had said, “I performed a test to
determine…..,” when in effect, he did not
participate in analyzing the critical documents.
One juror said, “ He put his foot in his mouth,
and he couldn’t take it out because of his ego.
He did not walk into the courtroom intending
to lie.”
199
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It’s A Battle of Wits
I liked the grueling task of preparing beforehand
and participating in a courtroom battle over
accounting principles. There was the challenge to
react and respond to the many innuendoes and
leading questions asked by the opposing attorney.
Probably the stress was not worth the daily fees I
received, but I kind of enjoyed it. I sometimes
imagined the opposing attorney to be a black-clad
medieval knight racing towards me on horse-back
with a long, sharp lance. I always toppled the
vicious knight in my daydreams. Though not
always in court.
I.W. Collett and D. Forgione, Costly Reflections in a Midas Mirror, Thomas
Horton and Daughters, p.131
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You Can Be Sued
Witness Immunity State:
State of Washington
Pennsylvania
States Ignoring Immunity:
Alaska
California
Connecticut
Louisiana
Missouri
New Jersey [court appointed]
Texas
West Virginia
201
Hold-Harmless Provisions:
Engagement Letters
© D.L. Crumbley
Limiting Liability: generally valid between parties to
the agreement ( but not third parties).
Clause 1: In no event will our firm be liable for
incidental or consequential damages, even if we have
been advised of the possibility of such damages.
Clause 2: You and your client agree to hold our firm,
its partners, and employees harmless from any and all
liabilities, costs, and expenses relating to this
engagement, and expenses (and those of our legal
counsel) incurred by reason of any action taken or
committed at your direction and taken by us in good
faith; and you agree to indemnify us for any such
action taken at your direction.
Limiting Damages: generally valid between parties
to the agreement ( but not third parties).
Clause 3: Our aggregate liability to [attorney] or
[attorney’s client] whether in contract, tort, or
otherwise, will be limited to the amount paid to us by
[attorney] or [attorney’s client] for the services under
202
this engagement letter.
Hold-Harmless Provisions:
Engagement Letters
© D.L. Crumbley
Protecting Against Daubert (Frye) Rejection:
Attach your curriculum vitae (CV) as an exhibit to the
engagement letter.
Clause 4: As an exhibit to this engagement letter, I
have attached my CV. If a court later determines that I
am not qualified to offer testimony, such
determination will not deemed a breach of this
agreement, and you will still be liable for the payment
of fees and expenses as set forth herein.
Source: C.L. Wilkins and J.H. Kinrich, Business Valuation/Forensic and
Litigation Services Practice Aid 04-1, “ Engagement Letters in
Litigation Services,” a practice aid issued by the AICPA Forensic and
Litigation Services Committee.
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Breach of Contract
A client may win a breach of contract
dispute by showing that the expert failed
to
(a) perform a specific contracted service,
(b) perform the service in a timely
fashion,
(c) perform in a satisfactory manner, or
(d) comply with professional standards.
Examples of specific service performance
would include engagements such as a
review of a client’s internal control
system or conducting a complete audit.
Source: “Breach of Contract” (New York Practicing
Law Institute, January 2000), Ch. 3.2[B].
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Lack of Immunity
There is no immunity for
communication made outside the
context of the lawsuit.
Probably no immunity if the alleged
misconduct results in a professional
disciplinary proceeding.
If you present false evidence, may
be subject to criminal prosecution
(e.g, Larry J. Stewart) .
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10 Guidelines to Meet Potential 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
5. Use generally accepted analytical
methods
6. Use multiple analytical methods
7. Summarize 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 conclusion –
for reasonableness
Source: R.E. Figlewicz and Hans-Dieter Sprohge, “The
CPA’s Expert Witness Role in Litigation Services: A Maze
of Legal and Accounting Standards,” The Ohio CPA
Journal, July-September, 2002, p. 35
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Sufficient Relevant Data
• A practioner needs to base his or her
conclusions and judgments on
sufficient relevant data.
• Ballentine’s Law Dictionary defines
evidence as follows:
 The means by which any matter of fact, the truth
of which is submitted to investigation, may be
established or disproved. That which
demonstrates, makes clear, or ascertains the truth
of the very fact or point in issue, either on the one
side or the other.
 The law of evidence embraces those rules which
determine what testimony is to be admitted or
rejected in the trial of a civil action, or a criminal
prosecution, and what weight is given to
evidence which is admitted.
Source: Ballentine’s Law Dictionary
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Sufficient Relevant Data (contd…)
Ballentine’s further defines sufficient evidence and
relevant evidence as follows:
• Sufficient evidence—Abstractly, evidence of such
probative value as to support the verdict of the jury or
a finding of fact by the court. Practically, evidence
such as will satisfy an unprejudiced mind of the truth
of that which the court or jury has found to be the fact.
[Emphasis added]
• Relevant evidence—Any matter of fact the effect,
tendency, or design of which, when presented to the
mind, is to produce a persuasion concerning the
existence of some other matter of fact — a persuasion
either affirmative or disaffirmative of its existence.
Concisely, evidence of one fact rendering the
existence of the fact in issue probable.
• A practitioner must advise the attorney of possible
missing or questionable documents and the lack of
sufficient relevant data upon which to reach an
opinion.
Source: Ballentine’s Law Dictionary
208
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Eleven Guidelines for Evidence
 Relevance
 Objectivity
 Documentation
 Externality
 Sample Size
 Sample Method
 Corroboration
 Timeliness
 Authoritativeness
 Directness
 Adequacy of Controls
Source: R.L. Ratliff and I.R. Johnson, “Evidence,” Internal Auditor, August 1998,
pp.56-61
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Ten Commandments for Depositions
 Always tell the truth, but answer only the question asked.
 Think before answering.
 Never answer a question you do not understand.
 Do not guess or speculate.
 Do not bring notes, diagrams, books, or other written
material to the deposition unless a subpoena or your
attorney requires you to do so.
 Listen carefully to each objection made by your lawyer.
 Do not argue or become angry or hostile with the
examining attorney.
 Even if a question calls for a yes or no answer, ask to
explain your response if you feel a qualification or
explanation is required to complete your answer.
 Beware of questions which involve absolutes.
 Do not memorize your answers before the deposition.
Source: B.P. Brinig, “The Art of Testifying,” in Handbook of Financial Planning for
Divorce and Separation, John Wiley, 1990.
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Always Be Truthful
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An investigator was asked in crossexamination: “You said that you wrote your notes
contemporaneously. Is that correct?”
‘Yes,’ replied the witness.
‘And was the interview conducted at normal
conversation speed?’ Counsel asked and witness
agreed that this was the case.
‘They were very neat and tidy, Mr. Jones, aren’t they?’
‘Yes,’replied the witness and then added a fatal piece
of humor: ‘Unlike lawyers and doctors, I have been
trained to write nicely.’
‘Very good, Mr. Jones. I am now going to dictate a
passage to you at normal conversational speed, and I
would like you to write down notes of everything I
say.’
Within two minutes the witness was a blubbering
wreck, because he could not keep pace with dictation.
The case was thrown out.
Source: M.J. Comer and T.E. Stephens, Deception at Work, Burlington, Vt:
Gower Publishing Company, 2004, p. 397.
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An Expert’s Advantages
 They are experts.
 They are not intimidated by the
process.
 They can hide behind their
expertise.
 Trial work is more lucrative
than office or classroom work.
 They are more highly
educated than lawyers.
 They like to teach.
Source: D.M. Malone and P.J. Zwier, Effective
Expert Testimony, Notre Dame, IN: NITA,
2000, p. 56.
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Getting to Experts
However, Malone and Zwier point out how
to “get to” unintimidated experts; they
“may lose sight of the deposing attorney’s
goal, which is to find means to diminish the
expert’s credibility or to challenge the bases
for the expert’s opinions.”
Call it arrogant. “Because they think they
are safe within their own field, experts at
deposition may be more willing to provide
explanations and lengthy answers, to
volunteer information, and to educate their
ignorant but interested students.”
They advise lawyers to smile, nod, lean
forward, maintain eye contact, and ask open
questions to “play” the expert. Encourage
them to teach at the deposition.
Source: D.M. Malone and P.J. Zwier, Effective Expert
Testimony, Notre Dame, IN: NITA, 2000, p. 57.
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Seven Answers at Deposition
1.
2.
3.
4.
5.
6.
Yes.
No.
Green.
I don’t know.
I don’t remember.
I don’t understand the
question.
7. I need a break.
Source: D.M. Malone and P.J. Zwier, Effective
Expert Testimony, Notre Dame, IN: NITA,
2000, p. 81.
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Weaknesses of Experts
 It is the lawyer’s arena.
 They cannot resist teaching.
 Their time is finite and the
universe is infinite.
 They must rely on assumptions.
 They are concerned about
consistency.
 They worry about facts they do
not know.
 You know how to use FRE
803(18).
Source: D.M. Malone and P.J. Zwier, Effective
Expert Testimony, Notre Dame, IN: NITA,
2000, p. 73.
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Federal Rule of Evidence 803(18)
Federal Rule of Evidence 803(18) permits
the introduction of relevant material from
written sources to get around the hearsay
rule.
The opposing attorney can get the expert to
“concede the existence of reliable
authorities in the field” that later may be
used at trial to help their side.
Source: D.M. Malone and P.J. Zwier, Effective
Expert Testimony, Notre Dame, IN: NITA,
2000, p. 73.
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Challenging The Opposing Expert
• General educational background.
• Areas of claimed expertise.
• Education in the field.
• Job history, terminations, multiple careers.
• Work experience in the field, practical
experience.
• Ever sued in professional capacity?
• Subject to any investigation?
• Published works.
• Engagements
• Other opinions rendered.
• Other cases where testified.
• Acknowledge and importance of:
a. Using accepted methodology.
b. Fairness
c. Careful math, if applicable.
• Materials
• Transcripts
• How the party first learned of the case.
Source: D.E. Heinberg and B.C. Riopelle, “The Use of Financial Expert Witness (or
Consultant)--- From Both the Attorney’s and Expert’s Perspective,” The Value
Examiner, November/December, 2004, p.48
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Challenging The Opposing Expert
(Cont.)
• Prior contact with parties.
• Other work for same party.
• Prior testimony for same counsel.
• First meeting with counsel- “Did counsel tell you
what they needed?”
• All communications with counsel:
a. Written
b. E-mail
c. Verbal
• Engagement letter
• All communications with outsiders.
• All communications with co-workers, staff and
independent contractors
•Notes
•E-mails
•Anything destroyed?
Source: D.E. Heinberg and B.C. Riopelle, “The Use of Financial Expert Witness
(or Consultant)--- From Both the Attorney’s and Expert’s Perspective,” The Value
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Examiner, November/December, 2004, p.48
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Challenging The Opposing Expert
(Cont.)
• Terminology
• Precise methodology used
• Margin of error.
• Assistants involved, background checks, training
•Ever given an opinion on this subject before?
• Readings
• Precise opinions.
• All things relied on to give opinion.
• Theories rejected (e.g., if opinion is reasonable
royalty, has he ruled out lost profits?)
• Process of preparing report:
a. Ideas
b. Exchange of drafts with counsel
c. Changes suggested by counsel
• All opinions reached.
Source: D.E. Heinberg and B.C. Riopelle, “The Use of Financial Expert Witness
(or Consultant)--- From Both the Attorney’s and Expert’s Perspective,” The Value
Examiner, November/December, 2004, p.48
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Challenging The Opposing Expert
(Cont.)
• Time spent on report
• Test all assumptions
• Access to facts and process for gathering.
• Order in which all tasks performed.
• Individuals whom he or she considers to be experts
in the field.
• Look for inconsistencies.
• Check math
• Work remaining to be done.
• Time records and bills
• Comment on your expert’s report.
Source: D.E. Heinberg and B.C. Riopelle, “The Use of Financial Expert Witness
(or Consultant)--- From Both the Attorney’s and Expert’s Perspective,” The Value
Examiner, November/December, 2004, p.48
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Jerry Lee Lewis
Judges do say negative things about experts,
and if an expert witness is denied, that side
may lose. Most often the deadline for
listing experts has passed. An old saying by
Jerry Lee Lewis is appropriate: “You don’t
miss your water until the well runs dry.”
If the expert and report is not admissible, the
lawsuit may be over.
For example, a plaintiff lost a breach of
contract and breach of fiduciary duty dispute
by summary judgment because their
accounting expert report was “pure
speculation, based upon utterly
implausible assumptions and unreliable
methodology.” But Daubert challenges must
be timely.
Sources: Target Market Publishing Co. v. ADVO, Inc.,
136 F.3d 1139 (CA-7, 1998).
Questar Pipeline Co. v. Grynberg, 2001 F.3d 1277
(CA-10, 2000).
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Cross Examination Tactics
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 No substitute exists for good preparation.
 Before your cross-examination, question your assumptions
and explore alternative positions.
 Study the opposing expert’s analysis.
 If you can’t answer the question yes or no, say so and shift
the burden back to the lawyer to frame a proper question, one
that can be simply answered or permits a fair explanation.
 Answer only the question asked.
 Become familiar with the examining attorney’s background,
skills, and tactics.
 Be yourself, but be sensitive to negative habits which may
distract from the quality or credibility of your testimony, such
as averting your eyes when asked a difficult question.
 Be polite.
 Avoid the appearance of bias or untrustworthiness.
 Do not hesitate to concede an error. But be careful:
 “So, you just picked a number?”
 “So, your study isn’t accurate, isn’t it?”
 “So, after this brief, informal interview, you decided....”
 Don’t overstate your opinion.
Source: B.P. Brinig, “The Art of Testifying,” in Handbook of Financial Planning
for Divorce and Separation, John Wiley, 1990.
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Cross Examination Tactics (more)
 Do not speak to people outside courtroom
while waiting and during breaks.
 Turn off your cell phone or pager before
entering the court.
 Do not wear emblems.
 Avoid humor, but laugh at judge’s humor.
 Keep your hands on top of the table, not
hidden.
 Be sure your attorney questions you in detail
about your qualifications in order to impress
the judge/jurors. Do not allow the other side to
stipulate you as an expert.
 Dress neatly and conservatively.
 Arrive on time at the court house (have
multiple reminders).
 When taking the oath as a witness, say loudly,
“I do.”
 Be sincere and respectful.
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Cross Examination Tactics (more)
Talk directly to the jurors (or judge if no
jurors). Look them in the eyes. Make contact with
each of the jurors.
Explain number carefully, possibly using
analogies with tax returns and checkbook.
Pausing does not harm you.
Use first person, active person: I reviewed these
records, and I found….
Tell stories about people.
Be careful when shown passages from
textbooks, etc.
Jurors have nothing to do for long periods. They
are always watching. Be careful every place in the
court house, even while driving to the court
house.
When you are in trouble in the court room, do
not lean back. Instead lean forward.
 When you are finished, do not leave the
courtroom until there is break.
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Judd Robbins
Computer Forensic Expert
© D.L. Crumbley
"Judd Robbins is a litigator's dream expert witness:
he not only has solid technical skills and a resume to
support them, but is creative, litigation savvy, and a
pleasure to work with, as well."
.......... Trial Attorney, New York, New York
"Judd has that uncommon ability to take complex
computer subject matter and break it down in a way
that is understandable to a layman."
.......... Trial Counsel, Los Angeles, California
"Judd related very well to the jury. He made himself
available to us whenever he was needed. Easy to
work with. Took the time to work with us. Always got
back to us right away."
.................... District Attorney, South Dakota
"He was easy to understand.
...made it seem easy...
I believed his explanation."
……………..Juror Polling Feedback
4 Minute Video Deposition Extract
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Judge’s Instructions to Jury:
“You have heard evidence in this case from
witnesses who testified as experts. The law
allows an expert to express opinions on subjects
involving their special knowledge, training, skill,
experience, or research. You shall determine
what weight, if any, should be given such
testimony, as with any other witness.”
Jay W. Danker’s Four Rules:
 A relevant, coherent, understandable story.
 To keep their interest at all times.
 To be spoken to in clear, definite terms.
 Respect and sincerity.*
* Jay W. Danker, Communicating with the Jury. Handout materials for the Fifth Annual National
Expert Witness and Litigation Seminar, Hyannis, Massachusetts (June 20, 21, 1996) 2.
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The Three Cs
The jurors expect an expert to
•Establish his/her competency.
•Convince the jury of his/her
credibility.
•Communicate effectively his/her
knowledge and opinions.
----------------------------------------------“He made his testimony
relate to something the jury could
understand from their own
experience gain from buying
lumber at a lumber yard.”
Source; Judge Joseph B. Morris, Today’s CPA, May/June
1991, pp.48-49.
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Kiss
Business people often
believe that their goal in a
presentation is to deliver
information. The reality is that
information presented in a speech
is rarely remembered. Images,
metaphors, and anecdotes are
what stick in listeners’ minds.
Source: David Booth, “An Actor’s Guide to Giving a Great
Speech,” Bottom Line Personal, March 1, 2004, p.8.
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A Bulletproof Expert
They give opposing counsel little or nothing
productive during cross-examination. This is
dangerous to the other side because the jury
expects counsel to make some good points
during cross-examination. When few or no good
Points are made during cross-examination, the
expert’s stature is likely to grow significantly and
opposing counsel’s stature is likely to diminish.
Steven Babitsky and J.J. Mangrauiti, Cross-Examination, Seak, Inc. 2003,
p.392
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Random Process
“ Further, even though Gage and Terell hadn’t
gotten them any points, neither had they put
too many on the boards for Powell. That,
though, could change in an instant.
One false move now could turn the
momentum of the entire trial. It was a time to
be conservative in the literal sense- conserve
what you’ve already got. Don’t let the other
side score.”
Source: J.T. Lescroart, The 13th Juror, New York: Dell Publishing, 1994,
pp.343-344.
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Three Communication Techniques
Central – focus on what you say.
Peripheral – focus on how you say
things.
• Amount of evidence presented.
• Number of points you make.
• Length of your testimony.
• Your qualifications.
• Trustworthiness.
• Likeability.
Combination.
Source: D.S. Scott and R. Laguzza, “Communication With The
Jury,” Litigation Services Handbook, John Wiley, 2001, p. 15-2.
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Ross Davis and Ross Laguzza Say
• At least one of the jurors will not listen
to you.
• Those that listen to you must understand
you (e.g., Accounting/Taxation/Valuation
issues are not easy).
• Jurors need to understand why you say
what you say.
• You must persuade the jurors that what
you say is correct, despite the crossexamination.
Source: D.S. Scott and R. Laguzza, “Communication With The
Jury,” Litigation Services Handbook, John Wiley, 2001, p. 15-1.
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Why Financial Experts Fail
1. The financial expert does not know the case
story (e.g., the strategic messages).
2. Expert never develops home base messages,
or develop the wrong ones (short simple
messages).
3. Inconsistencies between direct and crossexamination.
4. Unnecessary use of jargon and terms or art.
5. Insufficient meaningful practice.
Source: D.S. Scott and R. Laguzza, “Communication With The
Jury,” Litigation Services Handbook, John Wiley, 2001, pp.
15-10 and 15-11..
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Turning Jurors Off
 Over-rehearsed testimony.
 Unenthusiastic testimony.
 No directly examining relevant evidence.
 Overly technical presentation.
 Rambling and irrelevant testimony.
 Mistaken and contradictory testimony.
 Evasive or combative responses.
 Indirect eye contact.
 Ill at ease or nervous.
 Crossing arms across chest.
 Drinking a lot of water.
 Looking toward your attorney for help on cross.
Source: Sarah E. Murray, “How Experts Can Win Jurors and Influence Outcome,” NACVA,
June 3, 2004.
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Dines’ Potpourri of Advice
1. Read your client-lawyer’s entire case file,
including the narrative, thoroughly and as often as
necessary to understand all the known facts. Ask
for more information from your client-attorney if
needed.
2. Prepare a list of questions (with answers) for your
attorney that he can ask you during the
qualification phase as an expert witness.
3. Address your findings in a professional and
business like manner. Be eloquent, clear and
precise. Your demeanor should be proper.
4. Obtain a predetermined retainer. Your attorney
may request a retainer agreement. This is okay.
But get you initial retainer up-front. Remember
the slogan of small general stores throughout the
country in the late 19th century: “ Cash makes no
enemies.”
5. Never become an advocate or hired gun. Your
mission is to determine certain facts within your
expertise, and testify about them. That’s all.
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Dines’ Potpourri of Advice
6. Educate your attorney in simple lay terms so that
he understands all the aspects of of your testimony
related to your expertise. Sure, he may have
graduated at the top of his class at Yale or
Harvard, but what does he know about intangible
assets or retained earnings?
7. Offer suggestions that will help your
client-attorney in the trial.
8. Explain whatever test procedures you intend to
use. Yes, you’re the expert in these procedures, but
the lawyer is the expert in how juries will respond
to your explanations.
9. Request additional information that you may
need to conduct further research tests in order to
formulate your evaluation. Provide your client
attorney with an estimate of additional costs, if
any.
10. Help your attorney draft interrogatories and
interpret those of the opposition.
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Dines’ Potpourri of Advice
11. Help your attorney interpret numbered exhibits
and demonstrative evidence and explain how you
intend to use them. Also determine the estimated
cost of these.
12. Fully review your CV and fee schedule. Be
assured the opposing attorney will scrutinize it and
attempt to discredit you during the qualifying
phase.
13. Request a copy of the complaint, including all of
the known evidence pertaining to your expertise,
as well as the existing documents and
photographs. Be cognizant of the current research
and literature pertinent to the case that is available
in the field of your expertise. You don’t want to
build your opinion on a protocol that has been in
use for fifty years-but was discredited within the
past ninety years.
14. You should not exaggerate the strengths of the
case. Sometimes it is more valuable to point out
any weakness and voice more conservative
opinions.
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Dines’ Potpourri of Advice
15. Discuss with your attorney any weak (as well as
strong) points your opinion may possess, especially
if you have not testified before, and how to handle
questions relating to it. Have your attorney bring
these points out immediately during crossexamination. Although the opposing attorney will
doubtless make an issue out of these issues, his
attack will have been blunted.
16. Focus on only the scientific, technical, or objective
portions of the case. Avoid extraneous or unrelated
issues.
17. Practice a mock trial at least once: more is better.
You can never practice enough. Your attorneys can
save you the embarrassment of not being qualified.
Also, this will prevent misunderstanding and any
apparent contradictions.
18. Be prepared to attend a settlement or arbitration
conference that includes you and the opposing
attorneys.
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Dines’ Potpourri of Advice
19. Do not drink any carbonated drinks or alcohol at
least twenty-four hours prior to the trial. Drink
water without ice at room temperature. Eat light,
healthful meals. If you are on medication, explain
it to your attorney.
20. Do not be late to court for any reason (outside a
terrorist attack). “Stuck in traffic” is not an excuse,
nor is “I couldn’t find parking space.” Being on
time is one reason you charge by the half-day for
your in-court testimony.
21. Your attorney will tell you whether or not you
should sit in the spectator section of the court or
be sequestered outside the courtroom until you are
called to testify. This is determined by the judge.
22. Consider taking as aspirin or diarrhea preventive
prior giving a deposition or testifying in open
court.
23. Ask your client-attorney which files you should
take to court. Keep in mind these files are
considered discoverable and must be shown to the
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© D.L. Crumbley
opposing attorney if he requests it. Privileged files
should not be taken to court.
24. Before reading from your notes, obtain the judge’s
permission. The opposing attorney may raise an
objection.
25. You should also take several copies of your CV,
and be prepared to provide them to the jurors if
requested.
26. Business cards must not be used for solicitation.
However, it is generally permissible to give the
court reporter one to provide your full name,
address, and so forth.
27. When appearing in state or municipal courts, learn
beforehand whether or not you will be allowed to
take pen and pad with you to the witness stand. (In
federal court, you are allowed to take a pen and
pad to the witness stand.)
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28. Maintain close contact with your attorney
throughout the proceedings as to the status of the
case, even though you may not be in court. Your
calendar will help him provide dates on which to
schedule a deposition or trial appearances.
Source: J.E. Dines, Expert Witness Manual, Irvine, CA: Pantex
International, 2004, Chapter 14
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Investigative Techniques and Evidence
 Documentary evidence – written
evidence on paper or computer medium.
 Testimonial evidence – testimony of
individuals.
 Observational evidence – evidence,
actions, or observations seen by an
investigator.
• Physical examination of evidence (e.g.,
counts or inspections).
• Fixed point observations of activities
(e.g., watching a scene and recording).
• Moving observations.
 Invigilation – strict temporary controls
are imposed so that fraud virtually
impossible. Keep detailed records.
 Covert observations.
 Forensic document examination.
Source: D.R. Carmichael et.al., Fraud Detection, Vol. I,
Practitioners Publishing Co., 2002, pp. 3-1 to 3-4
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Evidence
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 Best evidence rule:
original documents to be produced rather
than secondary evidence (including oral
testimony)
 Many exceptions: Computer print-out –
now admissible if a foundation of
accuracy is laid.
 Copies admitted if lost.
 Generally can get around the best
evidence rule.
 Demonstrative evidence (the chalks)
objects – the gun.
models.
photographs.
videos.
charts.
exhibits
 Do they have the tendency to “assist
the trier of the facts”?
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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.
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Authentication Concept
Authentication Concept: The
writing or object must be proven to
be what it purports to be
direct testimony / chain of custody.
content.
other circumstances.
e.g., computer records may be used
in the courtroom by showing that
they were prepared by an accurate
process.
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Criminal Proceedings
 No plaintiff, but a prosecutor.
 A criminal defendant.
 Due process is stronger.
 Burden of proof beyond a reasonable
doubt.
 4th Amendment, search and seizures.
 5th Amendment, right against selfincrimination.
 Obtaining information from
defendant more difficult.
 Case dismissed if prosecutorial
misconduct.
 Double jeopardy applies.
 Fewer depositions.
 Original documentation and chain of
custody important.
 Normally jury must be unanimous.
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Motives, Means, and Opportunity
“ Motive, means, and opportunity. These
facts remain, and we will prove them.
And the facts will show that Jennifer Witt
killed her husband for five-million
dollars--motive. The murder weapon was
his own gun, which she and her husband
kept in the bedroom of her house--means.
She was alone in the house with her
husband and son when she turned the
gun on them--opportunity. We will prove
these beyond a reasonable doubt, and in
so doing, will recommend that a person
capable of these crimes has forfeited her
right to live in our society.”
Source: J.T. Lescroart, The 13th Juror, New York: Dell
Publishing, 1994, p. 227
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Criminal Investigations Differ
Different mentality – look for the
financial evidence to support or
refute an allegation.
Different skill set (an investigative
competency) – inquiring,
observant, professional skepticism,
and attention to detail . Your job is
not to determine guilt or innocence.
Strategy – team approach –
requires obtaining witnesses,
collecting evidence, and proving
fraudulent intent.
Source: Laura J. East, “The Role of the Forensic
Accountants In a Criminal Investigation.” Journal of
Forensic Accounting, Vol. IV, 2003, pp. 181-198.
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Common Problems In Criminal
Investigation
 Identifying the criminal activity and
the violation.
 Locating witnesses who have moved.
 Gaining the cooperation of witnesses.
 Establishing fraudulent intent.
 Organizing and maintaining documents
and other evidence.
 Responding to defense motions and
anticipating defenses.
 Completing investigations within the
statute of limitations.
 Investigators and prosecutors being
reassigned over the life of the case.
 Criminals adapting their schemes to
new technology.
 Competing for a prosecutor’s time.
Source: Laura J. East, “The Role of the Forensic Accountants In
a Criminal Investigations.” Journal of Forensic Accounting.
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Criminal Grand Jury (e.g. Fraud)
 Arrest or grand jury.
 16 – 23 sworn jurors; meet bi-weekly
or monthly.
 Indictment if at least 12 votes (without
prosecutor present).
 Accused has no right to be informed.
 Have power to accuse, not to convict.
 Can subpoena witnesses and
documents.
 If accused attends, no right to an
attorney.
 A witness may be compelled to testify
under a grant of immunity.
 If immunized witness refuses, can be
found in contempt, jailed.
 Arraignment: reading of the indictment
in open court.
 Burden of proof much higher: beyond a
reasonable doubt. Innocent until proven
guilty (U.S. constitution).
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Criminal Expert’s Report
 After a suspect has been indicted but
before the trail, an expert testifying in a
criminal trial may be asked to prepare a
written summary of the testimony
expected to be given. Under Federal
Rule of Criminal Procedures
16(a)(1)(E), a defendant has a right to
request that the government provide a
written summary of the testimony
expected to be given by the
government’s expert if prepared, the
government’s summary report should
include the information listed above.
 Once the government provides the
defendant with this summary
information, the government is entitled
under Rule of Criminal Procedures
16(b)(1)( C ) to reciprocal discovery of
the same information from the
defendant’s expert.
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Rule 26 Ramification
Dear Dr.
If, hypothetically, I was engaged as
an expert witness by an attorney in
connection with “undesirables” let’s say,
for example, drug dealers and I gave
expert testimony. Would the fact that I
was associated with such people be a
reason the opposing counsel or trier of
fact might use to have me dismissed as
an expert witness in future cases? I
believe that under Rule 26 I must
indicate the cases I have served on as an
expert witness. If there are negative
ramifications, that is certainly something
I wish to avoid. Will the court or anyone
else hold the above hypothetical example
against me in any way?
Thank you for your attention in this
important matter.
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Administrative Proceedings
 May have own particular procedures.
 Broad standard of procedural due
process.
 Technical rules of evidence may not
apply.
 Procedural formality may be missing.
 Prosecution and judicial function may
be the same.
 But be prepared to document and
support your opinion.
 Often no formal appeal from an
administrative decision.
 Therefore, must file a separate
pleading to obtain a judicial review
(e.g., writ of mandamus or writ of
review).
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AICPA Consulting Aids
 AICPA Consulting Services Report 93-1
(superseded by AICPA Consulting Services
Special Report 03-1, March 2003)
 AICPA Consulting Services Special
Report 93-2
• CPA serving as an expert witness for a
client is not an advocate.
• Trier of fact.
 AICPA Consulting Services Practice Aid
95-2
• If a CPA acts as an expert witness,
engagement letter discoverable.
• Detailed engagement letter can be a
roadmap for opposing attorney.
• May wish to restrict services to a broad
statement.
• CPA work product not protected.
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AICPA Consulting Aids
 AICPA Consulting Services Report Practice Aid
96-3
• Minimum elements to be included in your report.
• Table of contents, executive summary,introduction and
background, objectives of the engagement, assumptions, and
references.
• Does not require a report.
• Sampling less useful for off-the-book fraud.
 AICPA Consulting Services Report Practice Aid
97-1
•
•
•
•
•
•
List of selected badges of fraud.
Description of fraud schemes.
Legal references.
Illustrative engagement letter scope paragraph.
A short letter or memorandum.
Statement of prediction, list of interviews conducted, and
summary of interview information.
• Avoid stating any conclusions about the presence and absence
of fraud.
• Avoid editorial content or judgments.
• Opinion on guilt or innocence left to judge or jury. (CFE has
similar directive).
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AICPA Consulting Aids
 Statement on Standards for Consulting
Services No.1 – Consulting Services
Definitions and Standards. These standards
apply.
•
•
•
•
•
•
•
Professional competence.
Due professional care.
Planning and supervision.
Sufficient relevant data.
Client interest.
Understanding with client.
Communication with the client.
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EXPOSURE DRAFT
STATEMENT ON
RESPONSIBILITIES FOR LITIGATION
SERVICES NO. 1
December 1, 2001
Prepared by
Litigation and Dispute Resolution Subcommittee
Statement on Responsibilities Task Force
Comments should be received by January 31, 2002, and
addressed to Anat Kendal, Director, Member Innovation—
Financial Planning, Harborside Financial Center,
201 Plaza Three, Jersey City, NJ 07311-3881
or via the Internet to [email protected].
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Litigation Services
 Consulting services that involve
pending or potential formal legal or
regulatory proceedings before a trier
of fact in connection with the
resolution of a dispute between two or
more parties. A trier of fact is a court,
regulatory body, or government
authority; their agents; a grand jury; or
an arbitrator or mediator of a dispute.
Roles of Litigation Services
Practitioner
 Expert witness
 Consultant
 Other
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Litigation Services Practitioner
Products and Services
Computation
Consulting
Business valuations
Proactive and reactive fraud
investigation
Pre- and post-bankruptcy
restructuring, solvency analysis,
and liquidation consulting
Special accountings, tracings,
reconstructions, and cash flow
analysis
Source: AICPA Proposed Statement on Responsibilities for
Litigation Services No. 1, December 1, 2001.
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Litigation Services Practitioner
Products and Services (contd …)
 Tax issues assessment and analysis
 Marital dissolution’s assessment and
analysis
 Contract costs and claims assessment
and analysis
 Historical results assessment and
analysis
 Antitrust and other business
combinations assessment and
analysis
 Construction and environmental
disputes assessment and analysis
 Business interruption and other
insurance claims assessment and
analysis
Source: AICPA Proposed Statement on Responsibilities for
Litigation Services No. 1, December 1, 2001.
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Tasks of the Litigation Services Practitioner
• Issue identification
• Locating other experts
• Fact-finding
• Analysis
• Discovery assistance
• Document management
• Settlement assistance
• Expert testimony
• Trial and deposition assistance
• Post-trial support (for example, accounting
services, and funds administration)
• Negotiations
• Arbitration
• Mediation
• Training
Source: AICPA Proposed Statement on Responsibilities for
Litigation Services No. 1, December 1, 2001.
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Three guidelines for admissibility of expert
testimony
a. The testimony should assist the trier of fact to
understand the evidence or to determine a fact in issue.
b. The expert should have some minimum qualifications,
which would include one or more of the following:
–Special knowledge
–Special skills
–Special experience
–Special training
–Special education
c. In addition, before providing testimony, the expert
would have to show that the testimony (a) is based upon
sufficient reliable facts or data, (b) is the product of
reliable principles and methods, and (c) is the result of
the application of established principles and methods to
the facts in the case.
The reliability standards set for expert testimony are
based on three pillars: (a) reliable data, (b) a reliable
methodology, and (c) the reliable application of the
methodology.
Source: AICPA Proposed Statement on Responsibilities for
Litigation Services No. 1, December 1, 2001.
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Pyramid of Standards and
Responsibilities
Source: AICPA Proposed Statement on Responsibilities for
Litigation Services No. 1, December 1, 2001.
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Testimony Pyramid
Expert testimony must be based upon
sufficient facts or data, be the product
of reliable principles and methods, and
the principles and methods must be
reliably applied to the facts of the case.
Source: AICPA Proposed Statement on Responsibilities for
Litigation Services No. 1, December 1, 2001.
264
Professional Responsibility
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AICPA Standards
Code of Professional Conduct
Rule 102: Objectivity and integrity
1. Conflict of interests
 expert accepts work against the interest of an
existing client.
 make conflict search of names before
receiving confidential information.
2. Objectivity and subordinating judgment
 make sure your opinion is your opinion.
 expected to defend your position
 avoid allowing opposing attorney to put
words in your mouth.
Rule 201 – General Standards




professional competence
due professional care.
adequate planning/supervision of services
sufficient relevant data.
Rule 202 – Technical Standards.
Rule 203 – Accounting principles
Rule 301 – Confidential client communication
Rule 302 – Contingent fees
 if contingent, can not be objective.
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Understanding With The Attorney
a. Identification of the attorney’s client
b. The title of the litigation, including the
litigants’ names, the court, and docket number
c. A description of the nature of the litigation
services to be provided or a statement that the
services will be as the attorney may direct
d. An identification of the expert witness or the
willingness of the person who will be the
expert witness if necessary
e. Reference to the absence or existence of
conflicts of interest
f. The absence or existence of the attorney’s work
product privilege
g. Restrictions of the use or exposure of the CPA’s
work
h. The CPA’s right to withdraw from and
terminate the engagement in certain
circumstances
Source: AICPA Proposed Statement on Responsibilities for
Litigation Services No. 1, December 1, 2001.
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Cash Receipts Statement?
The receiver, Thomas F. Lennon, hired a CPA,
William Ling, from San Diego. The receiver’s
November 6, 1997 “cash receipt statement”
prepared by Mr. Ling appeared as follows:
Beginning
Balance
$268,439
Money
Distributed to
Investors
$2,281,255
Money
6,704,320 Employees /
Raised From
Principals /
Investors
Overhead
$2,332,066
Oil and Gas
Production
394,575
Oil Field
Operations
$1,616,000
Other
194,575
Attorney’s Fees
Other
1,027,984
158,626
$145,978
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The End Is Here
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