Transcript Slide 1

Forensic Accounting: Strategies for Detecting and
Controlling Fraud
D. Larry Crumbley, CPA, Cr.FA, CFFA, FCPA
KPMG Endowed Professor
Department of Accounting
Louisiana State University
Baton Rouge, LA 70803
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, an value
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.
Forensic Report
Expert Opinion
Glimpse Forward
Overview of Forensic Accounting
PCAOB, Smaller Businesses
 Indirect Methods of Determining Income
 Procurement Frauds
 Developing Fraud Interviewing Skills
Fraud Detection Questions
 Some Forensic Accounting Tools
 Best Practices of Litigation Services
 Federal Rules of Civil Procedures
 Federal Rules of Evidence
 Surviving Daubert/Frye Challenges
 Privileges
 Testimony Best Practices
Now John at the bar is a friend of mine.
He gets me my drinks for free.
Sing us a song, you’re the piano man.
“Piano Man”
Billy Joel
Forensic Accounting Factors
Time: Forensic accounting focuses on the
past, although it may do so in order to
look forward (e.g., damages, valuations).
 Purpose: Forensic accounting is
performed for a specific legal forum or in
anticipation of appearing before a legal
 Peremptory: Forensic accountants may be
employed in a wide variety of risk
management engagements within
business enterprises as a matter of right,
without the necessity of allegations (e.g.,
----------------------------------------------With a single clue or minor inconsistency, a
forensic accountant can solve a
fraudulent mystery.
Forensic Accounting Areas
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
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
-------------------------------------------------------“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
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
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
Fannie Mae Forensic Probe
BOD hired investigators who cleared the
current management of Fannie Mae of
knowingly participating in any wrongdoing.
The report took 17 months; 616 pages
plus 2,000 plus pages of supporting
Cost of $60 million to $70 million.
The fraud was estimated to be $11 billion.
Former N.H. Senator Warren Rudman
used The Huron Consulting Group.
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, which 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 Witness,” WSJ, February 1, 2005, C-4
Industry Sources: need a Certification
American College of Forensic Examiners (2750 E. Sunshine,
Springfield, MO 65804; 800-423-9737; DABFA
and Cr.FA; 2000)
Certified Fraud Examiners (Association of CFES, The Gregor
Bldg., 716 West Avenue Austin, TX 78701; 800-245-3321;
Certified In Financial Forensics (CFF) AICPA, Fall 2008,
Forensic CPA Society (FCPA); formed in July 2005, Spokane, WA.
[email protected].
Certified Forensic Financial Analyst (NACVA, Salt Lake City, Utah
84106; 801-486-0600). Also, Certified Fraud Deterrence (CFD)
National Litigation Support Services Association (NLSSA, III East
Wacker Drive, Suite 990, Chicago, IL 60601; 800-869-0491).
Not-for-profit. About 20 firms. $1,825.
Canadian Institute of Chartered Accountants (CICA) – CA.IFA –
Alliance for Excellence in Investigative Accounting.
Certified Forensic Investigator (CFI) – Canada Early 1980’s.
Certified Fraud Specialist (CFS), not-for-profit, educational antifraud corporation located in Sacramento, Calif., for those
dealing in white-collar crime, fraud, and abuse issues.
Association of Certified Fraud Specialists.
PCAOB Guidance: Smaller Public
Scaling the Audit for Smaller, Less
Complex Companies.
Evaluating Entity-Level Controls.
Assessing the Risk of Management
Override and Evaluating Mitigating
Evaluating Segregation of Duties and
Alternative Controls.
Auditing Information Technology Controls
in a Less Complex IT Environment.
Considering Financial Reporting
Competencies and Their Effect on
Internal Control.
Obtaining Sufficient Competent Evidence
When the Company has Less Formal
Auditing Smaller, Less Complex
Companies with Pervasive Control
Attributes of Less Complex
Use of entity-level controls to achieve control objectives.
In smaller, less complex companies, senior
management often is involved in many day-to- day
business activities and performs duties that are
important to effective internal control. Consequently, the
auditor's evaluation of entity-level controls can provide a
substantial amount of evidence about the effectiveness
of internal control.
Risk of management override. The extensive
involvement of senior management in day-to-day
activities and fewer levels of management can provide
additional opportunities for management to override
controls or intentionally misstate the financial
statements in smaller, less complex companies. In an
integrated audit, the auditor should consider the risk of
management override and company actions to address
that risk in connection with assessing the risk of material
misstatement due to fraud and evaluating entity-level
Source: PCAOB, October 17, 2007, pp. 7,8
Attributes of Less Complex
Companies (cont.)
Implementation of segregation of duties and
alternative controls. By their nature, smaller, less
complex companies have fewer employees, which
limit the opportunity to segregate incompatible
duties. Smaller, less complex companies might use
alternative approaches to achieve the objectives of
segregation of duties, and the auditor should
evaluate whether those alternative controls achieve
the control objectives.
Use of information technology (IT). A smaller, less
complex company with less complex business
processes and centralized accounting operations
might have less complex information systems that
make greater use of off- the-shelf packaged software
without modification. In the areas in which off-theshelf software is used, the auditor's testing of
information technology controls might focus on the
application controls built into the pre-packaged
software that management relies on to achieve its
control objectives and the testing of IT general
controls might focus on those controls that are
important to the effective operation of the selected
application controls.
Source: PCAOB, October 17, 2007, pp. 7,8
Attributes of Less Complex
Companies (cont.)
Maintenance of financial reporting
competencies. Smaller, less complex
companies might address their needs for
financial reporting competencies through
means other than internal staffing, such as
engaging outside professionals. The auditor
may take into consideration the use of those
third parties when assessing competencies
of the company.
Nature and extent of documentation. A
smaller, less complex company typically
needs less formal documentation to run the
business, including maintaining effective
internal control. The auditor may take that
into account when selecting controls to test
and planning tests of controls.
Source: PCAOB, October 17, 2007, pp. 7,8
Entity-Level Controls
Controls related to the control
Controls over management override;
the company's risk assessment
Centralized processing and controls,
including shared service
Controls to monitor results of
Controls to monitor other controls,
including activities of the audit
committee and self-assessment
Controls over the period-end financial
reporting process.
Policies that address significant
business control and risk
management practices.
Source: PCAOB, October 17, 2007, pp. 12.
Judging Entity-Level Controls
Purpose of the control. A procedure that
functions to prevent or detect misstatements
generally is more precise than a procedure
that merely identifies and explains
Level of aggregation. A control that is
performed at a more granular level
generally is more precise than one
performed at a higher level. For example,
an analysis of revenue by location or
product line normally is more precise
than an analysis of total company
Consistency of performance. A control
that is performed routinely and
consistently generally is more precise than
one performed sporadically.
Correlation to relevant assertions. A
control that is directly related to an
assertion normally is more likely to prevent
or detect misstatements than a control that
is only indirectly related to an assertion.
Source: PCAOB, October 17, 2007, pp. 14-15.
Judging Entity-Level Controls (cont.)
Criteria for investigation. For detective
controls, the threshold for investigating
deviations or differences from expectations
relative to materiality is an indication of a
control's precision. For example, a control
that investigates items that are near the
threshold for financial statement
materiality has less precision and a
greater risk of failing to prevent or detect
misstatements that could be material than a
control with a lower threshold for
Predictability of expectations. Some
entity-level controls are designed to detect
misstatements by using key performance
indicators or other information to develop
expectations about reported amounts. The
precision of those controls depends on the
ability to develop sufficiently precise
expectations to highlight potentially material
Source: PCAOB, October 17, 2007, pp. 14-15
Characteristics of Less Complex IT
Transaction processing. Data inputs can
be readily compared or reconciled to system
outputs. Management tends to rely primarily
on manual controls over transaction
Software. The company typically uses offthe-shelf packaged software without
modification. The packaged software
requires relatively little user configuration to
Systems configurations. Computer
systems tend to be centralized in a single
location, and there are a limited number of
interfaces into the system.
End-user computing. The company is
relatively more dependent on spreadsheets
and other user-developed applications,
which are used to process, accumulate,
summarize, and report the results of
business operations, and perform
straightforward calculations using relatively
simple formulas.
Source: PCAOB, October 17, 2007, pp. 26.
Evaluating Management’s Oversight
Whether management recognizes situations for which
additional expertise is needed to adequately identify and
address risks of misstatement.
How management determines that the outside
professionals possess the necessary qualifications.
Whom management designates to oversee the services and
whether they possess the suitable skill, knowledge, or
experience to sufficiently oversee the outside professionals
(Note: Management is not required to possess the
expertise to perform or re-perform the services).
Whether management has established controls over the
work of the outside accounting professional (e.g., controls
over the exchange of information and controls to test their
work) and over the completeness and accuracy of the
information provided to the outside professional.
How management participates in matters involving
judgment, for example, whether management understands
and makes significant assumptions and judgments
underlying accounting calculations prepared by an outside
How management evaluates the adequacy and the results
of the services performed, including the form and content
of the outside accounting professional's findings, and
accepts responsibility for the results of the services.
Source: PCAOB, October 17, 2007, pp. 36.
Pervasive Control Deficiencies
Ineffective control environment (considering
the risk profile of the company). An
ineffective control environment can increase
the risk associated with a control. Also,
certain controls in the control environment,
such as maintaining financial reporting
competencies, might be necessary for the
effective functioning of other controls.
Ineffective IT controls or information
systems. For example, ineffective
information systems could impair the
effectiveness of certain IT-dependent
Pervasive lack of segregation of duties
without appropriate alternative controls.
When a person performs two or more
incompatible duties, the effectiveness of
some controls might be impaired without
appropriate alternative controls.
Frequent management override of controls.
A control that is frequently overridden is less
likely to operate effectively.
Source: PCAOB, October 17, 2007, pp. 46.
Establishing Proper Environment
Principle 1: as part of an organization’s governance
structure, a fraud risk management program6 should
be in place , including a written policy ( or policies) to
convey the expectations of the board of directors and
senior management regarding managing fraud risk.
Principle 2: Fraud risk exposure should be assessed
periodically by the organization to identify specific
potential schemes and events that the organization
needs to mitigate.
Principle 3: Prevention techniques to avoid potential
key fraud risk events should be established, where
feasible, to mitigate possible impacts on the
Principle 4: Detection techniques should be
established to uncover fraud events when preventive
measures fail or unmitigated risks are realized.
Principle 5: A reporting process should be in place to
solicit input on potential fraud, and a coordinated
approach to investigation and corrective action
should be used to help ensure potential fraud is
addressed appropriately and timely.
Source: Managing the Business Risk of Fraud: A practical Guide, 2008
Lifestyle Probes
The lifestyle of a taxpayer or employee may
give clues as to the possibilities of
unreported income. Obvious lifestyle
changes may indicate fraud and unreported
 Lavish residence
 Expensive cars and boats
 Vacation home
 Private schools for children
 Exotic vacations
IRS Financial Status Audits
If someone is spending beyond his or her
apparent means, there should be concern.
If a forensic accountant suspects fraud or
unreported income, a form of financial
audit may be appropriate that will enable
the investigator to check the lifestyles of
the possible perpetrators.
Forensic Audit Approaches
Used by the IRS
Direct methods involve probing
missing income by pointing to specific
items of income that do not appear on
the tax return. In direct methods, the
agents use conventional auditing
techniques such as looking for
canceled checks of customers, deed
records of real estate transactions,
public records and other direct
evidence of unreported income.
Indirect methods use economic reality
and financial status techniques in
which the taxpayer’s finances are
reconstructed through circumstantial
Indirect Methods
An indirect method should be used when:
 The taxpayer has inadequate books and
 The books do not clearly reflect taxable
 There is a reason to believe that the
taxpayer has omitted taxable income
 There is a significant increase in year-toyear net worth
 Gross profit percentages change
significantly for that particular business
 The taxpayer’s expenses (both business
and personal) exceed reported income
and there is no obvious cause for the
Market Segment Specialization
The Market Segment Specialization
Program focuses on developing highly
trained examiners for a particular market
segment. An integral part of the approach
used is the development and publication
of Audit Technique Guides.
These Guides contain examination
techniques, common and unique industry
issues, business practices, industry
terminology, and other information to
assist examiners in performing
examinations. A forensic accountant can
use this resource to learn about a
particular industry.
Minimum Income Probes
For non-business returns, an agent
question the taxpayer or
representative about possible
sources of income other than
reported on the return. If there is no
other information in the file
indicating potential unreported
income, the minimum income probe
is met.
For taxpayers who are self-employed
and file a Schedule C or F, an
analysis is made of tax return
information to determine if reported
income is sufficient to support the
taxpayer’s financial activities.
Cash T
A cash T is an analysis of all of the
cash received by the taxpayer and all
of the cash spent by the taxpayer over
a period of time. The theory of the
cash T is that if a taxpayer’s
expenditures during a given year
exceed reported income, and the
source of the funds for such
expenditures is unexplained, such
excess amount represent unreported
income or possible fraud.
Preliminary Cash-T
Gross Receipts:
Schedule C
Business Expenses:
Schedule C
Personal Living
Source and Application of Funds
Method (Expenditure Approach)
This technique is a variation of the net
worth method that shows increases and
decreases in a taxpayer’s accounts at the
end of the year. The format of this method
is to list the applications of funds first and
then subtract the sources. If the taxpayer’s
applications exceed his or her known cash
receipts (including cash on hand at the
beginning of the year), any difference may
be unreported income.
Source/Application of Funds
Application of funds:
Bank balance increase
Down payment on home
Closing costs on home
Purchase of SUV
Rent payment (4 months)
Mortgage payment
Down payment on boat
Credit card payments
Miscellaneous (living)
Known sources of funds:
Cash on hand
Dividends and interest
Loan proceeds
Net unreported funds
Net Worth Method
The net worth method is a common indirect
balance sheet approach to estimating
income. To use the net worth method, an IRS
agent or forensic accountant must:
1. Calculate the person’s net worth (the
known assets less known liabilities)
at the beginning and ending of a
2. Add nondeductible living expenses to
the increase in net worth
Account for any difference between
reported income and the increase in
net worth during the year as (a)
nontaxable income and (b)
unidentified differences
Hollard v. U.S., 348 U.S. 121 (1954).
Net Worth Example
Total assets (at cost)
Less: Total liabilities
Net worth, end of the year
Net worth, beginning of year
Increase/decrease in NW
Add: living expenditures
Estimated Income
Less: Known sources of
Unexplained income
Net Worth Application
Calculated Net Worth1
Computed Net Worth2
Net Asset increase
Unexplained net worth
Net asset increase
$225,000 $421,000
0 $111,000
1 Actual Net Worth recalculated based upon actual assets less
2 Net Worth based upon reported income less expenses.
Bank Deposit Method
The bank deposit method looks at the
funds deposited during the year. This
method attempts to reconstruct gross
taxable receipts rather than adjusted.
Gleckman v. U.S., 80 F.2d 394(CA-8,
Formula for Bank Deposit Method
Total deposits to all accounts
Transfers and re-deposits
Net deposits
Cash Expenditures
All total receipts
Funds from known sources
Funds from unknown sources
Formula for Expenditure Method
Known sources of income
Unknown sources of income
Percentage of Markup Method
Gross Profit on Sales Formula
Sales per books
Gross profit percentage
Gross profit as recomputed
Sales on Cost of Sales Formula Cost of SalesPercentage of Sales Price
Cost of Product A
Cost of Product B
Cost of Sales – Percent of Selling Price
Product A
Product B
Recompiled Sales of products A and B
Product A
Product B
Sales as recomputed
Ratio Analysis Formula
Restaurant Sales
Number of waiters
Average sales per waiter
Customer’s tip percentage
Waitress tip income as recomputed
Unit and Volume of Sales Method
Average sales price per machine
Number of machines manufactured
Total sales as recomputed
Total sales per return
Unreported sales:
Beginning inventory
Ending inventory
Some Exercises
Given the following facts about Sammie Bright,
calculate his preliminary understatement using the
Cash-T method.
Schedule C expenses
Personal living expenses
Schedule C receipts
31) Based upon the following facts about Phil Tizzard, in
Sour Lakes, Texas, calculate any unexplained net
worth increase (if any):
Computed Net worth (reported income
less expenses)
Calculated Net worth (actual net
worth recalculated upon actual
assets less liabilities)
32) Ben Lautenberg is a waiter in Las Vegas, and
reports tip income of $4,200 for the year. The
restaurant sales where he works were $360,000
and there were 5 waiters. Assume that the waiters
have about the same amount of sales. Compute
Ben’s tip income recomputed if customers’ tip
percentage is approximately 11%.
Other Techniques
A check spread deals with
disbursements and may be used when a
target uses checking accounts. George A.
Manning says the following information is
needed to perform a check spread: date,
payee, check number, amount, bank from,
bank to, first endorsement, second
endorsement, and second signatory. Check
spreads show patterns of activities and can
gather data for the net worth method.
A deposit spread deals with the
receipts into a checking account, and shows
patterns of activities and gathers data for the
net worth and expenditures methods.
Credit card spreads may be used for
legal and stolen credit cards to show where a
target has been geographically over time.
Source: G.A. Manning, Financial Investigation and Forensic Accounting,
Boca Raton, FL: CRC Press, 1999, pp. 196-198.
Financial Statement Fraud May Serve
Many Purposes
Obtaining credit, long-term
financing, or additional capital
investment based on misleading
financial statements;
Maintaining or creating favorable
stock value;
Concealing deficiencies in
Hiding improper business
transactions (e.g., fictitious sales or
misrepresented assets); and
Resolving temporary financial
difficulties (e.g., insufficient cash
flow, unfavorable business
decisions, defense control in
maintaining prestige).
Source: Zab Rezaee, Financial Statement Fraud, New
York: John Wiley & Sons, 2002.
Management may also engage in financial
statement fraud to obtain personal benefits of:
Increasing compensation through
higher reported earnings;
Enhancing value of personal
holding of company stock such as
stock-based compensation;
Converting the company’s assets
for personal use; and
Obtaining a promotion or
maintaining the current position
within the company.
Source: Zab Rezaee, Financial Statement Fraud, New
York: John Wiley & Sons, 2002.
Rest Of The Story:
Fraudsters Should Be Prosecuted
Although large frauds may be reported to
law enforcement agencies, smaller frauds
are often not reported.
This failure to report fraud incidents and the
reluctance of police to aggressively tackle
the issue only empowers the fraudsters and
diminishes the victims. Ultimately, these
unreported incidents are precursors to
larger and larger acts of violence. If we do
not deal with simple crimes, we will
eventually have to deal with homicide.
Source: Stephen Doherty, “How Can Workplace
Violence Be Deterred,” Security Management, April
2002, p. 134.
Use IRS Form 1099 Threat
For fraudsters and embezzlers,
use the threat of filling a Form 1099
for amounts stolen.
 Ask for an installment payback.
 If they stop payment, report them
to the IRS on a Form 1099.
Some Exercises
KPMG provides 10 steps to follow when an
organization finds or suspects fraud:
Shut the door! Keep assets secure until
you can provide appropriate long-term
Safeguard the evidence. Ensure that all
records and documents necessary for
an investigation remain intact and are
not altered by you or anyone else.
Notify your insurer. Failure to notify may
negate your coverage.
Call a professional. Do not confront or
terminate the employment of a
suspected perpetrator without first
consulting your legal advisor.
Prioritize your objectives. What’s most
important: punishment, loss recovery,
prevention, detection of future
KPMG’s 10 steps to follow contd..
Consider prosecution. Before you make
the call, weigh the plusses and
minuses and determine if your
insurance company requires
Terminate business relations. If the
fraud is external, business relations
with the suspect individual or
organization should be terminated.
Seek advice and assistance. An
important consideration is whether you
have the knowledge and resources
necessary to effectively manage the
Prepare a witness list. It is important
that statements be taken before a
“party line” can develop.
Consider the message. Whatever you
do will affect future situations. Now
may be the time to change the way your
business operates.
Catch Me If You Can
Punishment for fraud and recovery of
stolen funds are so rare, prevention
is the only viable course of action.
Frank W. Abagnale
30 years ago Abagnale cashed $2.5
million in fraudulent checks in every
state and 26 foreign countries. Was
later associated with the FBI for 25
Over-all Fraud Plan
Background checks
 Avoid Nepotism
 Signed Conditions of Employment Agreement
 Non-compete Agreement
 Confidentiality of Information Agreement
 Bonding
 Two-signatures on checks/ wire transfers/ lines
of credit
 Lockbox
 Positive pay
 Check security and restrictive endorsements
 Check stock (can not be scanned and it smears
 Close out cash registers at unpredictable times
 Back up computer files
 Accounting personnel can not cancel debt
 Have an internal audit
 CEO signs numbered check request form
E.J. McMillan, Policies and Procedures to Prevent Fraud &
Embezzlement, 2006, John Wiley.
Types of Misappropriations
Cash and check
Larceny of cash
Swapping checks
for cash
Check tampering
Credit card refund
and cancellation
Inventory fraud
Accounts receivable
Borrowing against
accounts receivable
Short shipments
with full prices
Doctored sales
Sham payments
land flipping,
pump and dump,
and cybersmearing
Bid rigging
How Cash Is Misappropriated-2008
Median Loss
Cash larceny
Check Tampering
Register Disbursements
Cash on hand misappropriations
Source: 2008 Wells Report, ACFE.
Cash Wheel
Accounts Receivable
Adjusting Entries
Accounts Payable
Source: Fraud Auditing Small Businesses With The Wheel , James A. Goldstine
Some Employee Schemes
Embezzlement/skimming involves
converting business receipts to
one’s personal use and benefit, by
such techniques as cash register
thefts, understated/unrecorded
sales, theft of incoming checks etc.
Some Skimming Schemes (off-book)
Unrecorded sales.
Theft of incoming checks.
Swapping checks for cash.
Auditing Suggestions
 Compare receipts with deposits.
 Surprise cash count.
 Investigate customers complaints.
 Gross profit analysis (also for money
 Check for reversing transactions, altered
cash counts, and register tapes that are
 Camera surveillance.
Preventive Measures
Segregation of duties, mandatory
vacations, and rotation of duties
help prevent cash larceny.
Review and analyze each journal
entry to the cash account.
Two windows at drive-through
Signs: Free meal if no receipt.
Blank checks and the automatic
check signing machine should be
kept in a safe place from employees.
Pre-numbered checks should be
logged and restricted to one
responsible employee. Require two
signatures on cashier checks.
Processing Checks Best Procedure
Step 1. The invoice is approved for payment.
Step 2. A check request form is completed.
Step 3. The CEO approves the check
Step 4. The check request is forwarded to
Step 5. Accounting processes the check.
Step 6. The CEO signs the check.
Step 7. A second designated employee (who
does not approve the payment and is
not in the accounting department)
should cosign the check. Therefore, 4
people involved.
E.J. McMillan, Policies & Procedures to Prevent Fraud & Embezzlement,
John Wiley, 2006, p.44.
Processing Checks Best Procedure
Invoice is approved for payment.
Check request form is prepared.
The CEO approves/ signs the numbered
check request form.
Check request form is forwarded to
Accounting processes the check.
The check is signed by two authorized
The check is mailed.
The bank statements are sent to the CEO’s
home (or P.O. box) for review.
The CEO forwards the reviewed bank
statements to accounting for reconciliation.
E.J. McMillan, Policies & Procedures to Prevent Fraud &
Embezzlement, John Wiley, 2006, p.45.
Some Employee Schemes (contd .)
Kiting: building up balances in bank
accounts based upon floating
checks drawn against similar
accounts in other banks. Wire
transferring makes kiting easier.
Auditing Suggestions
 Look for frequent deposits and
checks in the same amount.
 Large deposits on Fridays.
 Short time lag between
 Bank reconciliation audit [cut-off
bank statement].
Some Employee Schemes (contd …)
Cut-off Bank Statement
 Shorter period of time (10-20
 Bank statement sent directly to
fraud auditors.
 Compare the cancelled checks,
etc. with the cut-off bank
 Helpful for finding kiting and
Cash Schemes
Other Cash Schemes
 Theft of checks (bottom or middle
of checks).
 Checks may be intercepted or
payee altered (washing checks).
 Forged endorsements
(disappearing ink).
 Stolen credit cards.
 Refund schemes.
 Kickback schemes.
Refund Schemes
A television station’s former
accounting director pleaded guilty
to stealing more $1.8 million from
her employees and spending it on
jewelry, paintings, and fur coats.
She would overpay the station’s
travel bills and divert the refunds
to her own credit card bills and
personal accounts.
She was sentenced to 7 ½ years
in prison on a single count of theft
from CBS affiliate WBBM – TV
Source: AP, “Ex-Accountant at CBS Affiliate Sentenced,” Las Vegas
Sun, November 5, 2003.
Accounts Receivable Schemes
 Fictitious receivables [for a
fictitious sale], which is later
written off.
 Borrowing against receivables
(use receivable as collateral).
 Improper posting of credits
against receivables.
Recording of payment on a customer’s
account some time after receipt of
payment. Later covered with receipt from
another customer (robbing Peter to pay
Lapping is more successful where one
employee has both custody of cash and
record keeping responsibility.
Warning Signs of Lapping
• Increase in complaints.
• Excessive billing errors.
• Delays in posting customer
• Trend of decreasing accounts
receivable payments.
• Accounts receivable details do
not agree with the general
Lapping (cont.)
Audit Steps
 Independently verifying
customers who do not pay.
 Reviewing write-offs.
 Reviewing customers’
Compare the checks on a sample
of deposit slips to the details of
the customers’ credits that are
listed on the day’s posting to the
customer’s account receivables.
Closely monitor aging accounts.
How Non-Cash Assets are
Misappropriated – 2006
Median Loss
Source: 2006 Wells Report, ACFE.
Inventory Fraud
 Stealing inventory/supplies for personal use or
for sale at flea markets/garage sales.
 Kickback schemes (vendor/supplier and an
employee). Sale of unreported inventory at
inflated prices.
Audit Steps for Inventory Fraud
 Use renumbered inventory tags matched to
count sheets; use count procedures for workin-progress items; separate duties between
purchasing and logging receipts of shipments
 Check for same vendors.
 Prices higher than other vendors.
 Purchasing agent does not take vacation.
 Only photocopies of invoices are available.
 Aging of inventory.
 Inventory turnover
 There is data-mining software.
Stealing Diamond Inventory
Farrah Daly was charged with
stealing at least 39 diamonds (1
to 3 carats), one at a time over
several years from a diamond
sorting area.
She and her husband allegedly
had friends and others sell the
approximately $500,000 worth of
diamonds at pawn shops and
jewelry stores.
Source: AP, “Ohio Woman Accused of Stealing Diamonds,”
Las Vegas Sun, November 10, 2003.
Reducing Bad Debts
Before MCI was acquired by WorldCom, Walter
Paulo a billing manager, had to reduce a $180
million bad debt expense down to $15 million.
Eventually MCI had to write-off $650 million in
bad debt.
His schemes:
Allow a customer to sign a promissory note
to turn the receivable into a short-term asset.
Redacting invoices.
Developing interpretations to explain why
some items are aged so long.
Using questionable codes.
Used unapplied cash to cover.
Arthur Andersen did not audit the smaller bad
debt accounts where the questionable
accounts occurred (e.g., the third tier).
Paulo said that the AA auditors were young,
inexperienced, and fresh out of college.
Source: J.M. Jacka, “An Environment for Fraud,” Internal Auditor, April 2004, pp. 49-52
Accounts Payable Fraud Red Flags
Duplicate payments (2% of total purchases)
$80 million times 2% = $1.6 million loss.
Extract only the numerical digits of an invoice
number and match on only the numbers portion of
the invoice.
Try identifying the dates that are similar such as
dates that are less than 14 days.
Try matching on the absolute value of the amount.
Rounded-amount invoices.
Invoices just below approval amounts.
Abnormal invoice volume activity (two invoices one
month and 60 the next).
Vendors with sequential invoice numbers.
LC 0002, LC 0003, LC 0004
Above average payments per vendor.
C. Warner and B. G. Dubinsky, “Uncovering Accounts Payable
Fraud,” Fraud Magazine, July/ August 2006, pp. 29-51.
Top 10 Financial Red Flags of Insurance Fraud
 Visible
alteration of documents.
 Conflicting dates and/ or information.
 Missing pages of documents.
 Missing key information.
 Significant discrepancies between tax returns and other
financial documentation.
 Poor financial condition prior to loss.
 Business appears to be winding down immediately prior
to loss.
 Discovery or previously undisclosed financial or
business interests.
 Expenses continue while not working or operating.
 Income and/ or ownership is transferred to family.
D. W. Draz, “Insurance Industry Anti-Fraud Insights,” Fraud
Magazine, July/ August, 2006, p.63.
Look For Fraud Symptoms
Journal Entries.
Accounting Ledgers.
Source Documents
 Employee time cards.
 Sales invoices.
 Shipping documents.
 Expense invoices.
 Purchase documents.
 Credit card receipts.
 Register tapes.
Source Documents Fraud Symptoms
of missing documents.
Counterfeit/false documents.
Excessive voids/credits.
Second endorsements.
Duplicate payments.
Large numbers of reconciling items.
Older items on bank reconciliations.
Ghost employees.
Lost register tapes.
Lots of round numbers.
Too many beginning 9’s.
Journal Entries Fraud Symptoms
supporting documents.
Unexplained adjustments.
Unusual/numerous entries at end
of period.
Written entries in computer
Many round numbers.
Too many beginning 9’s.
Consideration of Fraud-All Section 316
The characteristics of fraudulent entries
or adjustments. Inappropriate journal
entries and other adjustments often have
certain unique identifying characteristics,
including entries
Made to unrelated, unusual, or seldomused accounts;
Made by people who typically do not make
journal entries;
Recorded at the end of the period or as
post-closing entries that have little or no
explanation or description;
Made either before or during the
preparation of the financial statements
that do not have account numbers; or
Containing round numbers or consistent
ending numbers.
Round Numbers Red Flag
Areas where rounded number should
not be expected:
Amounts on tax returns(T&E).
 Inventory Counts.
 Regulatory filings.
 Accounts receivable balances.
 Journal entries.
 Any measure presumed to be exact.
Shows Estimation, Approximation, or Fraud. XL audit
Commander, free, Excel add-on
Controls Over Journal Entries
Controls that prevent or detect unauthorized
journal entries can reduce the opportunity
for the quarterly and annual financial
statements to be intentionally misstated.
Such controls might include, among other
things, restricting access to the general
ledger system, requiring dual
authorizations for manual entries, or
performing periodic reviews of journal
entries to identify unauthorized entries.
As part of obtaining an understanding of the
financial reporting process, the auditor
should consider how journal entries are
recorded in the general ledger and whether
the company has controls that would either
prevent unauthorized journal entries from
being made to the general ledger or directly
to the financial statements or detect
unauthorized entries. Tests of controls over
journal entries could be performed in
connection with the testing of journal entries
required by AU sec. 316.
Source: PCAOB, p. 21.
Unusual Entries
Officer Loan
Officers Salary
Officer Loan
Staff Salaries
Officers Salary
Cost of Goods Sold
[No related sales transaction]
---------------------------------------Allowance of Bad Debts $32,000
Account Receivables
---------------------------------------Expense accounts where no department or person has control
 General maintenance account
 General transportation account
 Stationary/ general office supplies
 Scrap disposal accounts
 Suspense and cash sweep accounts
 Deferred asset or liability
 Contra-accounts (bad debt reserve, accumulated depreciation)
 Intercompany accounts
 Accounts over which a sole, domineering, incompetent, or frequently absent
individual has control.
Ledger Fraud Symptoms
Underlying assets disagree.
Subsidiary ledger different than
general ledger.
Investigate and reconcile
differences between control
accounts and supporting ledger.
Difference may be concealed
Which of these statements are false?
A high degree of competition accompanied by
declining margins would be an example of an
opportunity for fraudulent financial reporting.
Personal guarantees of debt of a company that
are significant to one’s personal net worth is an
example of a pressure/incentive for fraudulent
financial reporting.
A heavy concentration of one’s wealth in a
particular company would be an example of a
rationalization condition for fraudulent financial
An excessive interest by management in
maintaining a company’s stock price is an
example of rationalization for fraudulent financial
Anticipated future layoff would be an example of
an incentive to misappropriate assets.
A large amount of cash on hand would be an
example of a rationalization to misappropriate
Inadequate internal controls is an example of an
opportunity to misappropriate assets.
Which of these statements are false?
A high degree of competition accompanied by
declining margins would be an example of an
opportunity for fraudulent financial reporting. F
Personal guarantees of debt of a company that
are significant to one’s personal net worth is an
example of a pressure/incentive for fraudulent
financial reporting. T
A heavy concentration of one’s wealth in a
particular company would be an example of a
rationalization condition for fraudulent financial
reporting. F (I/P)
An excessive interest by management in
maintaining a company’s stock price is an
example of rationalization for fraudulent financial
reporting. T
Anticipated future layoff would be an example of
an incentive to misappropriate assets. T
A large amount of cash on hand would be an
example of a rationalization to misappropriate
assets. F (O)
Inadequate internal controls is an example of an
opportunity to misappropriate assets. T
Payroll Schemes
 Ghost Employee: A person on the
payroll who does not work for that
 False Workers’ Compensation
claims: Fake injury to collect
disability payments.
 Commission schemes: Falsify
amount of sales or the
commission rate.
 Falsify hours and salary:
Exaggerate the time one works or
adjusts own salary.
Stop Ghost Employees
Ensure that the payroll preparation, disbursement and
distribution functions are segregated.
Look for paychecks without deductions for taxes or
Social Security. Completely fictitious employees
frequently don’t have any.
Examine payroll checks that have dual endorsements.
Although most of them are legitimate, two signatures
could signal the forgery of a departed employee’s
endorsement, which the thief also endorses and
deposits into his or her own account.
Use direct deposits. This method, although not
foolproof, can cut down on payroll chicanery by
eliminating paper paychecks and the possibility of
alteration, forgery and most theft, although it doesn’t
prevent misdirection of deposits into unauthorized
Check payroll records for the presence of duplicate
names, addresses and Social Security numbers.
On occasion, hand-deliver paychecks to employees and
require positive identification. If you have leftover
paychecks, make sure they belong to actual employees,
not ghosts.
Be wary of budget variations in payroll expense. Higherthan-budgeted labor costs can indicate ghost
Source: J. T. Wells, “Keep Ghosts Off The Payroll,” Journal of Accountancy,
December 2002.
Some Employee Schemes (contd …)
Fictitious Disbursements
 Multiple payments to same payee.
 Multiple payees for the same product or
 Inflated invoices.
 Shell companies and/or fictitious
 Bogus claims (e.g., health care fraud and
insurance claims).
 Overstate refunds or bogus refunds at
cash register.
 Many fictitious expense schemes (e.g.,
meals, mileage, sharing taxi, claiming
business expenses never taken).
 Duplicate reimbursements.
 Overpayment of wages.
Some Employee Schemes (contd …)
Other Fraud Schemes
 Stealing inventory/scrap.
 Stealing property.
 Theft of proprietary assets.
 Personal use of assets.
 Shoplifting.
 False down grading of products.
 A land flip involves a situation where a
company decides to purchase land for a
project. A person or group will find the land and
buy it under a front name or company. The
fraudster then increases the price of the land
before selling it to the company.
 Money laundering is the use of techniques to
take money that comes from one source, hide
that source, and make the funds available in
another setting so that the funds can be used
without incurring legal restrictions or penalties.
Some Employee Schemes (contd …)
Other Fraud Schemes (contd …)
 A ponzi scheme is a pyramid-type
technique where early investors are
paid with new money collected from
future investors, who lose their
 Bid rigging occurs when a vendor is
given an unfair advantage in an open
competition for a certain contract.
Ponzi Scheme Example
 Women
Helping Women group hosted
invitation – only “birthday parties” that
promised $40,000 in the future to each
woman who invested $5,000.
 Some of the women received the payoff, but most lost out.
 $12 million pyramid schemes.
 Cheryl Bean, the leader, given 3 years
probation, ordered to pay $15,000 in
restitution, and $10,000 to a charity
Source: AP, “Pyramid Scheme Leader Pleads No Contest,” Las Vegas
Sun, November 8, 2003.
Hammersmith Trust Ponzi Scheme
Hundreds of sophisticated investors put $100
million in this prime banking scheme that
promised as much as 1,600% annual return.
 The scheme revolved around the so-called
international prime banking instruments (e.g.,
high-yield commercial paper or secret bank
debenture programs). There is no market for
prime bank instruments.
 “Not a single dime is invested in anything – save
the fraudulent pyramid itself, with some money
going from one investor to the other in the form
of purported “interest” and “return of principal
“payments – while most of it sticks to the
pyramid or rather, to the people running the
Source: John Anderson, “Take The Money & Run,” Smart Money,
December 2003, pp. 122-130.
How Sellers on eBay Fix Auctions
Seller places bids on own items using
fake identities (shill bidding).
Shill bidding may be commonplace on
Associates of seller bid up the price.
Forensic Auditing Steps
Count the Petty Cash Twice in a
Investigate Suppliers (Vendors)
Investigate Customers’ Complaints
Examine Endorsements on
Canceled Checks
Add Up the Accounts Receivable
Audit General Journal Entries
Match Payroll to Life and Medical
Insurance Deductions
Source: Jack C. Robertson, Fraud Examination for Managers
and Auditors, Austin, TX: Viesca Books, 2000, pp. 213-216.
Forensic Auditing Steps (contd …)
Match Payroll to Social Security
Match Payroll with Addresses
Retrieve Customer’s Checks
Use Marked Coins and Currency
Measure Deposit Lag Time
Document Examination
Inquiry, Ask Questions
Covert Surveillance
Source: Jack C. Robertson, Fraud Examination for Managers
and Auditors, Austin, TX: Viesca Books, 2000, pp. 213-216.
Vendor Allowances
• In exchange for better shelf space or advertisement
mentioning its products, a merchandise vendor will
pay stores an extra fee--an allowance often based
upon the amount of products sold.
• Employees at OfficeMax “fabricated supporting
documents for approximately 3.3 million in claims
billed to a vendor to its retail business.” Six
employees were fired, and CEO Christopher Milliken
• The SEC sued three former executives in December
2004 at Kmart Holding Corp. for their role in a $24
million accounting fraud that booked these allowances
•The SEC settled a case in October 2004 with Ahold
NV involving allegations of fraudulent inflation of
promotional allowances at U.S. Foodservice, Inc. unit.
Source: David Armstrong, “OfficeMax Results To Be Restated; CEO Steps
Down,” WSJ, February 15, 2005, p. A-3.
A Valid Contract?
Lawful objective
Capacity of parties to
Something of value
Appropriate form (e.g.,
in writing)
Entered into freely
Breach of Contract
Breach of contract: a party fails to perform or
says he/ she will not perform. Other party can
sue for damages.
The intentional failure to perform a contract,
however, does not necessarily constitute
Must show that the party did not intend to
perform the contract and deliberately misled
the other party.
Civil or criminal action: party knowingly and
willfully that the contract (or statement) was
false with the intent to deceive or defraud.
With this extra burden, may not be worthwhile
to try to prove the fraud. Just get rid of the
person because of a conflict of interest.
Some Contract/ Procurement Frauds
Bribes and kickbacks.
Bid rigging.
Defective pricing.
Phantom vendors [].
Product substitution.
Conflict of interests.
False claims.
Cost mischarging.
Contract specification failures.
Duplicate, false, or inflated invoices.
Split purchases.
Unnecessary purchases.
Defective delivery.
H.R. Davia et. al, Accountant’s Guide to Fraud Detection and
Control, John Wiley, 2000, p.62.
Types of Bid Rigging
Collective bidding.
Exclusive bidders.
Change order requests.
Manipulation of bids.
Leaking bid information.
Unbalanced bidding.
Potpourri of Bribes
Vernon Jackson admitted to bribery of Rep. William
Jefferson, D-LA. More than $400,000 to one million
paid to a company controlled by the congressman’s
wife in exchange for help promoting iGate. Gave 24%
stake in iGate and paid $80,000 in travel expenses to
Africa. [$90,000 found in Jefferson’s freezer.]
Two prominent Baton Rouge restaurateurs and four
other businessmen accused of bribing a parish tax
auditor and an undercover FBI agent with cash,
diamonds, trips, whiskey and women to avoid paying
taxes on $10 million, face federal charges.
An indictment alleges Laymon offered an undercover
FBI agent posing as an East Baton Rouge Parish
auditor $800, a weekend trip to Costa Rica and two
prostitutes a day if he concluded that Arzi’s didn’t owe
any sales tax. BR Advocate (12-17-06).
Potpourri of Bribes
A Greek prosecutor is investigating claims that
Siemens Greece paid up to $550 million in bribes to
officials at the defense and interior ministries in order
to win a security contract for the 2004 Olympic games
in Athens. A senior Siemens accountant said bribery
was a common practice at Siemens.
A Paris judge launched an investigation into
allegations that Total, a French oil and gas group, paid
bribes to win a $2 billion gas contract in Iran. The
investigation stems from the discovery of $82 million
in two Swiss bank accounts, allegedly by Total to an
Iranian intermediary to help the French company
consortium to win an Iranian contract.
A report claims that AWB, the company responsible for
selling Australia wheat, paid over $221 million to Alia,
a Jordanian hauling company, ostensibly to distribute
its wheat in Iraq. In fact, the money was going to the
Iraq government.
Potpourri of Bribes
Armstrong Williams, an American columnist and
television host, was paid $240,000 by the Dept. of
Education to comment regularly on “No Child Left
Behind,” an education-reform bill.
Nineteen individuals indicated for receiving bribes and
rigging bids for school window washing contracts.
Congressman Randy Cunningham, R-Calif., resigned
from Congress (2005), hours after pleading guilty to
taking at least $2.4 million in bribes to help friends
and campaign contributors win defense contracts.
Prosecutors said he received cash, cars, rugs,
antiques, furniture, yacht club dues, moving expenses,
and vacations from four co-conspirators in exchange
for aid in winning defense contracts.
In January 2007, Peter Hartz was given a two year
suspended prison sentence and fines for bribing the
head of the labor union ($3.25 million) for secret
bonuses and fake consultancy fees. Involved sex
holidays and paying for prostitutes for labor officials.
Potpourri of Bribes
In the 1950s in the U.S., record companies would
pay money for the broadcast of records on radio,
called payola. Now outlawed.
In England, police interviewed Prime Minister
Tony Blair in February 2007, about allegations
that honors, including seats in the House of Lords
and Knighthoods, were given to individuals who
loaned money to the Labour party ($9.8 million).
Under Bill Clinton, Democratic National
Committee donors were allowed to spend the
night in the Lincoln bedroom for a contribution of
$150,000 (e.g., Chairman of Occidental
Petroleum). Then in 1997, Clinton made an
exception so that OP could pursue a venture in
A lawsuit in February 2007, alleged that Intel
provided secret kickbacks to Dell in order to
ensure it remained the computer makers sole
microprocessor supplier.
Bribes Are Universal
Give people power and discretion, and
whether they are grand viziers or border
guards, some will use their position to enrich
themselves. The problem can be big enough
to hold back a country’s development. One
study has shown that bribes account for 8%
of the total cost of running a business in
Another found that corruption boosted the
price of hospital supplies in Buenos Aires by
15%. Paul Wolfowitz, the head of the World
Bank, is devoting special efforts during his
presidency to a drive against corruption.
“How to Grease a Palm,” The Economist, December 23, 2006, p.
Tone at the Top: Germany
A sales director once bragged at an office party about
how he had bribed several large retail customers.
Some only responded to very large gifts, he said,
recalling one case when he discreetly pushed a car key
to the other side of the negotiating table. The trick was
to find out what they liked, and then you were almost
I was one of this man’s employees – during a stint at
this particular company that was mercifully short. What
bothered me the most about his remarks was the way
he bragged about it. In that company, as in countless
others, bribery was not only tolerated, it was cool. If
you wanted to become a successful marketing
executive, this was what they expected of you
Wolfgang Munchau, “A dangerous precedent for
corruption,” Financial Times, December 28, 2006, p. 15.
Bribes/ Kickbacks Scenario
Something of Value
Later Influence an Official Act
Sexual favors
Credit cards
Spouse’s high salary
Discounts (e.g.,
Awarding Selection
Higher Prices
Excessive Quantity
Accepting Lower Quality
No, Delayed, or Short Delivery
•Prove the corrupting influence
circumstantially through factors on the right,
or outsider received more and more business as
the insider gets more and more value.
•Use indirect methods on employee.
Kickback Example
Paul J. Silvester, former state
treasurer for Connecticut, admitted
accepting cash kickbacks in return
for placing millions of dollars in state
pension investments with certain
equity funds.
Mr. Silvester was sentenced to
51 months in prison for taking bribes
in return for investing $527.5 million
from the state pension fund in five
investment funds.
Source: Marc Santora, “After Help in Corruption Cases, Central
Figure Gets 51 Months,” N.Y. Times, November 21, 2003, p. C-12.
Parmalat Kickback Scheme
Former Bank of America
executive Luca Sala told
investigators that over 7 years he
took $27 million in a kickback
scheme involving Parmalat.
He obtained the monies by a
kickback arrangement with an
outside broker who helped organize
bond issues from Parmalat.
Mr. Sala (corporate finance
head) helped organize several bond
placements for Parmalat for which
the bank regularly received fees.
Source: A. Galloni and C. Mollenkamp, “Ex-Parmalat Banker Admits
Stealing $27 Million,” WSJ, February 27, 2004, p. A-3.
Some Bribery Red Flags
Lack of standard invoices.
Requests for fund to be routed to a foreign bank.
Requests for checks made payable to “cash” or to
“the bearer.”
Commission substantially higher than going rate.
Requests for a large line of credit from a customer.
Insistence by a government official that a certain
third-party agent or supplier be used.
Lack of staff or facilities to actually perform the
Request by a local agent for a rate increase in the
middle of negotiations.
Suggested need to utilize more than one local
Source: M. T. Biegelman and J. T. Bartow, Executive Roadmap
to Fraud Prevention and Internal Controls, John Wiley,
2006, pp. 325-326.
Duty to Cooperate
Audit Rights
1. Audits under clause 2 may be conducted of:
the Contractor's practices and procedures as they relate to the Contract, including security
the manner in which the Contractor performs its obligations under the Contract;
the compliance of the Contractor's invoices and reports with its obligations under the
the Contractor's compliance with all its obligations under the Contract;
the Contractor's compliance with its confidentiality, privacy, security and Commonwealth
policy obligations under the Contract; and
any other matters determined by [Agency] to be relevant to the performance of the
Contractor's obligations under the Contract.
2. Audits
The Contractor must participate in audits of the Contract at the frequency and in relation to
the matters specified by [Agency], (including on an ad hoc basis if requested by [Agency]),
for the purpose of ensuring that the Contract is being properly performed and administered.
[Agency] may appoint an independent person to assist in the audits. Audits may consider all
aspects of the Contractor's performance including but not limited to any performance
indicators, benchmarks or targets.
The Contractor must participate promptly and cooperatively in any audits conducted by
[Agency] or its nominee.
Except for those circumstances in which notice is not practicable or appropriate (eg. caused
by a regulatory request with shorter notice or investigation of theft or breach of contract),
and without limiting any other right, recourse or remedy of [Agency], must give the
Contractor reasonable notice of an audit and where reasonably practicable an indication of
which documents and/or class of documents the auditor may require.
Subject to any express provisions in the Contract to the contrary each party must bear its
own costs of any audits.
Subject to clauses 2.6 and 3.6, the requirement for, and participation in, audits does not in
any way reduce the Contractor's responsibility to perform its obligations in accordance with
the Contract.
[Agency] must use reasonable endeavors to ensure that audits performed pursuant to clause
2.1 do not unreasonably delay or disrupt in any material respect the Contractor's
performance of its obligations under the Contract.
[Any amendments to the Contract resulting from audits must be effected by agreement in
writing between the parties in accordance with the Contract amendment provisions of the
The Contractor must promptly take, at no additional cost to [Agency], corrective action to
rectify any error, non-compliance or inaccuracy identified in any audit in the way the
Contractor has under the Contract:
(a) supplied any goods or services; or
(b) calculated fees, or any other amounts or charges billed to [Agency].
Purchasing Agent’s Kickback Checklist
He or she doesn’t take time off.
The purchasing agent has personal financial
The agent’s lifestyle is too extravagant for his or
her income.
Close personal relationship between purchasing
agent and vendor.
Favoritism toward one vendor.
Excessive purchases from one vendor.
Prices charged are higher than market average.
Expenditures come in just under the review limit.
Multiple purchases over a short period.
Substandard products or services.
Accelerated payment of invoices.
Sole-source purchases of merchandise or services.
Be sure different personnel handle the following duties:
vendor approval, purchase requisitions, purchase
approval, receiving, and payment (e.g., separation of
Source: J. T. Wells, “The Case of the Pilfering Purchasing Manager,”
Journal of Accountancy, May, 2004.
Red Flags for Phantom Vendors
Invoices for unspecified consulting or
other poorly defined services.
Unfamiliar vendors.
Vendors that have only a post-office-box
Vendors with company names consisting
only of initials. Many such companies are
legitimate, but crooks commonly use this
naming convention.
Rapidly increasing purchases from one
Vendor billings more than once a month.
Vendor addresses that match employee
Large billings broken into multiple smaller
invoices, each of which is for an amount
that will not attract attention.
Source: J. T. Wells, “Billing Schemes Part I: Shell Companies
That Don’t Deliver,” Journal of Accountancy, July, 2002.
More Phony Vendors Red Flags
Ensure those involved in purchasing cannot
approve vendors.
Before approving a new vendor, evaluate its
legitimacy by
Obtaining its corporate records and other relevant
Checking its credit rating.
Confirming that it is listed in telephone directories.
Contacting its references from clients and others.
Being particularly cautious about a vendor with a
post-office-box address or a name composed
entirely of initials.
Determining whether its business address
matches any employee’s home address.
Once the company approves a new vendor, the CPA
should closely monitor the account by
Watching for increases in the amount or frequency
of billings.
Observing variances from budgets or projections.
Comparing its prices with those charged by other
Source: J. T. Wells, “Billing Schemes Part I: Shell Companies That Don’t
Deliver,” Journal of Accountancy, July, 2002.
Preventing Procurement Fraud
Create an Approved Vendor
Separate job responsibilities.
Look for cliques.
Establish a hot-line for
Do the parking-lot test.
Get insurance.
Baseline, “Six Steps to Prevent Procurement Fraud,” June 6, 2006,,1540,1972097,00.asp
E-mail Evidence
E-mails may be a prime evidence
source for procurement and contract
Obtain subpoenas for the e-mails of all
suspects, persons of interest, and any
other parties that may have e-mail
In U.S. starting 12-1-06, a company
must recognize, declare, and produce
E-documents whenever it is involved
with civil litigation.
Courts will no longer accept
incompetence or computer problems as
an excuse for failing to meet Edocument requests.
Morgan Stanley hit with a $1.45 billion
judgment (2005).
Bid Rigging or Bid Pooling
Sherman Antitrust Act – illegal
restraint of trade. Felony.
Substantial fines and up to three
Group of dealers choose one
dealer to bid on items. Later the
dealers themselves bid on the
items bought and they, therefore,
share the profits.
Bid Rigging Red Flags
Low turnout of auction attendees.
 Winking, hand signals or other similar signs
among dealers after the bidding is opened.
 A uniformity to the bidding. For example, Dealer
One bids on a particular lot and buys it with
little or no activity, and then Dealer Two buys
another lot, again with little or no competition.
 Difficulty getting things going.
 A lot of handshaking and other signs of
recognition among several dealers before or
after the auction takes place.
 An air of silence throughout the auction since
auctions are generally noisy – or conversely, a
lot of conversation among bidders during the
sale of lots they normally should be bidding on.
 Low competition among known dealers who
normally bid strongly against one another.
Source: The Official Government
Auction Guide.
Interviewing Executives
One way to detect fraud is to interview company personnel. The AICPA
Fraud Task Force provides an interviewing template of 13 questions for
CEOs, CFOs, and Controllers.
1. Explain the purpose of interview- need to assess risk and comply with
audit responsibilities
2. Inquire whether they are aware of any instances of fraud within their
organization- Do they have reason to believe that fraud may have
occurred or is occurring?
3. Has the CEO or CFO ever approved an accounting treatment for
transactions that were not appropriate?
4. Have there been any instances where someone has attempted to
inflate assets or revenue or deliberately understate liabilities and
5. Is there any member of management that has a direct interest or
indirect interest in any customer, vendor, competitor, supplier or
6. Is any member of management related to any other member of
7. Does anyone in the company have any personal, financial or other
problems that might affect their job performance?
8. If there was an area within the company that might be vulnerable to
fraud, what would that be?
9. Has anyone within the accounting department been let go or resigned
within the past year?
10. Is there anyone in management that appears to be living a lifestyle
beyond their means? – expensive cars, trips, jewelry, vices
11. Has anyone been involved in civil or criminal proceedings or filed
12. Does the company have a strong ethics policy?
13. Has anyone ever been fired for committing fraud against the company?
Source: Ronald L. Durkin et. al, “Incorporating Forensic Procedures in an Audit Environment,” Litigation and Dispute
Resolution Services Subcommittee, New York: AICPA, 2003.
Selecting the Right
“Someone knows what is going on. If you tune in,
you will get a feel for it.”
Lorraine Horton, Kingston, R.I.
-------------------------------------------------------------“It is important that you select the right person to
interview, and be conversant in interviewing
techniques. For instances, pick someone from
customer complaints or an employee who didn’t
get a raise for two years, as they would be likely
to provide the needed information.”
R.J. DiPasquale, Parsippany, N.J.
Source: H.W. Wolosky, “Forensic Accounting to the Forefront,” Practical
Accountant, February 2004, pp. 23-28
Listen to rouges and whistle-blowers who complain.
Interview vs. Interrogation
where person asks questions to
develop factual information (e.g.,
who, what, when, where, how).
Interrogation-accusatory interview
to obtain an admission of guilt.
-----------------“Doubt leads to inquiry, and inquiry
leads to the truth.”
Saint Thomas Aquinas
Differentiate Between the Two
Involves a witness
Involves a suspect
Involves a victim
Involves custody
No Miranda rights
Requires Miranda rights
General information
Specific facts
Less demanding
More demanding
Highly structured
Interview in the field
Interrogate at the office
Information not known
Confirm known information
Scattershot approach
Pin-down approach
Don Rabon, Interviewing and Interrogation, Durham: Carolina Academic Press, 1992, p.5.
Moving from Unwilling to Willing Chair
Ask general questions.
Win them over.
Make them feel that this is what’s
best for them.
Take away the foundation.
Gain their confidence.
Explain the facts.
Relate to them.
Deescalate the crisis.
Give them a way out.
Explain the advantages of
Give them a change to explain.
Lie to them.
Downplay the disadvantages of
Understand them.
Hang it on them.
Use deception.
Put it on them.
Play on their sympathy.
Threaten them.
Play on their conscience.
Get them to trust.
Determine their frame of mind.
Mimic their manner.
Talk to them.
Know how far to push.
Show them what they’re looking
Get on their level.
Show them acceptance.
Speak their language.
Develop a rapport.
Show them.
Tell them.
Don Rabon, Interviewing and Interrogation, Durham: Carolina Academic Press, 1992, p.8.
Advantage and Disadvantages
 Advantages
of an interview (non-
 Facilitates
the development of
 Easier to develop rapport.
 More effective way of developing usable
 Disadvantages of
 Interviewee
may be alienated and refuse
to speak to anyone later.
 If interviewee will not speak to anyone,
ability to obtain information or admission
is diminished.
Source: John E. Reed Associates, Inc.
Some Persuasive Techniques
Indirect Approach.
Complete-file approach.
I-know-everything approach.
Utility technique.
Quick questioning approach.
Incentive approach.
Repetition technique.
Silent approach.
Change-of-scene technique.
Emotional approach.
Psychological technique.
Good-guy, bad guy approach.
Cold shoulder approach.
Don Rabon, Interviewing and Interrogation, Durham: Carolina Academic
Press, 1992, p.8.
Interrogators’ Hints
 Interrogation,
at its most artful, is a
contest of wits. By intimidation or bluff,
the gator must somehow find a way to
turn the person against his own cause.
 Ego up, with flattery.
 Ego down, with denigration
 Con games, tricking a person into
believing you already know something
(you do not really know)
 Or feeding them misinformation about
their friends or family.
 Avoid making offers, but dangle
promises. “Gator may promise to talk to
the boss.”
 Fear is the most useful interrogation
Mark Bowden, “The Ploy,” The Atlantic, May 2007, pp. 54-60
Verbal and Nonverbal Behavior
Verbal behavior includes not only
words, but timing, pitch, rate, and
clarity of the responses.
Nonverbal behavior includes body
movement, position changes
gestures, eye contact, and facial
See “Interviewing & Interrogation,” The Reid Technique,
John E. Reid Associates, Inc., L.E.R.C Law Enforcements.
Nonverbal Language
 60%
of communication is nonverbal.
 Previous contact with person helpful.
 During President Bill Clinton’s testimony
he touched his nose several times when
he was lying, but did not touch his nose
during truthful testimony.
 Two-thirds of truth interviewees cross their
Source: “Lying 101: There May Be Nonverbal Indicators of Lying,”
Posture Language
 Truthful
 Frontally
 Upright or forward.
 Open (perhaps crossed legs).
 Dynamic, comfortable changes.
 Deceptive
 Non-frontally
 Slouched, retracted or leaning.
 Barriers (crossed arms, purse in lap).
 Frozen and rigid.
Source: John E. Reid Associates, Inc.
Some Lying Signs
Covering mouth with hand.
Rubbing nose.
Frequent blinking.
Biting lip.
Moving or tapping foot.
Crossing arms.
Leaning forward.
Handling objects (e.g., pencil, pen).
Avoiding eye contact or averting eyes.
Clearing the throat.
Closing and opening coat.
Picking at lint on clothing.
Playing with collar.
Moving away.
Shrug gestures.
Slow response.
Higher pitch.
Long answer.
Gap between words becomes longer.
Non-words such as uh.
Source: “Lying 101: There May Be Nonverbal Indicators of Lying,”
Deception Indicators
Dryness of mouth
Frequent changes in position
Tapping of feet
Gripping arms of the chair
Elbows held close to the body
Running hands through the hair
Chewing of fingernails, pencils, or
other objects
Excessive sweating
Pulsation of the carotid artery
Pallor, flushing, or change in complexion, color
Excessive swallowing
Avoiding direct gaze
Appearance of being disturbed and/or very
Audible turbulence in the stomach.
Don Rabon, Interviewing and Interrogation, Durham: Carolina Academic Press, 1992, p.139.
Establishing a Baseline
Dance continued to ask about his life [the bad guy] in Seaside
and in prison, observing him the whole while: how he behaved
when she asked the questions and how he behaved when he
answered. She wasn’t doing this to get information-She’d done
her homework and knew the answers to everything she asked-but
was instead establishing his behavioral baseline.
In spotting lies, interrogators consider three factors: nonverbal
behavior ( body language, or kinesics), verbal quality ( pitch of
voice or pauses before answering) and verbal content (what the
suspect says). The first two are far more reliable indications of
deception, since it’s much easier to control what we say than
how we say it and our body’s natural reaction when we do.
The baseline is a catalog of those behaviors exhibited when
the subject is telling the truth. This is the standard the
interrogator will compare later with the subject’s behavior when
he might have a reason to lie. Any differences between the two
suggest deception.
Finally Dance had a good profile of the truthful Daniel Pell
and moved to the crux of her mission.
Source: Jeffrey Deauer, The Sleeping Doll, London: Hodder & Stoughton, 2007,
Establishing a Baseline (cont.)
Still relaxed. The body language wasn’t any different from
his baseline. He was showing only emblems-common
gestures that tended to substitute for words, like shrugs and
finger pointing. There were no adaptors, which signal
tension, or affect displays-signs that he was experiencing
‘Not Really.’
Which wasn’t an answer to a yes-or-no question; it was
even more slippery than ‘I don’t recall.’ Dance noticed too
that pell had put his hands, tipped with long, clean nails, on
the table at the word ‘ relatives’. This was a deviation from
base-line behavior. It didn’t mean lying, but he was feeling
stress. The questions were upsetting him.
Source: Jeffrey Deauer, The Sleeping Doll, London: Hodder &
Stoughton, 2007, p.9-11.
Studying and Mirrows
He was meticulous and in no hurry[the bad guy];
interviewers and interviewees share mutual curiosity.
(She told the students in her interrogation seminars, “
They’re studying you as hard as you’re studying themusually even harder, since they have more to lose.”
Mirrors weren’t placed in interrogation rooms to hide
cameras and witness-there are far better high-tech ways
to do so –but because people are less inclined to lie
when they see themselves.
Dance gave a faint smile. ‘ And you understand that you
can withdraw from this interview anytime you want and
that you have a right to an attorney?’
Source: Jeffrey Deauer, The Sleeping Doll, London: Hodder
& Stoughton, 2007, p.6-7.
Lying: James R. Brown Style
lied in person to investors when I met
them. I lied in company’s filings. I lied in
the company’s press releases.” Adelphia
Communications vice-president of
 He had no formal training in accounting
and finance.
 Adelphia began manipulating its
financial reports soon after the company
went public in 1986.
 We regularly fabricated statistics on the
number of subscribers, cash flow, cablesystem upgrades, and other closely
followed metrics.
Lying: James R. Brown Style (cont.)
 Top
executives would meet on Saturdays
to determine if we were meeting loan
agreements. If not, we would make other
types of manipulations of either arbitrarily
moving expenses between companies or
adding invented affiliate income or
interest income from one internal
company to another.
 For more than 10 years we kept two sets
of books.
Source: Chad Bray, “Adelphia Witness Lays Out Lies,” WSJ, May 19, 2004,
pp. C-1 and C-2.
----------------------------------------------------I swear on my heart
I was telling the truth
at the time.
Baby I lied. Baby I lied.
Deborah Allen
Voice – Analysis Software
in Israel; can be used
over the phone. Nemesysco
Measures stress levels and
displays them on a screen.
U.K. insurers are using it,
connected between the telephone
and computer.
Screen flashes “High Stress.”
70% O.K. Of 30% high risk, 12%
prove O.K., but 18% rejected as
Source: Charles Fleming, “Insurers Employ Voice-Analysis Software to Detect Fraud,”
WSJ, May 17, 2004, pp. B-1 and B-4.
Fewer People Lie in E-mail
• People tell fewer lies in e-mails than
in phone calls and face-to-face
• Possible reason: Most people know
that e-mails leave a record.
J. T. Hancock, Corporate Human Interaction
I got one thing to tell you,
I…oooo, I ain’t tryin’ to sell ya’,
No lies.
Grand Funk Railroad
Interviewing Techniques
“Bosch didn’t say anything. He
knew that sometimes when he
was quiet, the person he needed
information from would eventually
fill the silence.” (pp. 5-6).
-------------------------------------------“Just listen. You are a detective.
Detectives are supposed to listen.
You once told me that solving
murders are getting people to talk
and just listening to them.” (pp.
-------------------------------------------------Source: Michael Connelly, The Black Ice, St. Martin’s
Paperback, 1993.
Progression of Interpersonal Communication
on Type
minutes to
one hour
Three to six
Three to six
Progression of Interpersonal Communication
Preferable to
have training
in active
and basic
analysis as
well as
psychology of
training in
fifteen hours
training plus
thirty hours
of training in
Reid Nine
standards for
formats and
as well as
minimum ten
hours of
*Inbau, F.E., Reid, J. E. & Budkley, J.P. (1986) Criminal Interrogation and
Confessions, third edition (Baltimore, Williams and Wilkins).
Source: William Morrisette, Intuition, 21 Garden Avenue, North Providence, R.I.
Progression of Interpersonal Communication
Appropriate Use
When you
are looking
for direction
in an
Result is a
rather than a
When you
the need for
a formal
and are
or suspects.
Must accept
as it is
When you are
with an
suspect and
require a
account of
that person’s
guilt. Make
use of
and as such
Most desirous
form for
suspects of
severe offences
or suspects who
may be
unstable. Does
not use
and therefore
beneficial when
you need to
identify true
motivation for
the offense.
Source: William Morrisette, Intuition, 21 Garden Avenue, North Providence, R.I. 02911.
A Thousand Lies
What is a man that stays true to the game
But has to cheat a little to get by
Well that is a person that I know too well
What if a man doesn’t stay true to the game
Don’t care for no one, only cares for his greed.
Machine Head
Chance of Confession
John Baldwin found in 600
investigative interviews that 35.7 percent
of suspects confessed from the outset and
an additional 16.2 percent confessed
initially to part of the allegation.
“Police Interviewing Techniques,” British Journal of
Criminology, Vol. 33, 1993.
William Morrisette believes that
“an investigator who properly identifies
and implements the appropriate
investigative communication type should
be able to achieve an 85 percent
confession rate through basic
interrogation and a 95 percent rate by
way of advanced interrogation.”
Fraud Detection Questions
Question # 1 –
Reason Why? Do you know why you
are here today?
Principle: Innocent subjects will
acknowledge the reason for the
interview, while the guilty subject
will generally avoid indicating
knowledge of the issue.
Wayne Hoover, “Non-Confrontational Approach to Interviewing,” NACVA’s
Twelfth Annual Consultants’ Conference, Philadelphia, June 1-4,
Fraud Detection Questions
Question #2 –
Know/Suspect: Who do you think
may have taken that $5,000 from
the safe?
Principle: Innocent subjects are
more likely to volunteer a name or
offer a suspicion.
Wayne Hoover, “Non-Confrontational Approach to Interviewing,” NACVA’s
Twelfth Annual Consultants’ Conference, Philadelphia, June 1-4,
Fraud Detection Questions
Question #3 –
Vouch: Is there anyone that you work with
that you feel would not have taken that
$5,000 from the safe?
Principle: Innocent subjects will vouch for
others, while the guilty will vouch for
themselves or no one.
Wayne Hoover, “Non-Confrontational Approach to Interviewing,” NACVA’s Twelfth
Annual Consultants’ Conference, Philadelphia, June 1-4, 2005.
Fraud Detection Questions
Question #4 –
Think: Do you think that the $5,000
was actually stolen?
Principle: Innocent subjects will
generally agree that the money
was actually stolen.
Wayne Hoover, “Non-Confrontational Approach to Interviewing,” NACVA’s
Twelfth Annual Consultants’ Conference, Philadelphia, June 1-4,
Fraud Detection Questions
Question #5 –
Opportunity: Who do you think would
have the best opportunity to take that
$5,000 from the safe?
Principle: Innocent subjects will usually
offer a name of an individual or named
position who would have had the best
Wayne Hoover, “Non-Confrontational Approach to Interviewing,” NACVA’s Twelfth
Annual Consultants’ Conference, Philadelphia, June 1-4, 2005.
Fraud Detection Questions
Question #6 –
Happen: What do you think should
happen to the person who stole
that missing $5,000?
Principle: Innocent subjects will
generally offer harsher
punishment than the guilty.
Wayne Hoover, “Non-Confrontational Approach to Interviewing,” NACVA’s
Twelfth Annual Consultants’ Conference, Philadelphia, June 1-4,
Fraud Detection Questions
Question #7 –
2nd Chance: Would you be inclined to give
someone a second chance?
Principle: Innocent subjects generally
continue to offer harsh punishment,
while the guilty are more likely to offer
a second chance.
Wayne Hoover, “Non-Confrontational Approach to Interviewing,” NACVA’s Twelfth
Annual Consultants’ Conference, Philadelphia, June 1-4, 2005.
Corporate Spies
There are ways for businesses to protect themselves
from corporate spies. Personnel must be made
aware of the damage from financial spies, and the
normal closed-circuit cameras and security
guards patrolling premises are important. Other
preventive measures include
 An eavesdropping protection kit that releases a soft
noise that blocks out voices, making it impossible
for eavesdroppers to hear.
 A vanishing e-mail, called VaporStream, lets people
send e-mails that leave no trail. The e-mails cannot
be tracked copied, or printed. Cost is $40 a year.
 A wiretap-detection device that alerts you if a phone
is being tapped, or if there is any interruption in the
phone line.
 FiberGuard Net 800 uses fiber optics that send an
alert if a fence or gate is cut or if someone climbs
over the fence.
Joseph Pisani, “Spy v. Spy: Corporate Espionage,” Business
Week Online, October 2, 2006
Forensic Accounting Tools/
Chain of Custody.
Questioned Documents (e.g. ink
Continuous Controls.
Timeline Analysis.
Tracing Schedule.
Link Analysis.
Proof of Cash.
Entity Charts.
Full - and False – Inclusion Tools.
Forensic Accounting Tools/
Techniques (cont.)
Aberrant pattern detection(e.g., Benford Analysis)
Duplicate numbers test (Excel/Idea/Account
Rounded numbers test
Lifestyle analysis
Attributes sampling
Document map[a separate pane that displays a
list of headings in a document in order to quickly
navigate through the document and keep track
of your location on it
Event analysis (e.g., attacks of hackers on a
computer system)
GAP analysis
Stratification percentage comparison
Net worth analysis, etc.
Analytic techniques (e.g., horizontal, etc.)
Chain of Custody
Just as in the movies or on a
television show such as CSI,
forensic accountants must
safeguard evidence through a
financial chain of evidence.
There must be a way to show that
the evidence has not been
tampered with or damaged.
If documents are seized, the
forensic accountant should put his
or her initials and date of the
seizure on the back of each
Or put the document in a
transparent envelope and write a
description on the envelope.
Store the original and work only with
a copy.
Enforcement Manual
Enforcement Manual
History and Custody of Documents
U.S. Department of Labor
Pension and Welfare Benefits
Date _______________________________
Case Number________________________
Case Name __________________________
22. How were the documents obtained?
____ By consent (note any significant comments of the principal or third party
witness and any unusual circumstances which occurred)?
____ By legal process (describe).
What is the relationship between the documents and the person submitting
22. Were manual transcripts or facsimile copies made of any of the documents
either in whole or in part?.
______ Yes ______No
If Yes, list documents copies. Manner of reproduction
22. Have all copies been compared with the original documents and identified?
_____Yes _____No
If No, why not?
22. Were the original documents described herein under your control or
supervision at all times prior to their return to the principal, third party witness, or
_____Yes _____No
If No, set forth circumstances of any transfer in control.
22. Did the principal, third party witness, or a representative request access to
the documents during your custody?
___ Yes ___ No
If Yes, who requested access and what action was taken?
Signature ___________________
Title ________________________
PWBA 219
(May 1987)
Continuous Monitoring
• Correlation is well suited to environments where there
are (a) a large number of audit units (departments,
divisions, franchisees, or customers, etc.), (b) a series of
time-stamped revenues, expenses or loss amounts, and (c)
the goal of developing a formal process to compare each
audit unit against a valid benchmark.
• Correlation and time-series analysis are techniques that
could be used by forensic accountants in a monitoring
role to find evidence of intentional or unintentional errors
in situations where there are many audit units.
• The techniques could be used to proactively search for
errors without any preconceived belief as to their
existence, magnitude, or pervasiveness, or where the
forensic accountant seeks to provide additional evidence
showing that such errors occurred after the errors were
detected using some other detection method.
• If intentional errors were discovered using other methods
of discovery, then the techniques could be used by the
forensic accountant to show that the revenue or
expenditure or loss streams of an audit unit differed
significantly from a valid benchmark.
M. J. Nigrini, “Monitoring Techniques Available to the Forensic Accountant,” J. of Forensic
Accounting, Vol. 7, 2006, pp. 321-344.
Continuous Monitoring
• Management engages an independent outside supplier to
install and manage software to continuously analyze
every transaction within business applications to detect
improper activities and anomalies that indicate errors,
control overrides, and fraud [Oversight Systems].
• The software sorts incidents into errors, misuse, and
fraud (a detective control).
• Suspicious transactions can be identified and categorized
for future follow-up.
• Flag items such as manual income-increasing
adjustments, adjustments made late in the year, large
dollar amounts.
• Large companies with revenues over $1 billion.
• Over the course of a year monitoring each module (e.g.,
A/P, Sales, G/L) is designed to cost approximately the
amount the company would pay for one fulltime internal
auditor per module.
• One company saved $2 million of external auditing fees
for using C/M in the 404 area.
D. R. Hermanson, B. Moran, C. S. Rossie, and D. T. Wolfe, “Continuous Monitoring of Transactions to Reduce Fraud,
Misuse, and Errors,” J. of Forensic Accounting, Vol. 7, 2006, pp. 17-30.
Timeline Analysis
Timeline analysis (TA) may be used
to show the chronology of a dispute,
and certain software tools can
prepare trial exhibits.
Investigative analysis software can
show all detail from the beginning of
the event until the apprehension of
the target.
TA helps forensic accountants
communicate the timing of case
related events and summarizes the
Each link of the timeline chart
includes a reference to a source or
a direct link to a database. An
insurance fraud scheme timeline
from i2 Inc is shown in the next
Insurance Fraud Scheme
Tracing Schedule
A tracing schedule can be
used to show the flow of funds
from bank-to-bank, from bankto-entity, from entity-to-entity,
or from person-to-person.
A tracing schedule is helpful in
money laundering cases.
Link Analysis
Link analysis (LA) is a subset of
network analysis which shows
associations between people and
For example, a link analysis could
compare the mailing addresses of
company executives and the cell
phone numbers that they have
dialed during a given time frame.
LA provides crucial relationships
between many objects of different
types that are not apparent from
isolated pieces of data.
Table 5.1 is an example of LA with
respect to the primary suspect,
David Hoover.
Wikipedia, the free encyclopedia, Stuart Weiss,
“Forensic Accounting Tools and Techniques,” The Value
Examiner, January/ February, 2007, pp. 12-13.
Table 5.1 Link Analysis
Invigilation is a rather expensive
investigating technique that can be
used in potential fraud situations to
discover the fraud and can later be
used in the courtroom.
Here detailed records are kept
before and after the invigilation
period to determine the amount of
During the invigilation period strict
controls are imposed (e.g., cameras)
so that the fraud is virtually
Or the invigilation period could be
while the suspect is on vacation.
Invigilation Technique
No controls
Controls or
No controls
14 days
14 days
14 days
$67,000 lost
$0 lost
$62,000 lost
A genogram is a pictorial display of
personal relationships among
related or unrelated parties.
There are software programs that
are custom designed for
genograms, such as GenoPro 2007
($49 at
Simple symbols represent the
gender (box for male and circle for
female), with various lines to
illustrate family relationships.
People who are not related would
not be connected with a line, but
could be placed on the genogram.
They can lead to determining the
motive of a crime or provide
evidence that the person had no
direct involvement in the fraud.
Tracking Small Sums
FAS can employ aberrant pattern detection using digital analysis.
Benford’s Law is the DNA equivalent of numeric testing using
geometric progressions against actual transactions. Another
technique, full and false inclusion, is known as the yellow crime
scene tape of forensic accounting. It insures that no extraneous data
is included and no appropriate data is excluded. Another very
interesting technique uses Genograms, which are visual
representations of personal relationships. It is a tool that is been
borrowed from family counseling.
First FAS track people. Then the money is easy to find. The money
takes different forms, of course: cash, accounts, hard assets such as
real estate and automobiles, intangible assets like patents,
copyrights, trademarks, promissory notes, betting records. Both
money and people leave trails: phone records, voting records, even
genealogy research. In fact, the trails left in a free society are very
useful in catching terrorists who attempt to use our freedom to their
Proof of Cash
The proof of cash procedure is similar to
a bank reconciliation, except more
detailed and extensive.
This procedure can be used to verify that
cash accounts on the books are in
agreement with the cash transactions
recorded by the bank.
The Wyoming Department of Audit’s
proof is shown as Table 5.2.
Table 5.2
Entity Charts
Entity charts show entities and
owners with the relationship between
The charts can show how income and
assets are diverted, particularly
among seemingly unrelated parties
and entities.
Microsoft Excel drawing tools may be
used to prepare entity charts.
For example, an entity chart could
show the creation date of off-shore
bank accounts and the subsequent
decrease in the target’s U.S. bank
Or identification of other unrelated
parties may suggest additional
investigation is needed.
D. D. Dorrell and G. A. Gadawski, “Financial Forensics II,” May, 2005, Vol. 3,
No. 3, p. 50.
Full – and – False Inclusion Tests
These tests are used to ascertain
the proper universe of data under
investigation, so that no
appropriate data is excluded and
no extraneous data is included.
Full-and-false inclusion tests may
be helpful for finding hidden
Questioned Documents
Invoices and other documents may be
fake or altered when
 Font sizes or types are not consistent
 No address is shown for the vendor or
customer; this situation is especially
suspicious if a vendor has not identified an
address to which a check can be sent.
 The document has no identifying numbers
such as invoice number, purchase order
number, or customer number.
 All invoice numbers – on invoices from
vendors – are numbered sequentially, with no
numbers skipped.
 No tax is shown for taxable items.
 No shipping or freight cost is shown for items
that would have been shipped at the
purchaser’s expense.
 Little or no detail is provided on the invoice or
T. W. Golden, S. L. Skalak, and M. M. Clayton, A Guide to Forensic Accounting
Investigation, Hoboken, N.J.: John Wiley & Sons, 2006, pp. 156-157.
A Stamp Perforation match
Paper shreds demonstrating different optical properties
under ambient and specialized lighting
Inks of different intensities used on the same
Expert Fees
• What Can You Charge?
• Collecting receivables?
-------------------------------------------------------•Guide to Expert Fees, National Forensic
Center shows a range of fees.
•You can charge
Hourly rate
•Can charge variable rates
Testifying/deposition $400
Travel Time
•May charge more for videotaped deposition.
•Some charge on a portal-to-portal basis or “turn
off the meter.”
•Imitate attorney: charge for talking on phone,
Internet searching, research.
•Your initial telephone conversation and
forwarding your resume and contract agreement
probably not chargeable--- marketing costs.
•Your rate should be the same for the plaintiff and
the defendant.
Collecting Receivables
•Get an advance (better than payment after
•Keep the retainer until the final bill?
•Some experts make the retainer non-refundable.
•Get paid before you testify!
•Doctors set up a schedule of fee penalties for
cancellations and postponements.
•Frequent billing is important (weekly or daily).
•Offer a one or two percent discount if bill is paid
within 10 days (especially for the government).
• Do not have contingency payments.
Jess E. Dines, “ Payment Pitfalls,” The Forensic Examiner, Fall
2008, pp. 28-29.
More Suggestions
• Suspend work until past due payments are
•Send requests by certified mail with a return
•Tactful reminder letters may be appropriate.
•Have payments to be made by attorney(not client).
•Letter of agreement: client-attorney is solely
responsible for payment of all invoices.
•Avoid attorney who wishes to withhold payment
until client pays lawyer.
•Withhold portions of your report(e.g., charts and
diagrams) until paid.
Deposition Answer
I am being paid for my time,
experience, expertise and my outof-pocket expenses, and not for my
Top Niche Services
1. Business Valuations
2. SOX Compliance
3. Litigation Support
4. Attest Services
5. Estate/Trust/Gift
9. Forensic/Fraud
Source: Accounting Today (2005).
Matter-Specific Applications
Alter ego
Audits, Reviews, Compilations
Due Diligence
Fraud-Civil and Criminal
Fraudulent Transfer/Conveyance
Intangible Assets
Intellectual Property
Lost Profits
Marital Dissolution
Mergers, Acquisitions, and Divestitures
Tax Returns
Valuation, focusing on Normalizations
Six Areas of Litigation Services
Lost profits
Lost value
Lost cash flow
Lost revenue
Extra cost
Personal Injury
* Business and professional
* Pension
* Intangibles/intelligent
* Property
Antitrust Analysis
Market share, market
Pricing below cost
Dumping and other price
Anti-competition actions
CPA malpractice
Bankruptcy/ reorganization
Contract cost and claims
Regulated industries
Frauds (civil and criminal)
Historical analyses
Family law
General Consulting
Actuarial analyses
Statistical analyses
Industrial engineering
Market analyses
Computer consulting
Industry practices
Document management
* Tax bases
* Cost allocations
* Tax treatment of specific
Source: Management Advisory Services Technical Consulting Practice Aid 7: Litigation Services, (AICPA, 1986);
Forensic Accountant’s
Knowledge Base
© Hugh M. Christensen
“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
- D. Larry Crumbley
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)
Three Branches of Government
Executive (regulations)
Legislative law [takes precedence]
Judicial law [a referee]
U.S. Tort Costs Declines
tort system cost $247 billion in 2006,
which is $825 per U.S. citizen ($12 in
•U.S. tort costs accounted for 1.87% of GDP
(2.24 in 2003).
• Growth in U.S. tort costs since 1950 has
far exceeded U.S. population growth.
•Medical malpractice costs totaled nearly
$30.3 billion in 2006, more than $101 per
person (compared to $5 per person in
Tillinghast-Tower Perrin, U.S. Tort Costs: 2007 Update, December 10,
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%
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
 Federal Rules of Evidence.
* Find at
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.
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.
Tim McGraw’s Position
“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
There’s some hard times in the neighborhood
But why can’t every day be just this good?
Miscellaneous Ideas
lawyer’s job is ultimately to avoid
•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
•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
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.
Five Major Phases of Litigation
• Pleadings
•Discovery [Much of our work occurs here].
• Trial
• Outcome
• Possible Appeal
Complaint – Plaintiff files.
 Service of Process – served on
 Answer – Defendant must admit or
deny allegations.
 Demurrer- No cause of action
 Possible cross-complaint
Sharp v. U.S., 199 F. Supp. 743 (D.Del 1961),
aff’d 203 F.2d 783 (3rd Cir. 1962).
Major Ways to Sue
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
• 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
Source: John Grisham, The Street Lawyer, New York: Bantam Dell, 1998, p. 274
Expert Witnessing
Our purpose: Assist the trier of the
Question of Facts v. Question of
Law [not always clear].
Negligence may be either.
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
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
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).
Frequent Terms (3)
Pro se: Party representing himself or
 Per curiam: Decision of the whole
 en banc: decision rendered by full
 Concurring opinion: Agrees with
court’s conclusion, but…
 Dissenting opinion: Disagrees with
 Dicta (Dictum): incidental facts; not
binding on future cases.
 30 (b) (6): names a public or private
organization for deposition.
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
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
Frequent Terms (6)
Enjoin: to command or instruct with
authority (e.g., judge can enjoin
someone to do or not to do
 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
Frequent Terms (7)
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.
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
Long-arm statute – a state law extending
personal jurisdiction over out-of-state
persons (including corporations).
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
Mens rea – caused the criminal act with
guilty knowledge; state of mind indicating
culpability. Staples v. U.S., 511 U.S. 600
Preponderance of the evidence – greater
than 50%. Civil trial.
Clear and convincing evidence – ca 70%.
Beyond a reasonable doubt – greater
than 95%. Criminal trial.
Frequent Terms (10)
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
 Ipse Dixit- thing speaks for itself.
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.
Frequent Terms (11)
Chain of custody – accounting for
evidence and documents from the
time obtained until the end of the
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
Intestate – one dies without a will.
Stay – delay a legal order (e.g., an
Marketing of Services
1. Internet Sites- give-way something free.
2. Potential/Client Database
3. Contacting Attorney/Judges/ Networking.
4. Articles/columns/reprints.
5. Direct Advertising-Yellow Pages.
6. Listing in Internet Sites/referral services.
7. Speaking engagements.
8. Conventions/seminars/meetings.
9. Books.
10. Direct Mail
11. Advertising
12. Brochures
More Marketing
•Inform your immediate
•Create referrals from your
•Build relationships with other
expert witnesses.
•Trade business with your
•Ask for referrals.
•Send thank you notes.
Network with Attorneys/Judges
•Adopt a networking mentality.
•Do not be timid.
•Meet attorneys speaking at expert witness
•Become involved with law schools in your
•Exhibit at state bar and trial attorney
association conventions.
•Socialize with attorneys at judicial
•Contribute to and attend attorneys’
charity events.
Network with Attorneys/Judges
•Attend Continuing Legal Education
•Teach CLE classes for attorneys.
•Go where the attorneys/judges are.
•Attend attorneys’ group meetings.
•Keep in touch.
“Rather than combing through torn
clothing,” forensic accountants “comb
through corporate books, looking for
oddities that could signal swindles,”
says Bruce Dubinsky.
Investigations can be extremely
complex, with crates and crates of
documents and thousands of computer
files. Investigators look for flags or
patterns that would not normally occur.
Source: Mark Maremont, “Tyco Is Likely to Report New Woes,” Wall
Street Journal, April 30, 2003, p. C-1.
“Forensic accounting is very different from
auditing in that there is no template to use.
There are no set rules. You don’t know when
you go into a job how it is going to be.”
Lorraine Horton, Kingston, R.I
“Forensic accounting “is a very competitive field.
What is interesting is that you may be a good
accountant, but not a good forensic
accountant. The training and the way you look
at transactions are different.”
Robert J. DiPasquale, Parsippany, N.J.
---------------------------------------------------------“Unlike auditing, lower-level staff often can’t be
used for an engagement. They normally will not
spot anything out of the ordinary, and an
experienced person should be the one testifying
as well as doing the investigative work.”
Lorraine Horton, Kingston, R.I.
Source; H.W. Wolosky, “Forensic Accounting to the Forefront,”
Practical Accountant, February 2004, pp. 23-28.
1. Engagement Letters
2. Expert Reports
3. Have a document referencing system.
4. Reference sources of your work.
5. Avoid writing notes on your files.
6. For charts, reference sources on
7. Be careful, everything may be
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
nonprecedential, they are not binding. About 40% of
Federal appellate Daubert decision are unpublished.
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
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
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
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 220
succinct. Say, “ I have given expert testimony in
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
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)?
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
Finding Information About Attorneys
1. Search on Internet ( e.g., Legal
Database, Legal Match, Thompson
2. American Bar Association
3. Martindale- Hubbell, paper and internet
4. Prentice-Hall Directory
The Federal Judicial System
9 Justices
Federal Circuit
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
(Created in 1980,
formerly the U.S.
District Court, instead
of the circuit courts.)
(Three-judge panels, not the
entire circuit court, hear most
(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
Boards, and Merit
Systems Board)
50 States
Washington, D.C.,
Puerto Rico, Virgin
Islands, Guam*
* Patent disputes go from the district courts to the Federal Circuit.
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
• 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
• For Federal court, controversy must exceed $75,000.
• State courts have trial courts, appeals courts, and
supreme court.
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).
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).
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
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
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.
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
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.
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
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.,
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.
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)
Elements of the Attorney-Client Privilege
 Between attorney and client.
 For obtaining legal advice or
 Intended to be confidential.
 Privilege is not waived.
[Be careful with e-mails and cell
U.S. v. United Shoe Machine Corp., 89 F. Supp. 358 (D.
Mass. 1950)
Work Product Privilege: Tug of War
Fed. Rul. Of Civil Procedure 26(b)(3):
Subject to the provisions of subdivision
(b)(4)…, a party may obtain discovery of
documents... Prepared in anticipation of
litigation or for trial by or for another party or
by or for that other party’s representative
(including the other party’s … consultant, …)
only upon a showing that the party seeking
discovery has substantial need of the
materials in the preparation of the party’s
case and that the party is unable without
undue hardship to obtain the substantial
equivalent of the materials by other means. In
ordering discovery of such materials when the
required showing has been made, the court
shall protect against disclosure of the mental
impressions, conclusions, opinions, or legal
theories of an attorney or other representative
of a party concerning the litigation.
Split in Federal Courts: Tug of War
Majority of courts: a bright-line rule mandating disclosure of
all documents, including attorney opinion work product given
to testifying experts.
In re Pioneer Hi-Bred International, Inc., 238 F.3d 1370
(Fed. Cir. 2001).
Regional Airport Authority of Louisville and Jefferson
County v. LFG, LLC, 460 F.3d 697 (CA-6, 2006).
Trigon Ins. Co. v. U.S., 204 F.R.D. 277 (E.D. Va, 2001).
Elm Grove Coal Co. v. Director, Office of Workers’
Compensation Program, U.S. Dept. of Labor, 480 F.3d 278
(CA-4, 2007).
Fidelity Nat’l Title Ins. Co. of N.Y. v. Intercompany Nat’l Title
Ins. Co., 412 F.3d 745 (CA-7, 2005).
Kern River Gas Transmission v. 617 Acres of Land, 156 Fed.
App. 102 (CA-10, 2005).
Minority of courts: Allow some flexibility
University of Pittsburgh v. Townsend, WL 1002317 (E.D.
Tenn., 2007).
Haworth, Inc. v. Herman Miller, Inc., 162 F.R.D. 292 (W.D.
Mich., 1995).
Protecting Work Product Privilege
Attorney should directly retain the
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
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)
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
Accountant Privilege
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)
Accountant Privilege
Contains many exceptions, either
poorly or not at all defined, thus
limiting the privilege’s
effectiveness in protecting the
confidentiality of taxpayer
 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.
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).
E-mail Evidence
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
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.
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.
Best Practices
Know and follow employer
 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
 Insure mail lists are current for
confidential information limit
 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.
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 e-mail
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.
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).
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
Physical examination.
Production of tangible things and entry
upon land.
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
------------------------------------------------------Some beach somewhere,
There’s a beautiful sunset burnin’ up the
Blake Shelton
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%
“My opinion is based upon a
reasonable degree of scientific (or
medical or economic or accounting)
Otherwise, opinion may be stricken
from evidence.
Pyrrhic Civil Victory
Even if you win at a civil trial, no
assurance that any award will be
O.J. Simpson, $474 million.
Robert Blake had a $30 million civil
judgment against him. He declared
Incentive Test
A(n) ______ is a device used by courts to
have disputing parties to agree in advance of
a trial to facts, evidence, etc.
A(n) _____ _____ brief is filed by a party
not directly related to a lawsuit.
The _____ _____ doctrine states that a case
once decided will control.
The appropriate court to bring a dispute is
called _____ .
______ is opinions of a judge which goes
beyond the facts before the court and are not
binding on future courts as precedent.
A higher court ______ a lower court
decision and sends it back for further
You file a writ of ______ to ask the
Supreme Court to hear your dispute.
_____ _____ refers to a decision of the full
A ________ is a written statement of a
witness under oath, often in a
question/answer format.
Incentive Test
The ____ _____ is preliminary questioning
by the court (or lawyer) of jurors to
determine competency.
A motion in _____ is a request before trial
that evidence (or expert) of opposing side
is inadmissible.
The complaint and answer would be called
the _____ .
The _____ is the person sued.
A subpoena _____ _____ is a command to
produce documents to a court that become
A subpoena _____ _____ is a command to
appear and testify as a witness.
A(n) _____ _____ is appointed by a court
or judge to decide certain facts, etc.
Models, forms, and exhibits would be
considered ______ evidence.
______ ______ means a party is
representing himself.
Incentive Test
A(n) stipulation is a device used by courts
to have disputing parties to agree in advance
of a trial to facts, evidence, etc.
A(n) amicus curiae brief is filed by a party
not directly related to a lawsuit.
The stare decisis doctrine states that a case
once decided will control.
The appropriate court to bring a dispute is
called venue .
Dicta is opinions of a judge which goes
beyond the facts before the court and are not
binding on future courts as precedent.
A higher court remands a lower court
decision and sends it back for further
You file a writ of certiorari to ask the
Supreme Court to hear your dispute.
En banc refers to a decision of the full
A deposition is a written statement of a
witness under oath, often in a
question/answer format.
Incentive Test
The voir dire is preliminary questioning by
the court (or lawyer) of jurors to determine
A motion in limine is a request before trial
that evidence (or expert) of opposing side is
The complaint and answer would be called
the pleadings .
The respondent is the person sued
A subpoena duces tecum is a command to
produce documents to a court that become
A subpoena ad testificandum is a command
to appear and testify as a witness.
A(n) special master is appointed by a court
or judge to decide certain facts, etc.
Models, forms, and exhibits would be
considered demonstrative evidence.
Pro se means a party is representing himself.
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.
“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
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
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
person was present at the time of
the theft).
 Law does not value circumstantial
evidence any less than direct
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
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).
Ink Analysis
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.
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.
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.
Source: G.S. Smith, “Computer Forensic: Helping to Achieve The Auditors
Mission,” Working Paper, December 2003.
Digital Evidence: Today’s Fingerprints
• “The sight of hard drives, Internet files, and
e-mail as courtroom evidence is increasingly
• “In the wired world almost every crime
intersects with the digital realm at one time or
• “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,”
Data Extraction v. Data Investigation
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.
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.
Gene Morse Used Data Mining at
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.
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.
It’s all about the evidence. The dispute
has no face. You are not responsible for
what the jurors or judge decide.
CSI, Las Vegas, paraphrasing Gil Grissom
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).
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
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,
Source: Shawn Young, “Quest Case Shows Underlings Vulnerabilities,” WSJ,
April 2, 2004, p. C-1.
Types of Witnesses
Lay witness (or fact witness): a nonexpert who gives testimony about facts,
etc. Not subject to Daubert/ Frye
Expert witness: one who can offer an
opinion as a result of special skills
education, experience, or training. Subject
to Daubert/ Frye challenges.
Summary witness: voluminous
writings, recordings, or photographs which
can not conveniently be examined in court
may be presented in the form of charts,
summaries, or calculations. F.R.E. 1006.
Daubert may not apply. U.S. v. Caballero,
277. F.3d 1235 (CA-10, 2002).
Eye witness: one who testifies to
what was seen.
Rule 701. Opinion Testimony by Lay
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.
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
1) Proffered expert testimony must be both
relevant and reliable to be admissible
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.
Rule 703 - Basis of Opinion Testimony by Experts
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
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 in
a particular field.”
Rule 704 - Opinion on Ultimate Issue
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 cross-examination.”
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 cross276
Rule 706 – Court-Appointed Experts
a) The Court has the authority to appoint an
expert whom all parties may cross-examine
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
Special Master and Court Appointed
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.
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
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
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
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
Rule 1002. Requirement of Original
Rule 1003. Admissibility of Duplicates
Rule 1004. Admissibility of Other Evidence of
Rule 1005. Public Records.
Certified copy.
Fed. Rules of Evidence (more)
Rule 1006. Summaries.
Voluminous material may be
(e.g., charts, summary, calculations)
Rule 1008. Functions of Court and Jury.
In case of dispute, trier of the fact
Prima facie evidence: unless
overcome by other evidence,
suffices as proof of a fact in a
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.
Hearsay (evidence)
Rule 803 – Hearsay Exceptions; Availability of Declarant
Generally, hearsay is not admissible as evidence.
Exceptions relating to expert testimony
Business records such as memoranda, reports, records, or data
compilations kept on a regular basis by a person with
Public records; such as records, reports, statements, or data
compilations kept by public offices or agencies
Market reports and commercial publications; such as market
quotations, lists, directories, etc. relied on by the public
Learned treatises; such as almanacs of business information
and technical literature
Missing business records; reports normally prepared daily or
the fact that they were not prepared is admissible
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
Experts are not required to prove that the information upon
which they have relied is trustworthy
May be grounds for a Daubert/Kumho challenge if
confirmation is required or recommended by standards of
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.
Credibility Is Paramount
Most trials boil down to one
issue: Credibility
 Expect the other side to
present evidence that you are
biased (to throw out your
Prior Inconsistent Statements.
You are an advocate for the
Lies v. Truth
Prosecutors in the Lay/ Skilling/
Enron criminal trial used a poster
board divided into black and white
The black side said “lies” and the
white side said “truth.”
The four month case boiled down to
a simple decision over who had told
the truth and who had lied.
The prosecutors said the
defendants were evasive and had
use the answer “could not recall”
more than 200 times.
Source: Sheila McNulty, “Enron Case Hangs in the Balance
as Jury Retires,” Financial Times, May 18, 2006, p.16.
Ten Commandments of Demonstrative Evidence
Keep it Simple
Use Graphics with Every Witness (show &
(memory increases 700%)
Improve Interest Through Variety
Test Your Charts with Those Unfamiliar
with the Dispute
Use Only Properly-scaled and Labeled
Color Charts
Use Word Charts Rarely
Remember the Seriousness of the Setting
Charts Improve the Entire Process
Keep Up with Technology (ELMOs)
Get Help
Fulcrum Inquiry, "The Ten Commandments
of Demonstrative Evidence in Litigation."
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
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.
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.
Six Ways to Discredit Testimony
If an expert, the witness is not qualified.
2. The witness did not consider all the
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
Source: D.R. Carmichael, et. al, Fraud Detection, 5th, Fort
Worth: Practitioners Publishing, 2002, p. 8 – 39.
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
 Checking your firm’s files and
records for professional conflicts
early is extremely important.
Bias Goes to Weight
“An expert’s bias goes to the weight, not
the admissibility of the testimony, and
should be brought out on crossexamination.”
“A party who is otherwise qualified as an
expert may testify as an expert in his
own case regardless of concerns that
the party is plainly self-interested.”
U.S. v. Kelley, 6 F. Supp. 2d 1183 (D. Kan. 1998)
4 Weinstein’s Fed. Evidence, §702.06[8], pp. 702-45, 1997.
For example, court allowed Doug
Carmichael to testify for the FDIC even
though he was the Chief Auditor of
PCAOB. Grant Thornton tried to get him
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
Jury trials in auditor-liability disputes are
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
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
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.
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.
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
• The nature of the litigation services to be
• 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
• Whether the practitioner’s work will be
protected by the attorney work product
• Circumstances under which the practitioner
may terminate his or her engagement.
• Stress the independence of the expert.
• Fee (including payment arrangements).
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.
Admissibility Of Experts
Daubert for federal courts.
26 states apply Daubert or similar
standards (e.g., Louisiana, Texas,
Arkansas, Connecticut, Massachusetts).
10 states still follow Frye (e.g., Arizona,
California, Florida, New York,
11 states have not rejected Frye but apply
Daubert factors (Alabama, Colorado,
Hawaii, Nevada, Wisconsin).
4 states have developed their own tests
(e.g., Georgia, Utah, Virginia,
4 states open to Daubert (Illinois,
Minnesota, New Jersey, Washington).
States Following Daubert
New Hampshire
North Carolina
Rhode Island
South Dakota
West Virginia
States Rejecting Daubert
New York
North Dakota
States Using Modified Daubert
New Mexico
South Carolina
District of
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
 Whether the particular expert is qualified to
present expert testimony on the subject at
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
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.
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).
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.
 Are there standards controlling
methodology and principles?
Kumho Tire Co. Ltd. v. Carmichael, 119
S.Ct. 1167 (1999).
• Daubert factors apply to nonscientific
testimony as well as scientific expert
• Court will probably not exclude
testimony on the basis of one factor
• Frye rule: general acceptance rule may
still apply, especially in certain state
• Daubert challenges generally occur after
the deadline for naming experts. Thus,
disaster if disqualified.
• Can open expert up to a malpractice
Kumho Tire
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
I.W. Collett & M.Smith, Trap Doors and Trojan Horses, Thomas Horton & Daughters,
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
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.”
One talking head said that “he’s dead.”
Dr. Park Dietz during the 2002 Houston court case.
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.
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
Christopherson v. Allied Signal Corp., 939 F.2d 1106
(CA-5, 1991)
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)
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).
Rejecting Experts
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
[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.
Rejecting Experts
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
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.
Weight v. Admissibility
Daubert analysis should not replace trial
on merits, but any defects in an expert’s
methods should be addressed through
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).
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,
• 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)
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).
Bench Trial v. Jury Trial
Trial courts should be more reluctant to exclude
evidence (e.g., expert testimony) in a bench trial
than in a jury trial.
Builders Steel Co., 179 F.2d 379 (CA-8, 1950).
Thus, in bench trials evidence should be
admitted and then sifted when the district court
makes its findings of fact and conclusions of law.
Field Eng’g & Equip., Inc. v. Cargill, Inc., 651 F.2d 589, 594 (CA-8,
A trial court, capable of ruling accurately upon
the admissibility of evidence, is equally capable
of sifting it accurately after it has been received,
and, since findings are based on the evidence that
is found competent, material and convincing,
there is no harm in the presence in the record of
testimony that the court does not find competent
or material. Where the court has assumed the
role of fact-finder in a bench trial, “the better
course” is to “hear the testimony, and continue
to sustain objections when appropriate.”
Easley v. Anheuser-Busch, Inc, 758 F.2d 251, 258 (CA-8, 1985).
Searchable Databases of Daubert
Daubert Tracker (launched August
570 accounting decisions (mid-July 2006).
314 accounting experts admitted, 203
denied, 53 admitted/denied in part.
55%, 36%, and 9.3% ratios
14,000 trial and appellate opinions.
21,000 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
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. A year
subscription is $295.
Searchable Databases of Daubert Decisions (contd …)
“Daubert on the Web”
Online free tracking service.
In June, 2006, 84 cases were under
the field “Accountants and
Economists” with an admissibility
rate of .595.
There are a total of 25 fields with
various “admissibility rate,” such as
Computer experts,
Marketing experts,
In Louisiana, there have been at least 33 Daubert challenges with
a 60% admission rate.
Jury Verdict: Review & Analysis
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testifying for plaintiffs and defendants plus cutting
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Take advantage of the latest FREE addition to our
litigation support services. JVRA’s online expert
directory contains the names of thousands of experts
in hundreds of areas of expertise. This expert witness
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with notations as to which side the expert testified for,
their city and state and a search button to their cases
reported in JVRA. Click to enter.
Our Verdict-Trak TM on-line database contains over
100,000 completed civil cases reported in our various
Jury Verdict Review & Analysis publications since
1980 providing you with complete, detailed articles
with all pertinent trial and reference information.
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)
Successful Daubert Challenges (cont.)
Tax Court listed 18 reasons why P’s
damage expert was excluded (CA-2
affirmed). Failed to use the most reliable
DCF analysis; numerous outright and
largely admitted errors in analysis. Failed to
offer meaningful explanations.
Lippe v. Bairnco Corp., 99 Fed. Appx. 274 (CA-2, 2004).
P’s damage experts were unreliable; no
similarity between P’s companies and
businesses relied upon for earnings
benchmark; failed to allow for losses
caused by other factors.
El Aquila Food Prods., Inc. v. Gruma Corp., 131 Fed. Appx.
450 (CA-5, 2005).
Used unreliable data; did not understand
computers or computer market; changed
opinion from one he gave in an earlier
expert report; testimony non-technical.
Lantec, Inc. v. Novell, Inc., 306 F.3d 1003 (CA-10, 2002).
Testifying at a Deposition
Expert witnesses can expect to be asked about the
following at a deposition:
 The
scope of their
 Their current
employment (job
title, duties)
 Their educational
 Licenses
 Work experience
 Memberships in
 Publication and
 Fields in which they
are qualified as an
 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
 What opinions they
have formed
 The bases for their
Source: Crumbley, Heitger & Smith, Forensic and Investigative
Accounting, 2003, p. 8-13
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
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.
Preparing to Testify as an
Expert Witness
Maintain independence from the
 Evidence upon which experts may
 Use of confidential client
 Expert reports
 Working papers
 Evaluation of other experts
 Exhibits and other demonstrative
Source: Crumbley, Heitger & Smith, Forensic and
Investigative Accounting, 2003, p. 8-13
Differences Between Fact and Expert Witness
Purpose of
To provide the court with
relevant facts relating to the
To help the court or trier-of-fact
understand technical issues.
No specialized training is
necessary, unless the
witness undertakes a factual
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
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
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
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
Yes, as long as it is something that is
normally relied upon by experts in the
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.
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 recross exam. Own attorney has right
for last words with expert.
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.
Leading Questions
Didn’t the defendant appear to you
to be stealing money from the cash
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?
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.
Some Research Findings
65% of surveyed jurors were
influenced by expert testimony.
Merely referring to a witness as an
“expert” affords the witness
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.
Ten Commandments of
Demonstrative Evidence
Keep it simple
Use graphics with every important
Improve interest through variety.
Test your charts with those
unfamiliar with your case.
Use only properly-scaled and
labeled color graphs.
Use word charts rarely, if at all.
Remember the seriousness of the
Charts improve the entire process.
Keep up with technology.
Get help.
David Nolte, Fulcrum Inquiry, Los Angeles Lawyer, April
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
Both types of delivery impact the
weight given to evidence by jurors (or
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,
Moral: A picture is worth a thousand words.
Important Visual Rules
Storyboard your testimony (series of
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.
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
Friendly – friendly toward your
Dines’ Exhibits Hints
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
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.
Dines’Exhibits Hints
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
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.
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
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.
Dines’ Exhibits Hints
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.
Dines’ Exhibits Hints
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
Source: Jesse E. Dines, Expert Witness Manual, Irvine, CA: Pantex
International, Ch. 8.
Four Conditions
An expert witness can state an opinion or
conclusion if four conditions are
 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.
Three Approaches to Testifying
1. Express opinion based upon facts
personally observed, or facts
communicated to him by another
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
Source: J.R. Waltz, Evidence, New York:
Foundation Press, 1999, p. 15.
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
 Keep a diary of interview dates,
 Do not destroy interview notes.
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.
Types of Expert Reports
Fact-oriented report – gathers
and evaluates facts and uses
them to prepare a report. Check
and re-check 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.
Understanding Metadata
Electronic data not necessarily seen
on printed document; not normally
• Describe characteristics of data,
such as when and by whom it was
created, accessed or modified.
• Other side can access when users
inadvertently share confidential
information when sending or providing
files in electronic format.
• For example, metadata analysis
might reveal created years ago,
adapted from another case, last 10
authors, editing time, not the original
authors, and machine on which
document created.
• Software available to view hidden
Erica Garrison, “Metadata: What it is, Why it’s
significant, and How to deal with it,” Focus, February/ 351
March 2006, pp. 2-3.
Metadata in Microsoft Documents
Your name
• Your initials
• Your company or organization name
• The name of your computer
• The name of the network server or hard
disk on which the document was saved
• Other file properties and summary
• Non-visible portions of embedded OLE
(object linking and embedding) objects
• The names of previous document authors
• Document revisions
• Document versions, including previous
• Template information
• Hidden text or cells
• Personalized views
• Comments
Erica Garrison, “Metadata: What it is, Why it’s significant,
and How to deal with it,” Focus, February/ March 2006, 352
pp. 2-3.
Limiting Metadata
Disable “fast save.”
• Remove name and initials from
Microsoft Office.
• Be cautious when using “Track
changes” (allows collaborating and
• Copy and paste document into a new
blank file before saving.
Erica Garrison, “Metadata: What it is, Why it’s significant,
and How to deal with it,” Focus, February/ March 2006,
pp. 2-3.
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
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
Source: Jon Almeras, “Judges Offer Advice On Expert
Testimony,” Tax Notes (March 18, 2002), p. 1438.
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
From “What Was I Thinking” by Dierks Bentley
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)
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.
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.
Citators (cont.)
CCH Citator (2 volumes)
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
Gives citations to Federal Statutes and
lists cited cases for each court decision in
reverse chronological order
Missing most current cases (two or
three months).
Things to do
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.,
Things to do …
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
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.,
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.
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.
 Spoliation of evidence – losing or destroying
 Lying under oath.
 Defamation lawsuits against opponent's
 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)]
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
• 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
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.”
You Can Be Sued
Witness Immunity State:
State of Washington
States Ignoring Immunity:
New Jersey [court appointed]
West Virginia
Hold-Harmless Provisions: Engagement Letters
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
this engagement letter.
Hold-Harmless Provisions: Engagement
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 Sercices,” a practice aid issued by the AICPA Forensic and
Litigation Services Committee.
Breach of Contract
A client may win a breach of contract
dispute by showing that the expert failed
(a) perform a specific contracted service,
(b) perform the service in a timely
(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].
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) .
10 Guidelines to Meet Potential Legal Challenges
Apply the relevant professional standards
Know the relevant professional literature
Know the relevant professional
Use generally accepted analytical
Use multiple analytical methods
Summarize the conclusions of the
multiple analytical methods
Disclose all significant analytical
assumptions and variables
Subject the analysis to peer review
Test the analysis – and the conclusion –
for reasonableness
Know the relevant professional standards
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
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,
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.
Always Be Truthful
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
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.
An Expert’s Advantages
They are experts.
They are not intimidated by
the process.
They can hide behind their
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.
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.
Seven Answers at Deposition
I don’t know.
I don’t remember.
I don’t understand the
I need a break.
Source: D.M. Malone and P.J. Zwier, Effective
Expert Testimony, Notre Dame, IN: NITA,
2000, p. 81.
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
They worry about facts they do
not know.
You know how to use FRE
Source: D.M. Malone and P.J. Zwier, Effective
Expert Testimony, Notre Dame, IN: NITA,
2000, p. 73.
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
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.
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
• 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 Prespective,” The Value
Examiner, November/December, 2004, p.48
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
•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
Examiner, November/December, 2004, p.48
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
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
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).
Cross Examination Tactics
 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.
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
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.
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
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.
Judd Robbins
Computer Forensic Expert
"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
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.
The Three Cs
The jurors expect an expert to
•Establish his/her competency.
•Convince the jury of his/her
•Communicate effectively his/her
knowledge and opinions.
--------------------------“He made his testimony
relate to something the jury could
understand from their own
experience gained from buying
lumber at a lumber yard.”
Source; Judge Joseph B. Morris, Today’s CPA, May/June
1991, pp.48-49.
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.
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,
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,
Three Communication Techniques
Central – focus on what you say.
Peripheral – focus on how you say
• Amount of evidence presented.
• Number of points you make.
• Length of your testimony.
• Your qualifications.
• Trustworthiness.
• Likeability.
Source: D.S. Scott and R. Laguzza, “Communication With The
Jury,” Litigation Services Handbook, John Wiley, 2001, p. 15-2.
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.
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
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..
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.
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
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
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.
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
10. Help your attorney draft interrogatories and
interpret those of the opposition.
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
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
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
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
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
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
Dines’ Potpourri of Advice
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
25. You should also take several copies of your CV,
and be prepared to provide them to the jurors if
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.)
Dines’ Potpourri of Advice
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
Investigative Techniques and Evidence
Documentary evidence – written
evidence on paper or computer medium.
Testimonial evidence – testimony of
Observational evidence – evidence,
actions, or observations seen by an
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, Fraud Detection, Vol. I,
Practitioners Publishing Co., 2002, pp. 3-1 to 3-4
Best evidence rule:
Demonstrative evidence (the chalks)
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.
objects – the gun.
Do they have the tendency to “assist
the trier of the facts”?
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.
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.
Criminal Proceedings
No plaintiff, but a prosecutor.
A criminal defendant.
Due process is stronger.
Burden of proof beyond a reasonable
4th Amendment, search and seizures.
5th Amendment, right against selfincrimination.
Obtaining information from
defendant more difficult.
Case dismissed if prosecutorial
Double jeopardy applies.
Fewer depositions.
Original documentation and chain of
custody important.
Normally jury must be unanimous.
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.
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 In411
a Criminal Investigations.” Journal of Forensic Accounting.
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
If accused attends, no right to an
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).
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.
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
CPA serving as an expert witness for a
client is not an advocate.
Trier of fact.
AICPA Consulting Services Practice Aid
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
CPA work product not protected.
AICPA Consulting Aids
AICPA Consulting Services Report Practice Aid
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
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).
AICPA Consulting Aids
Statement on Standards for Consulting
Services No.1 – Consulting Services
Definitions and Standards. These
standards apply.
Professional competence.
Exercise Due professional care.
Adequate Planning and supervision.
Obtain Sufficient relevant data.
Client interest [accomplish client objectives while
maintaining integrity and objectivity].
Understanding with client [written or oral].
Communication with the client.
A. Conflicts of interest.
B. Significant reservations.
C. Significant engagement findings or events.
Understanding With The Attorney
Identification of the attorney’s client
The title of the litigation, including the
litigants’ names, the court, and docket number
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
An identification of the expert witness or the
willingness of the person who will be the
expert witness if necessary
Reference to the absence or existence of
conflicts of interest
The absence or existence of the attorney’s work
product privilege
Restrictions of the use or exposure of the CPA’s
The CPA’s right to withdraw from and
terminate the engagement in certain
Source: AICPA Proposed Statement on Responsibilities for
Litigation Services No. 1, December 1, 2001.
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:
Distributed to
Raised From
Employees /
Principals /
Oil and Gas
Oil Field
Attorney’s Fees
The End Is Here
Exhibit 70A-1
Sample Engagement Letter 1—Litigation Services
CPA & Company
Anytown, USA
September 4, 200X
John A. Smith, Esq.
Smith, Smith & Jones
100 Courthouse Way
Anytown, USA
Dear Mr. Smith:
You have asked me to read and analyze certain documents relating to a lawsuit brought against
your client, XYZ Company. You have also asked that I be available to testify at the time of trial
should you decide to use me as an expert witness. Any written reports or other documents that I
prepare are to be used only for the purpose of this litigation and may not be published or used for
any other purpose without my written consent.
Irrespective of the outcome of this matter, I understand that you will compensate me at my
standard hourly rate (currently $___) for all time spent, including travel, whether or not the
engagement is completed or its results are used. You will also compensate me for any out-ofpocket costs that I may incur. I will submit bills monthly, which are due and payable on receipt
and in all events prior to the commencement of my testimony.
[Optional sentence: Before commencing work on this engagement, I would like a retainer of $___
which will be applied to final billing on this engagement or refunded to the extent that it exceeds
such billing.]
Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be
settled by binding arbitration, in [insert desired venue], in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered
by the arbitrator may be entered in any court having jurisdiction thereof.
I look forward to assisting you in this matter and hope that my services will be beneficial. If you
approve of the engagement terms described above, I would appreciate your signing the enclosed
copy of this letter and returning it to me.
Sincerely yours,
John Jones, CPA
Name of attorney's firm
Exhibit 70A-2
Sample Engagement Letter 2—Litigation Services
[Optional additions are bracketed]
CPA & Company
Anytown, USA
September 4, 200X
John A. Smith, Esq.
Smith, Smith & Jones
100 Courthouse Way
Anytown, USA
Dear Mr. Smith:
The purpose of this letter is to summarize our understanding of the assistance that CPA &
Company will provide to you and your client, XYZ, Inc. in the matter of XYZ, Inc. v. ABC
Corporation et al. before the Superior Court of the State of California, County of Los Angeles,
which matter is Case. No. XXXXXX.
You have requested that we assist you with analysis and consultation with regard to the XYZ
litigation matter as you may direct. I would also be prepared to provide testimony at deposition
and trial should you decide that to be appropriate.
I will be responsible for the performance of our engagement with you and your client. My hourly
billing rate is $XXX. From time to time, if necessary, other professionals may also assist when
appropriate and needed. The hourly rates for our professionals are in the following ranges: Senior
managers and managers — $XXX to $XXX; senior accountants and senior consultants — $XXX
to $XXX; and consultants — $XXX to $XXX. [Our hourly rates are subject to change from time
to time. We will advise you immediately if the rates are being adjusted by our firm.]
Fees for our services are based upon the actual time expended on the engagement at the standard
hourly rates for the individuals assigned. In addition to our professional fees, we are reimbursed at
cost for any travel and out-of-pocket expenses. Bills are rendered and are payable monthly as
work progresses. [We reserve the right to defer rendering further services until payment is
received on past due invoices.]
[Our normal practice is to obtain a retainer, and we herewith request such a retainer in the amount
of $XX,XXX. This retainer is not intended to represent an estimate of the total cost of the work to
be performed. The retainer will be held against the final invoice for the engagement; any unused
retainer will be refunded.]
Exhibit 70A-2
Sample Engagement Letter 2—Litigation Services
We are certain that you recognize that it is difficult to estimate the amount of time that this
engagement may require. The time involved depends upon the extent and nature of available
information, as well as the developments that may occur as work progresses. It is our intention to
work closely with you to structure our work so that the appropriate personnel from our staff are
assigned to the various tasks in order to keep fees at a minimum.
[Furthermore, you, your client and I, all agree that any dispute over fees charged by our firm in
this engagement will be submitted for resolution by arbitration in accordance with the rules of the
American Arbitration Association. Such arbitration is limited only to the issue of fees charged and
shall be binding and final. In agreeing to arbitration, we each acknowledge that in the event of a
dispute over fees, each of us is giving up the right to have the dispute decided in a court of law
before a judge or jury and instead are accepting the use of arbitration for resolution.]
[You or your law firm or the court itself will advise us (with sufficient notice) of the work to be
performed by us and the requirement for appearance in court. If there is a substitution or change
in the association of attorneys involved in this litigation, we reserve the right to withdraw from this
If the arrangements described in this letter are acceptable to you and the services outlined are in
accordance with your requirements, please sign and return a copy of this letter. We look forward
to working with you in this matter. If I can provide you with any additional information, please do
not hesitate to call me at (555) 123-4567.
The proposed terms of this letter are subject to change if not accepted within 60 days of the date of
this letter.
Very truly yours,
(Name and Title)
CPA & Company
The services described in this letter are in accordance with our requirements and are acceptable to
me and my client.
John A. Smith, Esq.
Smith, Smith & Jones