The CPA's Roll In Litigation Support

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Reprinted From: Delaware Lawyer
Written By: William H. Master, CPA & Frank R. Sidlow, CPA
Today more accounting firms than ever are offering litigation support services to attorneys. The term forensic accountant is in vogue. Attorneys recognizing the complexities of business, tax and accounting issues are searching for the right consultants or experts to assist them in preparing and presenting their cases. A CPA who understands complex business issues and can convey them to laymen's terms coupled with the ability to be creative can be an invaluable asset.

The term litigation support services includes any professional assistance that accountants provide to attorneys during the litigation process. Many attorneys think of using an accountant as an expert witness or consultant only when the case involves taxes or another accountant. Because of their education and experience, accountants are able to address a multitude of complex business and economic issues. Accountants have the training and ability to understand and interpret financial data, to analyze the financial aspects of contracts, and through auditing skills, to do investigatory work.

In cases that involve reviewing and summarizing data or reconstructing records, the accountant can provide the manpower necessary to efficiently gather evidence. Accountants who are proficient with calculators and computers can make the attorney's job easier. With computers, using spreadsheet or database programs, the accountant can capture data and reproduce it in various formats. Using computers the accountant can create models based on hypotheses and calculate the effects of changes in assumptions quickly and relatively inexpensively compared to performing these tasks manually.

Historically, accountants have worked with business clients in establishing and reviewing values to be used when buying or selling businesses and in connection with buy-sell agreements. In addition, CPA's have been instrumental in developing projections and forecasts of financial information based on hypothetical situations. Transferring this knowledge and ability to litigation that requires valuation services or presentation of data in hypothetical situations is both logical and advisable.

CPAs provide litigation support services primarily in the area of civil litigation involving disputes between business entities, governments or individuals. There are also certain types of criminal cases that may require the services of a CPA such as price-fixing, bid-rigging and tax fraud. The CPA's training and experience, as an auditor and business consultant provides assistance to the attorney in many types of business related litigation. Accountants can also help in developing an automated or manual document retrieval system for cases that require organizing and summarizing a large volume of documents.

When the CPA is engaged as a consultant or as an expert witness it must be determined whether he has the experience to participate in the case. The attorney and the accountant must make certain that there are no conflicts of interest. If the attorney's client is also a client of the accountant the appearance of objectivity must be considered. While there are no ethical restrictions that would prevent the accountant from providing litigation services for an existing client, questions regarding the size of fees generated from accounting and auditing services and a perception that the CPA may be biased must be considered.

The CPA must determine that the items he will be consulting on, or testifying about, are consistent with what he currently does. The attorney must consider the effect, if any, of positions that the CPA has taken with respect to his current clients and previous testimony the CPA has given in similar cases on the case at hand.

Litigation support services are more demanding than most engagements undertaken by CPAs and are prone to postponement. Because of this the attorney must be certain that the CPA can devote the time required to his case.

The CPA will ascertain whether the client is the attorney or the attorney's client. The CPA must then determine whether there are funds to pay for his services regardless of the outcome of the litigation. If it appears that there will not be sufficient funds, the engagement may be viewed as one involving a contingent fee. Attorneys often work on a contingency basis which is entirely proper.

CPAs, however, are prohibited from working for a contingent fee under rule 402 of the Professional Rules of Conduct. Most canons of the bar prohibit an expert witness from being party to a contingent fee arrangement.

Litigation services require significant involvement by the individual who will be the expert witness. For this reason any assistants that might be used in the preparation of exhibits, charts and analyses must be directly supervised and controlled by the individual who will ultimately testify. If the CPA cannot devote substantial time to the engagement it should be declined.

The decision to utilize the services of an accountant should be made early in the case. The accountant can be of significant assistance in the preliminary stages by evaluating the facts and reviewing the financial and business issues pertaining to the case. Together the accountant and attorney can plan the best use of the accountant's services in the case.

The CPA's business knowledge or special knowledge of a specific industry can be beneficial in drafting interrogatories. This knowledge is also helpful in drafting requests for documents and in assisting the attorney's client in preparing to respond to requests for documents. While only the attorney can ask questions at a deposition, the accountant can be a valuable assistant during the examination of business people. This is particularly true when questions involve financial or accounting areas. The CPA is usually present during the deposition of the opposition's expert. Even if the attorney decides not to have the CPA present at the deposition the CPA will often assist in drafting questions to be asked.

There are benefits to engaging a CPA as a consultant in a case even though a decision has been made not to use a CPA as an expert witness. As a consultant the accountant can review the case and advise the attorney about facts and issues. He can develop various scenarios and explore many different theories attempting to prove a point. He can also develop the same assumptions that he would develop if he were actually testifying in the case and present his opinion to the attorney. In this capacity the work performed by the accountant is usually privileged and the results would not be disclosed to the opposing side. The attorney would use the CPA consultant in the same way he uses paralegals and consulting attorneys. The CPA would assist the attorney in structuring the case.

Some of the areas in which accountants provide advice and assistance are damage cases involving lost profits, revenue or cost overruns; areas of accounting such as bankruptcy, family law, contract disputes and claims, civil and criminal fraud; valuations of businesses and professional practices, pensions and intangibles; and general areas of consulting such as statistical analyses, projections or forecasts and computer consulting.

Accountants can assist in establishing the cause of damages in business transactions. Once the cause of damages has been established, the CPA can quantify the amount of the damages. Often the attorney is engaging the accountant to prepare or review a damage study for the plaintiff or to rebut a damage study prepared for the defendant.

A CPA may also be engaged by the attorney for the defendant to prepare an independent calculation of damages to be considered at trial. The CPA can prepare proforma financial statements representing the expected financial results. By using a spreadsheet model, he can compare actual results with the proforma results that were expected absent the alleged acts set forth in the case. Use of a damage model quantifies the damages.

Spreadsheet software is especially useful since it enables assumptions to be changed and provides recalculations quickly. The CPA can use various assumptions to test their validity and to determine the effect of modifications of them on the amount of the claim. Software is also available that allows the accountant to consider econometric and statistical approaches to calculating damages.

In the areas of bankruptcy, family law, and fraud, the more traditional accounting and auditing services come into play. The CPA can assist in determining whether the company can be turned around and how much debt is needed. Decisions regarding the possible restructuring of existing debt and the implementation of cost saving strategies should not be made without consulting a CPA. Accountants are often engaged by the trustee in bankruptcy to prepare financial statements, verify creditor claims and to develop other financial analyses.

The accountant can also prepare forecasts of financial statements for use in preparing the plan of reorganization. Identification of assets, sources of income and assistance in drafting a property settlement are the primary focus for accountants in divorce actions. The availability of funds and the income tax effects of alimony and child support payments are another area where the accountant can be of valuable assistance to the attorney.

Fraud cases draw upon the CPA's expertise as an auditor. These cases are usually time consuming and detail oriented requiring a concentration of manhours which the CPA can supply. Unlike traditional audits where CPAs rely on tests of transactions and documents, a fraud investigation requires each transaction or document to be examined. If documents have been destroyed, the accountant must reconstruct them by confirmation or interviews with third parties.

Determining the value of a closely held business or professional practice in divorces or in dissolutions of corporations or partnerships is an area where the CPA's expertise and practical experience can be of great benefit to the attorney. Many accountants perform valuations of businesses for estate and gift tax purposes and also for clients where buy-sell agreements call for annual valuations.

Experience in assisting clients in purchasing or selling businesses also provides the accountant with knowledge that can be used in the valuation process. An attorney may engage an accountant to prepare a valuation report or to view and comment on a valuation report prepared by another expert. Since financial statements reflect assets at their historic values, appraisals of real or personal property at current worth may have to be obtained. The accountant will also focus on the income and expenses of the company and may make adjustments for personal expenses or perks that may not be considered ordinary and necessary. There could also be adjustments to owners' salaries or to rents paid to owners if either are considered excessive or not high enough compared to market rates and similar expenses of comparable companies. The accountant is concerned with arriving at a true picture of earnings to be used in the valuation process.

Accountants can also provide insight into statistical data that may be presented in a case and can test the validity of the statistical assumptions. In the case of forecasts and projections, the accountant can review the assumptions and rationale and test the computations that have been presented. If the client's records are maintained on a computer, the CPA may be able to design time saving methods of extracting data essential to the case.

In selecting an accountant to serve as an expert witness the attorney must evaluate the accountant's knowledge of the business or industry and his prior experience. The attorney must also weigh the potential expense of using an expert and the expected results. Because the services needed can usually only be performed by the expert, fees add up quickly. Inquire about the accountant's familiarity with computers and his ability to prepare or review computer prepared models.

The academic community and state accounting and legal associations are good sources of referrals for individuals willing to work in the area of litigation support. Review the qualifications of the expert to determine his educational background and experience and the number of times the expert has testified in similar cases. It may be a plus if the expert has authored articles or given speeches related to the area in which he will testify. Avoid professional expert witnesses and those who testify only for plaintiffs or defendants.

Local experts may be perceived as more credible than experts from out of town. Consider the impression the expert will make on a judge or jury. Determine that the expert will be able to present his testimony in a clear and concise manner that laymen will be able to understand. Talk to other attorneys who have used the expert. An expert who has testified in other cases for opposing counsel has instant credibility.

Once you have made the decision to engage an accountant as an expert witness and have made a preliminary selection, you need to determine that his opinions and conclusions will support your position in the case that you are preparing. Have the expert evaluate the case and discuss his potential testimony. It is important to review any testimony that the expert may have given in other similar cases to determine that prior testimony was not in any way contrary to the testimony that will be presented in your case.

An expert should be able to tell you when his training or practical experience is not sufficient to assist you in the case or if he believes that he will reach a conclusion that will be different than the position you are trying to support.

When the accountant that you have engaged as your expert has completed his analysis and review of the case and has formulated his opinion, you must review and evaluate it. As you prepare to go to trial, you and the expert need to prepare and review the questions that you will pose so the expert's testimony is properly introduced.

Both the expert and the attorney need to discuss the possible questions that will be asked by opposing counsel during cross examination. It is appropriate for both the expert and the attorney to think as opposing expert and opposing counsel to determine how the opposition will attempt to counter your expert's testimony.

Cross examining your expert can be a valuable exercise. It enables the expert to respond to possible questions that will be asked and gives both you and the expert an opportunity to determine whether or not the answers are brief, to the point and in language that will be understood by a jury.

As with all witnesses, the CPA who has the requisite education and experience and can convey his opinions in a concise manner, treat everyone with respect, listen attentively and answer responsively will make a good impression. The CPA should be used as a sounding board while the attorney is developing and exploring ideas and strategies. Proper use of the accountant in litigation involving business issues can make the attorney's job easier and should have a positive effect on the outcome of your case.