Are you an expert?

CPAs often are called on to provide expert testimony as litigation support consultants during commercial disputes. As part of that testimony. CPAs may under-take everything from damage calculations and matrimonial lifestyle calculations to business valuations and forensic accounting services.

These opportunities to serve as expert witnesses, however, can open the door to professional liability exposure. Expert witness engagements are unpredictable and opposing attorneys challenge CPA witnesses in depositions and cross-examinations, testing their expertise, methodologies and testimony.

If errors, inconsistencies or contradictions are discovered between the CPA's current and past positions on the issues, the CPA's credibility may be damaged enough for the opposing attorney to call for a summary judgment.

Here are some questions to ask before jumping into the witness chair.

ARE YOU QUALIFIED?

A prerequisite to serving as an expert witness is being qualified and credentialed as a specialist in the field being examined. Dermatologists generally do not practice internal medicine, and estate planning attorneys generally do not take personal injury cases. The same principle applies to CPAs.

Expert witnesses used to enjoy the common law doctrine of witness immunity, but recent rulings have significantly eroded that immunity.

In 1994, a California jury awarded $42 million in damages against the accounting firm of Arthur Young for malpractice during an expert witness engagement (Mattco Forge v. Arthur Young). The case was reversed and remanded back to the trial court in 1997, but the precedent of a malpractice award stemming from an expert witness engagement was set.

The standards to which expert witnesses are held also have risen over the years. For a while, most courts adhered to "the Frye rule," which allowed expert or specialized evidence in court if it was "generally accepted" within the scientific community. The rule was supplemented in 1975 when Rule 702 introduced the admissibility of testimony relying on facts, data, principles and methods, as opposed to "general acceptance."

Daubert v. Merrell Dow Pharmaceuticals superceded the Frye rule in 1993, when the court found that evidence must be supported by the scientific method, thereby placing more importance on methodology than on general acceptance. In 1999, Kumho Tire Co. v. Carmichael extended the Daubert rule to all technical and specialized witnesses, such as CPAs, whether scientific or not.

As a result of those developments, CPA expert testimony can be impeached by opposing attorneys on the basis of the methodology used.

WHAT ARE JUROR EXPECTATIONS?

Jurors and other members of the public have high expectations for CPAs, and expectations for CPA expert witnesses are even higher. Although most jurors do not completely understand accounting concepts, they do understand the crucial role that CPAs play in shaping and influencing results in cases involving large dollar amounts.

Consequently, CPAs almost always are expected to get it right, while keeping the client's best interests in mind. That means CPAs must be knowledgeable, credible, helpful, trustworthy and free of conflicts of interest. Jury studies have shown that jurors generally expect CPAs to be experts in documentation and record retention. Falling short of that expectation may be viewed by jurors and the public as negligent at best, or intentionally misleading at worst.

Analyses and reports generated for expert testimony require detailed documentation. The rationale for the use of certain methodologies, any assumptions required for analyses and all advice and recommendations should be put into writing.

CONFLICTS OF INTEREST?

Before accepting an expert witness engagement, consider whether any relationships can lead to conflicts of interest with any of the parties involved--including the law firms. This also applies to potential witnesses and third-party defendants identified during the course of the case. The bigger the case, the longer the list of potential conflicts.

If a CPA's clients are in dispute with each other, conflict of interest charges might be brought into the dispute. Divorcing spouses and business partners in litigation, for example, will sometimes assert that their CPA gave the other party a benefit that worked to their detriment.

INCONSISTENCIES OR CONTRADICTIONS?

Opposing attorneys invariably will attempt to impeach the credibility or competence of an expert witness. One of the most common techniques is to discover that the position being supported by the expert witness in a lawsuit is inconsistent with a previous position the witness supported.

Unless there is a good reason for the inconsistency, the discovery can cast doubt on the testimony.

To avoid such a result, prospective witnesses should be sure that previous testimony and articles do not contain any potential inconsistencies with the issues.

"In federal courts, CPAs have to provide a list of cases for which they have served as an expert witness for the past four years, pursuant to Rule 26 of the Federal Rules of Civil Procedure, so opposing attorneys can always pull prior testimony from those cases," says Ann Wilson, CPA, former chair of the CalCPA Litigation Sections.

"A list of published articles also has to be provided in federal court for the past ten years, pursuant to Rule 26, which can give attorneys even more material to explore for inconsistencies and contradictions," Wilson says.

DO YOU BELIEVE IN THE CASE?

If the CPA lacks conviction about the merits of the case or the client's position, the CPA may unintentionally produce weak or unconvincing testimony, which may do more harm than good. A considerable amount of time may be needed to review documents, interview personnel and research professional literature before arriving at a conclusion about the case, but there should be no doubt in the CPA's mind when agreeing to provide testimony.

At the same time, CPAs need to maintain professional independence and objectivity, even though they are providing testimony in support of one side in the litigation. CPAs will be more effective as a witness by acting as an objective authority on the accounting issues and by avoiding the appearance of being led by the attorneys.

WHO IS THE CLIENT?

Client identification is important for clarifying fee and collection policies, stop-work clauses and record retention issues. Privileged communications between attorneys and clients also can complicate engagements for CPAs. Engagement letters for litigation support services often have dual signature lines for the attorney and client as a means of ensuring that all parties understand the engagement's terms and conditions.

If an attorney is retaining the CPA firm, the letter should be addressed to the attorney, but signed by both the client and the attorney, especially if the client is responsible for paying the fees. In most litigation support engagements, it is generally recommended that the CPA contract with the attorney, who then acts as the lead party in the engagement.

An expert witness should receive an advance fee deposit. The witness cannot withdraw right before trial because of nonpayment of fees and may be held in contempt of court for a last-minute disengagement. Clarify that the advance fee deposit amount is not an estimate of the total fee.

HAVE AN ENGAGEMENT LETTER?

The engagement letter is effectively a contract between the CPA, attorney and client. As such, a risk adviser or attorney should review it before the CPA accepts an expert witness engagement. The letter allocates, in limiting language, the responsibilities of each party in the engagement, including the information the CPA will need from the client and attorney. Fee and collection policies, stop-work clauses and record retention issues also should be covered.

The letter describes the limitations of the proposed services and tasks, which should be clearly specified. Examples include preparing a list of community property; valuating (named) items; analyzing tax ramifications of proposed property division or spousal support; or analyzing spendable income for the purpose of determining spousal and child support.

The engagement letter also should stipulate that the attorney and client agree that any written reports or documents are to be used only for the purpose of the litigation and may not be copied, distributed or used for any other purposes without the CPA's prior written consent.

Engagement letters are important as a first line of defense in the event a client makes a claim against the CPA. A comprehensive resource for engagement letter language is the CPA's Guide to Effective Engagement Letters, at www.camico.com (click on "Services," scroll down, then click on "Practice Management Tools," and scroll to the bottom of the page).

HOW DO YOU TESTIFY?

Cases are likely to become more complex and technical in the future, and jurors will continue to have trouble understanding or appreciating the accounting issues involved. CPAs will be called on more frequently to bridge the gap between the jurors' knowledge and the knowledge needed to properly decide on the issues.

CPA's effectiveness in bridging that gap will depend partly on their ability to present themselves well, to communicate technical concepts in plain English and to develop clear visual aids for use in testimony.

A "building block" approach to educating jurors often is effective because it starts with simple concepts and adds slightly more complex concepts, one at a time, until the entire situation has been presented.

The diligent and conscientious attorney will work closely with a CPA expert witness, investing considerable amounts of time and energy into the CPA's testimony and guiding the CPA through the procedures and rules. Attorneys who are unwilling to do so are exposing the CPA to increased liability risks.

At the same time, the CPA must maintain a certain degree of independence to be most effective as a witness. If independence is not possible, or there are actual or perceived conflicts of interest, the CPA should not accept the engagement.

The expert witness' success depends heavily on competence and expertise, not only in the field being examined--but in serving as a witness, presenting testimony and managing the risks inherent in the expert witness engagement.

RELATED ARTICLE: Major Rulings

Affecting Expert Witnesses

1923 Frye v. United States 

Effect: "General acceptance" in scientific community is required before expert testimony is admissible.

1975 Federal Rules of Evidence (Rule 702)

Effect: Qualified witnesses with "scientific, technical or specialized knowledge" may testify if their knowledge will assist the trier of fact.

1993 Daubert v. Merrell Dow Pharmaceuticals

Effect: The scientific method is elevated over "general acceptance" by the U.S. Supreme Court as a standard of evidentiary reliability. Judges become the gatekeepers for reliability.

1999 Kumho Tire Co. v. Carmichael

Effect: Nonscientific, technical and other specialized experts, such as CPAs, also are subject to judges' determination of evidentiary reliability.

BY JOHN F. RASPANTE, CPA

John F. Raspante, CPA, is regional representative, loss prevention services, for CAMICO Mutual Insurance Co. in the Northeast. You can reach him at [e-mail].