Be ready for your deposition.

Any CPA can be sued. Here's how to start on the right foot.

It is a bitter, but common, experience. You learn that a former client, perhaps one with which you had a long, harmonious relationship, has filed a lawsuit against you. The suit papers charge that you, as the accountant, were negligent in performing an audit or other engagement, causing the client to suffer business losses. The former client demands a staggering amount of money in compensation.

For accountants being sued, one of the most important events in the months after receiving the papers is the deposition: testimony under oath, with the former client's lawyer asking the questions. Accountants who don't understand the basic rules of testifying can do themselves and their firms a lot of harm. This article explains the process, tells CPAs how to prepare and gives examples of typical questions.

Malpractice claims have become the bane of the accounting profession. In 1990, executives with Laventhol & Horvath, then the nation's seventh largest CPA firm, fired its 3,400 employees and dissolved the firm, citing pending lawsuits as a major cause. A year later, Pannell, Kerr, Forster, then the nation's ninth largest accounting firm, ceased operations, also citing malpractice claims as a major reason for its financial troubles. in 1993, the Big Six firms spent about $800 million to pay lawyers' bills and settle malpractice claims. While claims against the largest firms get the most publicity, this trend toward litigation affects the entire profession. In 1993, accountants nationwide faced 500 liability suits for a total of $30 billion in damages, or about 13% of all income from audit fees. Nor are firms and their partners the only members of the profession whose lives may be touched by litigation.

EVERYONE IS VULNERABLE

Even if you are not named as a party in a suit, even if you long ago left the field of public accounting to enter the world of business, you may be called on to testify about work you did while a first-year staffer at your old firm.

Eventually, you may be sued. Look at a typical scenario. In the suit papers, which purport to describe the facts of your relationship with the client, John Jones, you will read distortions and omissions that create a false impression of the entire sequence of events. You wonder: is the client's memory really that poor? Or is he deliberately shading the truth? You bridle at his chicanery. You may become angry. You engage your own attorney to fight the suit and bring the truth to light.

Months pass. The lawyers for each side file pleadings, motions, amended pleadings and amended motions for leave to file additional pleadings. Each generation of pleadings seems more obscure and further removed from reality than the last. Your files relating to the former client are photocopied and given to the ex-client's attorney. Your own attorney receives copies of the client's files and other records.

Then depositions begin. One by one the client, his employees and other allies are put under oath and questioned by the attorneys. You read the transcripts of their depositions and are astounded at the witnesses' apparently willful distortions of the facts as you remember them. When will someone tell the truth and bring this nightmare to an end?

Finally, your attorney, Jane Smith, tells you it is your turn to be deposed. A week or two before the scheduled date, your attorney asks to meet with you to prepare for your deposition. She suggests you set aside the better part of a day. Will it really take so long? You'll just review the file, go into the deposition and tell the truth. How difficult can that be? Think again.

This lawsuit didn't come about because your former client had a memory lapse. Nor did it arise because he and his attorney cooked up a pack of lies in order to extort money from you or your liability insurance carrier. The client has suffered losses. He has persuaded himself (however mistakenly) that they resulted from your failure to live up to your professional responsibilities. Every witness in every transcript has told what he or she now believes to be the truth. Just telling your view of the truth is not going to change anyone's mind or win the lawsuit for you. Rather, an unskilled and heedless effort to "set the record straight" is more likely to result in legal disaster.

The opposing attorney, James White, will be asking you the questions. He already has the record he wants in his own client's version of the facts. What he hopes to get from you are basically two things:

1. Your story--what you will say at the trial when your own latter is asking the questions. He needs to know this in order to prepare to counter your view of the truth.

2. What lawyers call "admissions"--statements from your own mouth that the opposing lawyer can use to support his client's view of the matter. Your job, in general, is to give him as little of what he wants as you honestly can.

You may find yourself living with what you say at your deposition for a long time to come, Every word will be taken down by a court reporter. Later on, the lawyer for the other side may use portions of the transcript to support a motion for summary judgment, which will, if successful, result in a judgment against you on some or all issues without ever going to trial.

Alternatively, at trial, he may ask you the same questions before the jury that he asked in your deposition, and he will read the transcript back to you if you give materially different answers.

To do well in your deposition, you will need to have a decent (though not necessarily exhaustive) command of the facts. Much more important is a thorough understanding of the purpose of the deposition and your role in the process, What follows might be called "the rules of the game"--if this were a game. It's more akin to an ordeal for which you must prepare seriously. We begin with a review of basic principles common to any deposition. Then we discuss issues peculiar to depositions in an accountant's malpractice case and in a sidebar give some examples of types of questions often asked and some advice on the right and wrong ways to answer them.

THE SEVEN COMMANDMENTS 

1. Tell the truth. If you are uncomfortable about any area that might be raised, discuss it with your attorney. When asked a direct question, usually admitting an unfavorable fact is better than getting caught in a lie or a hedge.

2. Answer only the question that's asked (and don't volunteer anything). Most witness preparation can be summed up in those few words--most of the common mistakes are a result of forgetting those words. They are deceptively simple but very hard to remember during the heat of a deposition. It is common for the person being deposed to become helpful, defensive or start lecturing. These are all very dangerous activities. Take your time, listen to the question, think about what the lawyer is really asking you and then answer the question.

3. Understand your job in the deposition. The good news: In most cases, the weight of the world does not rest completely on your shoulders. The bad news: You probably will feel frustrated during the deposition that you can't do more. You play one part in the big picture. Discuss your role with your attorney. Too often an accountant wants to convince the other side its case has no merit. That is not going to happen. Frequently, the accountant, who practices problem solving for a living, gets caught up in problem solving for this case. That will only backfire during deposition. Your job in the deposition is not to resolve the matter but, rather, just to tell what you remember about what you observed or did.

4. Make them ask you the right question. The client's attorney questioning you may or may not know a lot about accounting. He or she may "play dumb" so you will explain things. Don't do it. Make the other attorney do his or her own work--do the analysis, understand the variables and phrase the question in correct terms so that it actually calls for the facts he or she wants. Most accountants are detail-oriented. They understand complex issues. They are tempted to answer, "It depends" and then tell the questioner what factors or considerations the answer depends on. Don't do it! Refrain from educating the other side. See point 2.

5. "I don't know" or "I don't remember" can be the right answer. Educated professionals are accustomed to taking tests. They think they are always supposed to know- the right answers in their work. Often "I don't know" is the wrong answer on the job. But in a deposition it is often the only really accurate answer. The questioner may act as if you should know more. Don't try to rise to the occasion and show how smart you are. In a deposition, never guess, speculate, hypothesize or speak for others.

6. Know how to use your workpapers. You may be questioned about a job that took place years ago. You may have little if any direct memory. All you have are your workpapers. The important thing in your deposition is to make clear the distinction between what you remember and what the workpapers tell you. You know that they are, or at least were intended to be, a record of the work you did, the issues you examined, the conclusions you reached. As you read through them, you will be reminded of many things you had forgotten about the job. But just as often, you will not remember doing the work recorded there, or the record will be ambiguous or lacking detail as to procedures that now seem critical. You think you understand what was done by putting the information in the workpapers together with your recollection of the standard procedures you followed on such engagements and your general knowledge of accounting. But this isn't the same as remembering.

7. Be cautious in answering general or hypothetical questions. Generally phrased questions about your "standard procedure" are especially dangerous. So are questions about what you would have customarily done in a set of hypothetical circumstances or your opinion on what ought to have been done under such circumstances. The lawyer may be using the question to elicit an answer from which the jury will later be asked to draw far-reaching and false implications that you never understood or intended. Frequently, the best, and most truthful, answer is that it depends on the circumstances or you would need to do further research before responding. Most professionals do not give definitive, "snap" answers to clients; they usually take the time to analyze, to consult with colleagues and to double-check their initial impressions. You should be just as conscientious when answering questions in a deposition. If you know the answer, give it, but if you haven't previously considered the question, be willing to say so. At least qualify your response by making it clear that you may not be immediately conscious of all the relevant considerations. Above all, be wary of categorical terminology in questions or answers. Never say "never" or "always" unless you are absolutely sure that the term is accurate.

When giving lists of relevant factors, alternatives, appropriate procedures or the like, leave yourself an opening. "There may be more, but that's all I can think of now" is often the best way to end such a recitation.

A deposition, and the ensuing trial, is not going to be a pleasant experience. But if you prepare yourself, keep a cool head and listen to your lawyer, you will make the best case for yourself and your firm.

CPA Liability

Accountants nationwide faced 500 liability suits for a total of $30 billion in damages.

(1993 statistics)

EXECUTIVE SUMMARY

* ANY ACCOUNTANT CAN BE sued for malpractice, even after he or she has left public accounting. A lawsuit can come as a complete surprise.

* AN IMPORTANT EARLY STEP in a lawsuit is a deposition: An accountant will have to make a statement under oath that will be recorded.

* THE RESULTS OF THE DEPOSITION may be brought up during a trial. One wrong answer can come back to haunt the accountant and can cause serious harm to the firm.

* IMPORTANT RULES TO REMEMBER during a deposition include telling the truth (but not volunteering information), remembering that your role is not solving a problem but answering questions, making sure you are asked the right questions, admitting that sometimes you simply don't know or can't remember, using your workpapers and being cautious in fielding hypothetical questions.

* MANY QUESTIONS HAVE OBVIOUS answers-but sometimes there are better answers than the obvious ones. The smart accountant knows to answer only the question asked.

PATRICIA J. McEVOY, PhD, is a Chicago-based trial consultant and a board member of the American Society of Trial Consultants. MELVILLE W. WASHBURN, PhD, JD, is a partner in the Chicago office of the law firm Sidley & Austin. He specializes in accounting issues.

Types of Questions Commonly Asked and How Not to Answer Them

The following are taken from actual depositions.

Question: (Showing you a client document) Have you seen this schedule before?

Wrong answer: I don't remember seeing this exact document before. I recognize this format, of course. It's something that, when preparing a tax return, we often asked the client to provide.

Better answer: I don't remember seeing this document before.

Explanation: Don't volunteer. Chances are that such a schedule was not provided for the engagement in question. The questioner will now ask why you looked at such schedules in other engagements. Isn't it useful to see such schedules? Don't they provide important information? And so on. Eventually, looking at this schedule will be presented to the jury as something that, by your own admission, you should have done but apparently didn't do when preparing the returns at issue in this case.

Question: (Asked of the partner in charge of the audit) How much time did you spend working on this audit before you certified the financial statements?

Wrong answer: About eight hours.

Better answer: I don't believe our audit opinion uses the word "certify" does it?

Explanation: Make the questioner frame the question properly. The questioner wants the jury to think that auditors "certify" financial statements and wants you to implicitly agree that this is what you did. You don't want to give a lecture, but you must make him or her use proper terms.

Question: Shouldn't the auditors always perform [a common generally accepted auditing standard procedure, such as imform the client in writing of material weaknesses in internal controls]?

Wrong answer: As far as I can remember, that is something an auditor should do.

Better answer: I remember that is a common procedure, but I don't remember that you always have to do it.

Explanation: Chances are that (1) you or your colleagues didn't do it on this audit, which is exactly why the questioner is asking you about it, and (2) there is a good explanation for why you didn't do it, which you will render suspect by giving the wrong answer here. Beware of questions containing the words always or never.

Question: Hypothetically, if a company's assets consisted entirely of five accounts receivable, wouldn't it be a good idea to confirm 100% of the receivables?

Wrong answer: Yes, I suppose it would be a good idea.

Better answer: It shouldn't be necessary; given the limited purposes of an audit. Audits are done on a test basis, and clients understand that.

Explanation: If you give the wrong answer, the questioner's next question will be, What if only half the company's assets were receivable? Then suppose there were 10 accounts instead of 5? Incrementally, the questioner will get to the circumstances that actually applied for your audit, where, of course, you did not confirm 100%. You don't want to start down this slippery slope. But a simple "no" answer is wrong also, because common sense tells the jury that if it's good to confirm 3% or 10%, it's even better to confirm 100%. The smarter answer shifts the terms from a question you'd rather not answer--"Wouldn't it be a good idea?"--to one you can answer--"Is it necessary?"

Again, answer the question that's asked and be cautious in answering hypotheticals. The lawyers and the jury will be using their common sense; you should use yours, too.