Expert witnesses - in jeopardy? Experts aren't always protected from lawsuits, so it pays to be informed.

Experts aren't always protected from lawsuits, so it pays to be informed.

Litigation services have become one of the faster growing practice areas for CPAs. Many practitioners previously dedicated to accounting and auditing have entered this area part-time or full-time. More CPAs are preparing damage analyses, performing business valuations, assisting counsel in document productions, participating in negotiations and providing expert witness testimony. Unfortunately, litigation against expert witnesses is increasing as well.

Professional liability has become a key concern for all CPAs, but most of the problems have been in traditional services. Because there have been relatively few cases against expert witnesses, some practitioners erroneously believe this practice area carries little or no liability exposure. A California lower court case demonstrates why this is a dangerous assumption: A jury awarded $14.2 million in compensatory damages and approximately $28 million in punitive damages in the first major plaintiff victory against a CPA firm performing litigation services (see MATTCO FORGE.) Practitioners who serve as expert witnesses clearly need to take the threat of litigation seriously.

EMERGING THREATS

Two factors have led to an increase in claims against all types of expert witnesses, both by the expert's client and opposing parties:

* In litigation at least one party is likely to be unhappy with the outcome and will search for someone to blame.

* The courts are beginning to erode the barriers that have protected expert witnesses from liability claims.

Potential allegations against CPA-experts include

* Breach of contract: The CPA failed to perform some aspect of the engagement.

* Professional malpractice: The expert's testimony about a business valuation was wrong; an exhibit used for trial was flawed; during pretrial negotiations, the expert did not properly disclose his or her opinion and misled the opposing party, resulting in a poor settlement for that party; the expert released improper documents to the opposing side during the discovery process.

* Libel or slander: The CPA made damaging remarks about another person or entity.

* Disparagement: The accountant damaged the reputation of the opposing party's business.

* Fraudulent or negligent misrepresentation: The opposing party incurred damages because the CPA misstated facts during the trial.

* Disclosing a client's confidential information: The CPA-expert used another client's information (without permission) for industry data comparisons.

KNOW THE STANDARDS

To minimize exposure to professional liability, the CPA first should determine which professional standards apply to the engagement. The standards always applicable to litigation services are composed of the American Institute of CPAs Code of Professional Conduct and Statement on Standards for Consulting Standards (SSCS) no. 1, Consulting Services: Definitions and Standards. Nonauthoritative educational guidance is available in AICPA Consulting Services Special Report 93-1, Application of AICPA Professional Standards in the Performance of Litigation Services, and Consulting Services Special Report 93-2, Conflicts of Interest in Litigation Services Engagements. Other professional standards also could apply if certain types of services, such as an audit, are performed as part of the litigation engagement.

The courts won't necessarily perceive the CPA's responsibilities as limited to the code and SSCS no. 1. In determining compliance with professional responsibilities, the courts frequently consider practice aids and other nonauthoritative guidance. Accordingly, CPAs serving as expert witnesses should stay abreast of the applicable professional literature. As a practical matter, they also should be aware of publications that are considered "authoritative," even though CPAs' professional standards don't recognize them as such, and be prepared to explain any departure from them.

Important professional ethics issues in expert witness services include

Integrity and objectivity. Rule 102 of the AICPA Code of Professional Conduct says, "In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free from conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others."

As an expert witness, the CPA must understand that the attorney alone is the client's legal advocate. When the CPA consults with a lawyer under the attorney work-product privilege and is not a witness, the CPA may assist in developing a partisan case but should tell the lawyer of any significant reservations he or she has.

The CPA may not knowingly provide misleading information to any party during any phase of the engagement, but he or she isn't required to volunteer information. For example, in settlement talks, the CPA expert witness should not attempt to negotiate a favorable client settlement by providing a knowingly inaccurate damage assessment or business valuation. Likewise, he or she should not make preliminary statements to any party about damage or valuation amounts without sufficient data unless the limitations of those preliminary conclusions are disclosed.

Professional competence. Rule 201 of the AICPA Code of Professional Conduct says, "A member shall ... undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence."

While a CPA clearly must be competent in a technical area, such as business valuations, it is not as clear whether the practitioner must be competent in the law. Clients often engage a particular CPA or firm because of past litigation services experience. Does the CPA have a responsibility to know about legal matters, such as the new mandatory reporting requirements for experts described in rule 26(a)(2) of the amended Federal Rules of Civil Procedure? Who is responsible if a mandatory reporting disclosure is omitted and the expert's report is rejected? Who is responsible if the expert's report is not submitted 90 days before trial, as now required? At least one court apparently has held a CPA firm responsible for knowing evidentiary rules because the firm had held itself out as being expert in litigation matters (see the sidebar). To minimize misunderstandings, the CPA should not profess legal expertise and should reach an understanding that counsel will advise the CPA of any legal requirements (for example, legal deadlines that pertain to the CPA). The understanding should be expressed in the engagement letter or in a separate communication to the attorney.

Additional elements of rule 201 important in litigation services are

Due professional care. The CPA should support each conclusion by performing the necessary procedures. However, when, for example, the practitioner is prevented from performing critical procedures due to a lack of information, the CPA should inform the client. The trier of fact also should be informed so it is not misled about how the particular conclusion was reached.

Supervision. The CPA actually giving the testimony should personally provide direct or indirect staff supervision. Litigation engagements typically don't allow firms to leverage staff, as is done in accounting and auditing work.

Sufficient relevant data. CPAs must obtain or attempt to obtain sufficient relevant information to provide a reasonable basis for expert witness opinions and other conclusions.

LIMITING EXPERT LIABILITY CLAIMS

One of the CPA's best defenses against litigation is good communications with the client, particularly a well-prepared engagement letter. There have been occasions when a CPA was accused of not fulfilling the engagement requirements. This can happen when the CPA promises more in the engagement agreement than ultimately is performed or even warranted. Because circumstances may change during the litigation--expected information does not become available or there is a change in the attorney's strategy--the CPA should not promise that a specific task will be performed or that a conclusion will be reached when developing the engagement letter. This prevents the client from claiming a breach of contract if the CPA can't reach the conclusion the client seeks and also prevents a loss of credibility based on preconceived conclusions.

Like engagement letters for other services, those for expert witnesses should specify what tasks the client or others must perform to enable the CPA to carry out the assignment. This, too, is an important protection against breach-of-contract claims. For example, if the CPA is retained to compute the costs the plaintiff has incurred because of the defendant's wrongful actions, the CPA may not be able to complete the engagement without the plaintiff s financial data.

A litigation services engagement is a consulting service classified as a transaction service under SSCS no. 1, which requires the CPA and client to reach an understanding about the services or procedures to be provided. The initial oral or written understanding often is reached at the beginning of the litigation assignment but may change during the engagement as new facts arise or circumstances change. Accordingly, the CPA should advise the client of any significant changes during the engagement. Any engagement letter should set forth the general tasks the CPA has agreed to perform and no others. If the engagement is open-ended at the outset, the engagement letter should list any known needed services as well as a catch-all phrase providing for "such other services as you (or your attorney) may specifically request us to perform." This places the burden on the retaining party and the party's counsel to prove that any services were specifically requested and not performed.

Some expert witnesses (usually non-CPAs) have gotten into trouble by misrepresenting or exaggerating their academic backgrounds or work experience. Such misrepresentations have led to claims by opposing parties who declined to challenge an expert's testimony because of his or her purported credentials, and by clients whose cases deteriorated when the expert's credibility was destroyed after his or her misrepresentations were revealed.

When a practitioner is asked to give an opinion on, for example, the costs to accomplish a certain task, the damages incurred as a result of past events or the value of a business enterprise, there are potential liability risks if the CPA alone determines the methodology and criteria by which the opinion will be reached. Often, there are no specific authoritative standards to guide the CPA's detail work. It may be helpful to discuss methodology and criteria with the attorney and perhaps to state in writing which ones the CPA will use in making the determinations mutually agreed on by the CPA and the attorney. In this way, oversights in reaching the expert opinion can be avoided. The practitioner, however, must be comfortable with his or her basis for reaching any conclusions. All too often, experts are pressured into positions by counsel, only to recant their opinions under cross-examination.

As noted above, CPAs normally should not guarantee to provide a specific opinion or testimony. It may be appropriate to say in the engagement letter that the CPA provides an opinion only after an analysis of the available relevant facts. Of course, the CPA may provide preliminary thoughts to the client, but early statements may change based on the actual facts revealed during the engagement. The CPA normally should advise the client if it appears that he or she will not be able to render an opinion or will not be able to render one that supports the client's position. This is an important safeguard against a later breach-of-contract claim alleging the CPA failed to perform the engagement.

Frequently, a CPA will be retained by an attorney but paid by his or her client. This is perfectly permissible, but the CPA should consider getting the party's written acceptance of the engagement letter's payment terms. Additionally, the CPA should ensure the attorney's client can pay the fees. If the expert has not been paid when he or she testifies, the opposing attorney could suggest the CPA's opinion is improperly influenced by the outstanding fees and is not independent.

CPAs also may consider including limitations on liability clauses in their engagement letters. Under such provisions, the CPA firm's liability is limited to engagement fees, some multiple of them or a specified amount. Many clients (especially attorneys) balk at this provision; however, if the CPA has appropriate bargaining power, the clause can be obtained.

While there is no prohibition against asking a client to indemnify the CPA against lawsuits, these arrangements do pose risks because they could be perceived as affecting the CPA's expert opinion. It's quite possible the attorney seeking the CPA's services might find such a provision unacceptable for this reason, Nevertheless, such provisions could help reduce a CPA's exposure to baseless lawsuits.

Like other engagements, litigation services are governed by client confidentiality provisions. Litigation services engagements are particularly sensitive since the CPA may be working under counsel's work-product or attorney-client privelege, and an inadvertent disclosure might jeopardize that privilege and adversely affect the outcome. Additionally, some jurisdictions recognize an accountant--client privilege and protected communications or work should be kept confidential unless specifically released by the client. In these jurisdictions, a CPA not serving as an expert witness normally is exempt from a subpoena. In this situation, the CPA's attorney can file a protective order after being served with the subpoena to prevent the CPA's deposition or production of client files.

CPAs must impress on their staff members the high sensitivity of litigation services engagements. Of course, once a CPA takes the stand, he or she may be required to disclose any information he or she reviewed in formulating an opinion. The engagement letter should carry a warning to this effect.

SIGNS OF EROSION

Although all types of expert witnesses generally have enjoyed a litigation privilege making them virtually immune from civil liability, there now is pressure on the courts to erode that protection. The traditional expert witness privilege was based on three considerations:

1. Without such a privilege, there would be no end to litigation, with each aggrieved party suing one or more witnesses from the last lawsuit asserting wrongful, damning testimony.

2. Witnesses might be unwilling to testify, fearing they would become the subject of future litigation.

3. The cross-examination process is sufficient to protect a litigant against untrustworthy witnesses.

The courts, however, are beginning to conclude that these considerations don't necessarily apply to the expert witness. Experts accept engagements as part of their professional services and are paid for their time, so they don't need special protection to encourage them to testify. In addition, they often testify on subjects beyond an attorney's knowledge, precluding effective cross-examination. Perhaps most important, there is considerable economic incentive for some "professional" experts (usually non-CPAs) to tailor their testimony to support a client's positions, so a deterrent is needed to keep them honest. For these reasons, the current national trend is toward disallowing the litigation privilege for all types of expert witnesses.

A complete discussion of litigation privilege is beyond the scope of this article. Additionally, privilege varies by jurisdiction and may not apply if the expert does not testify. For the immediate future, however, the privilege remains the principal line of defense for CPAs and other testifying experts who are sued. Unfortunately, the future of this privilege is largely out of the accounting profession's hands. The courts entertain a wide variety of expert testimony, including medical testimony, forensic testimony from police officials and crime laboratories, architectural and engineering testimony and testimony on a wide variety of business issues (such as industry practices and proprietary technical matters). If abuses continue in these areas, the resulting reforms will likely affect CPAs as well.

A CONCERN FOR ALL

Potential professional liability claims should be a concern for all litigation services practitioners. CPAs can and should attempt to minimize this exposure in addition to complying with the appropriate professional standards. Engagement letters should be prepared carefully to delineate the general scope of services to be provided, limit the CPA's liability exposure and warn the client of the limitations on the CPA's services. Moreover, any changes in the engagement should be communicated to the client orally or in writing. By taking prudent steps, CPAs can help limit their exposure while providing a valuable, growing service to clients.

EXECUTIVE SUMMARY

* LITIGATION SERVICES are one of the fast-growing practice areas for CPAs. Because there have been relatively few cases against expert witnesses, some practitioners erroneously believe this practice area carries little or no liability exposure. But in a recent California case, a jury awarded $14.2 million in compensatory damages and approximately $28 million in punitive damages in the first major plaintiff victory against a CPA performing litigation services.

* TO MINIMIZE LIABILITY, CPAs first should determine which professional standards apply to an engagement. In determining compliance with professional responsibilities, the courts frequently consider practice aids and other nonauthoritative guidance, so CPAs should stay abreast of applicable professional literature.

* ENGAGEMENT LETTERS should be carefully prepared to delineate the general scope of services to be provided, limit the CPA's liability exposure and warn the client of the limitations on the CPA's services. Any changes during the engagement should be communicated to the client and memorialized in writing. By taking prudent steps, practitioners can help limit their exposure.

MATTCO FORGE

A recent California lower court case was the first major plaintiff victory against a CPA in the performance of litigation services. (The case is being appealed.

In June 1994, a Los Angeles Superior Court jury awarded $14.2 million in compensatory damages and approximately $28 million in punitive damages to the plaintiff in Mattco Forge, Inc. v. Arthur Young & Co. The jury's verdict against the firm was for professional malpractice, fraudulent misrepresentation and fraudulent concealment. In addition, the jury awarded punitive damages of $250,000 against the Arthur Young partner and $5,000 against the Arthur Young manager. The trial followed a 1992 California Court of Appeals decision that Arthur Young did not have the litigation privilege to protect it from a lawsuit.

According to the 1992 opinion, the CPA firm was retained to compute lost profits for its client, Mattco, in a lawsuit against General Electric. Arthur Young asked for information from Mattco about its GE contracts, but some original documents could not be located, so Mattco recreated missing contract estimating sheets, gave them to the CPA firm and reportedly told the firm the documents were recreations. Subsequently, Arthur Young was required to give GE all documents and workpapers used during the assignment, including Mattco's reconstructed estimating sheets. GE filed and won a motion that found the recreated documents were fraudulent. The court assessed sanctions against Mattco, which abandoned the GE lawsuit. Mattco then sued Arthur Young alleging malpractice, fraud, negligent misrepresentation, breach of contract and other wrongdoings. A Los Angeles Superior Court found that the litigation privilege shielded Arthur Young from liability but a Court of Appeals reversed the decision.

The following are some of the practical concerns in a litigation services engagement and Mattco Forge's allegations about the firm's work:

Planning and supervision: The CPA firm partner did not adequately review the workpapers.

Professional competence: The partner and manager were not sufficiently experienced in litigation services.

Communications: The manager didn't tell the partner or the client (the attorney) that the engagement files included noncontemporaneous documents.

Workpaper annotations: The manager didn't date the recreated estimating sheets or otherwise disclose the recreation of data.

Misleading advertising: Firm brochures reportedly said its litigation services professionals were skilled in working with a real or apparent lack of data.

Quality assurance reviews: There was no indication the engagement team sought help from more experienced litigation services professionals.

CPAs providing litigation consulting or expert witness services are well advised to review the Mattco case and ensure their practices do not generate unnecessary risks.

MICHAEL A. CRAIN, CPA, is a shareholder with Peed, Koross & Finkelstein, Fort Lauderdale, Florida. He is a member of the American Institute of CPAs litigation services subcommittee and past chair of the Florida Institute of CPAs litigation services committee. DAN L. GOLDWASSER, LLB, a partner of Vedder Price Kaufman, Kammholz & Day, New York, is a member of the AICPA accountants' legal liability subcommittee. He serves as special counsel to the New York State Society of CPAs professional liability insurance task force and is chair of the American Bar Association's law and accounting committee. EVERETT P. HARRY, CPA, is a partner of Arthur Andersen & Co. in San Francisco and a member of the AICPA litigation services subcommittee. A member of the AICPA council, he also is chair of the California Society of CPAs litigation services committee.