Defense lawyers and accountants: a winning team.
It has become increasingly common in defending complicated criminal and civil cases for attorneys to employ accountants as members of the defense team. By doing so, immediately after being retained, the attorney has the advantage of the accountant's experience in developing the evidence for trial.
Examples abound of the help accountants can give lawyers. For instance, in criminal matters such as securities law violations, tax evasion, embezzlement or fraudulent conveyances, the CPA traces funds, develops market information, and analyzes the myriad of accounting problems that always arise. In civil cases, the CPA determines damages and analyzes valuation problems and generally assists in interpreting the various accounting and tax matters which occur.
Accountants help determine whether financial records are relevant in responding to subpoenas, assist counsel in preparing witnesses to testify at depositions and at trial, and in analyzing the strengths of one's own case as well as the opponent's. Accountant's familarity with computerized programs allows them to assist in setting up litigation support services such as financial statement and tax analyses and the development of other support documents.
Who to Hire
Having decided to retain a forensic, or investigative, accountant, the first and perhaps most fundamental question is whether the attorney should use the client's regular accountant. Should he be someone who is likely to be a fact witness? The answer is usually "no." The advantage of hiring an accountant with no prior relationship with the client is that the independent accountant's work is protected from disclosure just like the attorney's under the attorney-client privilege, cannot be compelled to disclose any aspect of their to disclose any aspect of their work for the attorney. This privilege, called the "Kovel privilege," allows the accountant virtually complete freedom in investigating a case and discussing his findings and opinions with the attorney without risk that such discussions will be subject to disclosure.(1) The client's regular accountant, however, must disclose all he learned before the attorney was retained,(2) indeed the regular accountant has to release all his papers and his client's even if the client might be able to refuse to do so if he still had possession of the documents.(3) (1)U.S. v. Kovel, 296 F2d 918, 62-1 USTC P9111, 9AFTR2d 366, 96 ALR2d 116 (CA2 NY 1961). (2)Couch v. U.S., 409 US 322, 34 L Ed 2d 548, 93 S Ct 611, 73-1 USTC P 9159, 31 AFTR2d 73-477 (1973). (3)Id.
The foremost disadvantage of hiring someone new is the cost; the regular accountant has done work which may well have to be duplicated. If cost is the predominating factor, it may be possible, at least theoretically, to draw a line between the work he does thereafter. The problem is that a vigorous adversary will attempt to cut through this distinction, arguing that the line is blurred. For example, if the charge is tax evasion, can the accountant who prepared the returns based on input from the client, successfully refuse to reveal what he learned during the investigative stage about possible additional sources of income? A judge may order the testimony, finding that it is not clear as to when the accountant actually learned the information in question. The judge may believe that the accountant was hired by the attorney just to shield relevant information which would otherwise be disclosable. besides the risk that the client's regular accountant may be required to testify, he may want to if offered immunity in a criminal matter or a release in a civil case covering the work he did while representing the client. Conversely, it may be in the client's interest to denigrate the work done by his regular accountant. For example, the client may claim he relied on his accountant who performed poorly. Such an attack will not be credible if that accountant remains in the client's employ.
All this point to hiring someone other than the regular accountant. Should the cost of hiring someone new be too great, make sure at a minimum that the old accountant maintains a detailed log of the work he does for the attorney. That type of record will help establish when information was obtained, which in turn may persuade a judge to draw the line between work for the client and work for the attorney.
Regardless of which accountant is retained, the best practice is to write-up the employment relationship in a written retainer agreement between the attorney and accountant, not between the accountant and client. The agreement should provide that the accountant not only take directions solely from the attorney, but that the attorney is absolutely entitled to demand delivery of the accountant's work papers at any time. A written agreement of this sort is good evidence that the accountant's efforts are under the umbrella of the attorney-client privilege. It may prove dispositive in shielding the investigative accountant from having to disclose his work product to the other side.
Once retained, don't make the mistake of limiting the accountant's access to evidence. Let the accountant promptly determine the method used by the client and adversary to maintain their respective books and records. For any business, knowledge of the kinds of books kept, who keeps them, and how the information is transmitted can be of great importance both in directing the investigate accountant's subsequent work, and in the development of tactics. Let the accountant review the indictment of pleading. Give him leeway to assist in anticipating and combatting the other side's arguments, and in developing strategy generally.
Can the investigative accountant who has no prior relation with the client testify as an expert at retrial without waiving the attorney-client privilege? Probably not. If he testifies, whatever was learned from the attorney may well be fair game for cross-examination. If the attorney told the accountant any negative evidence on his own, he'll have to reveal it. And, no attorney worth his salt will fail to tell his investigative accountant the problems in his case. To do otherwise would be self-defeating; a reason for hiring the accountant in the first place is to obtain help in overcoming perceived deficiencies in the other case. The accountant, therefore, may have uncovered facts detrimental to the client. Those facts, which otherwise might not surface, could conceivably be disclosed during a vigorous cross-examination.
If the investigative accountant's testimony is a problem, and if funding isn't, the safest course to follow is hiring a different accountant to testify. In preparing him, limit the negative information to that which the opponent clearly knows. In addition, although it is certainly not completely protective, the attorney should carefully limit the scope of the accountant's direct testimony so as to permit counsel to object on cross-examination to any questions going outside the scope of his direct examination.
We would be remiss if we failed to mention the accountant's more traditional role as expert witness at a trial. What type of person should one select? Besides a thorough knowledge of the area, the accountant's ability to articulate his thoughts and withstand vigorous cross-examination are essential traits. He must be able to simplify sometimes archaic and often complex matters for lay people (including both jurors and judges) whose familiarity with financial records and accounting issues may be limited.
The scope of expert testimony is quite broad. In federal courts, opinion evidence about any matter the Court deems helpful may be admitted. The accounting expert can both opine on topics raised by his client's position and comment on the strength of the adversary's positions. Bringing out the flaws in the other side's case can often be as helpful as establishing an affirmative position.
As litigation involves increasingly sophisticated financial concepts, the necessity of hiring investigative accountants has increased correspondingly. The lawyer whose training in accounting is minimal, must consider bringing an accountant on board, and should raise this matter with his client as soon as possible. By doing so early, and by properly memorializing the retention, the ground work is laid for assistance from an expert without risk that the expert's investigative efforts will be subject to disclosure to the other side.
We must bring to your attention the comfort that can be generated by having a forensic accountant close by during a trial. Many important accounting nuances could easily be missed by an attorney in the midst of complicated litigation. The experienced litigator, taking advantage of all resources available to him, should recognize the help available to him from the accounting profession at all stages of his assignment.
In the Personal Financial Planning department of the November 1988 issue, the article entitled "Avoiding the 15% Retirement Plan Excess Distributions/Accumulations Excise Tax," page 103, proposed that a plan beneficiary could take a lump-sum distribution from a qualified plan, rollover all but $750,000 to an IRA, and that the amount not rolled over would not be subject to the 15% excise tax due to the lump-sum exclusion (five times the annual exclusion).
Temp. Regs. Sec. 54.4981-IT, c-1(a) provides that in order to use the lump-sum distribution exclusion from the excise tax, the recipient not only must receive a qualified lump-sum distribution, but also make one of the following elections to apply to such lump-sum distribution: 1) five-year averaging; 2) capital gains treatment; or 3) grandfathered 10-year averaging. Since none of these elections are available if any portion of the lump-sum distribution is rolled over (Code Sec. 402(a)6(c)), the exclusion would be limited to the annual exclusion of $150,000 or $112,500, indexed for inflation.
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|Title Annotation:||reprinted from Case & Comment, Sept.-Oct. 1988|
|Author:||Sipshie, Norman W.; Lupert, Leslie A.|
|Publication:||The CPA Journal|
|Date:||Feb 1, 1989|
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