Powerful testimony techniques.
A CPA who performs business valuation and other litigation services often must appear as an expert witness in trials involving, for example, a disenfranchised shareholder, a dissolving partnership, divorcing spouses, a tax dispute or lost corporate profits.
The most exciting part of litigation services is the trial and, particularly, the cross-examination. But whether the CPA will be a shining or a falling star depends on his or her effectiveness on the witness stand.
This article provides information and illustrations of some effective and not-so-effective ways of presenting expert witness testimony in business valuation engagements. It also offers pointers on how the CPA can help the attorney approach a client's case and the opposition's expert witness.
THE RIGHT FOOT
The voir dire--the expert qualification process--offers the opportunity to make a good first impression on the fact finders--the judge or jury--by introducing the witness to them on a personal and not purely professional basis (see the sidebar on page 81 for an overview of the trial process). The most effective first statement is a response to the following:
Q:Would you please tell the court your name and your business specialty?
The answer immediately evokes a personal relationship rather than legal formality. Compare that question with
Q. State your name for the record. Are you a certified public accountant?
Follow-up questions should be open-ended and relate to the expert's background, education, training and experience. They should be framed so the witness can respond in a conversational manner rather than in a blunt yes-or-no fashion. Properly framed questions would be:
Q: Please tell the court about your educational background.
Q: Please tell the court of your certification as a business appraiser and explain the process of becoming a certified business appraiser.
How not to answer voir dire questions. It is critical that the witness appear confident but not cocky and not overstate his or her qualifications. It's wise, too, not to emphasize accomplishments that don't relate to the matter before the court.
Direct examination is the process of presenting evidence in support of a client's case. In a business valuation, it is the presentation of the expert's opinion of value. If the testimony is not accepted as reasonable, it could be disregarded entirely.
Effective direct examination testimony would begin like this:
Q: Did you have an opportunity to make an appraisal of the value of the XYZ Corporation?
A: Yes, I did.
Q: And what, in your opinion, is the value of the company?
A: The value of the company on June 30 of this year was approximately $5.4 million.
Q: Can you explain to the court how you made your appraisal?
The appraisal results can be stated at the beginning or at the conclusion of testimony. Presenting them at the beginning generally is more effective because
* It suggests strong belief in the value, which helps the witness's credibility.
* The stated value becomes the target the fact finders will consider throughout the trial. Without this target, they will try to develop their own estimates that may differ significantly from the witness's value.
* It helps the fact finders remember it throughout detailed testimony and understand the connection with the conclusion.
* Later testimony can be designed to support the value.
To lecture or not? Some attorneys ask highly experienced witnesses to explain how an opinion was found and then allow them to lecture about business valuation methods without interruption or prodding. When it's over, the fact finders should be totally convinced of the reasonableness of the conclusion. However, if the witness is less compelling, the fact finders may be totally lost in a maze of concepts. That's why this potentially effective technique should be used only when the expert and the attorney have worked together before and decided the expert can present the case logically and persuasively.
An even more effective direct examination technique for business appraisers is the lecture-report method. To use it, the expert must have a well-written business valuation report available for the fact finders' use during testimony. The opposing attorney likely will find it difficult to object to its use to simplify a complex subject, even if it hasn't been admitted into evidence.
Keep it simple. Too often, experts try to communicate the kind of high-tech analysis that only another expert could possibly understand. It is important that the expert be able to explain even complex issues to a lay person.
Experts may want to present every detail of their work to demonstrate the amount of time spent on intensive analysis. The best technique on direct examination is to answer questions fully but succinctly. Too much detail may confuse fact finders, while too little will require them to fill in missing parts based on personal experience.
An expert's effectiveness is strictly a function of how well his or her testimony is presented. It should be kept in mind that witnesses are presumed to be experts, but their inability to communicate in simple terms may raise questions about how well a textbook expert can apply his or her knowledge to a real-world problem. Pompous, pedantic experts frequently find themselves discredited by the testimony of an opposing witness with the skill to communicate authoritatively yet simply.
Witness preparation. The expert and the attorney should work together to develop a draft of direct examination testimony, preparing specific questions that ensure the necessary elements of proof are presented in an effective order. A well-rehearsed direct examination will logically and smoothly support the client's case and the appraiser's methods and conclusions.
Experts should help attorneys understand and organize the testimony. Direct examination should be rehearsed so the attorney fully understands the appraisal process, can identify presentation weaknesses in his or her own or the opponent's case and can frame needed additional questions. This preparation-which is ethical and entirely proper helps educate the attorney and readies the witness for trial.
WHAT NOT TO SAY ON DIRICT EXAMINATION
It is critical that the expert communicate his or her opinion authoritatively and unequivocally. It's the other attorney's job to get the expert to equivocate about the value given.
Nearly all business appraisals for litigation purposes have tight dead-lines, but whether on direct or cross-examination, the expert must believe in his or her opinion and maintain that position throughout the trial or risk damaging his or her credibility.
Here are some things an expert shouldn't say on the stand:
* I didn't have all of the information needed.
* I did the best I could with what I had to work with.
* I didn't have enough time to do the job right.
* I could not get the other side to cooperate, and they told lies.
* I feel uncertain about my opinion in this case.
* I used a computer program, so the value must be right.
An expert who doesn't feel comfortable about his or her opinion should not be presenting testimony. In some cases, of course, an expert can form an opinion with less documentation than in others because, for example, of experience in similar cases.
It is important to conclude the direct examination with a strong finish. A good close restates a summary of the expert's opinion in response to a series of closing questions that reinforce the testimony, reassure the fact finder that the expert is without bias and offer a final opportunity to persuade the fact finders of the expert's unequivocal belief in the opinion.
An effective cross-examination is the skillful and painstaking analysis and dissection of the basis of the expert's opinion. The goal is to get the expert witness to confess that the business's value really could be different from that given in his or her earlier testimony.
Unless Perry Mason conducts the cross-examination, the expert witness will not end up in a tearful confession. In reality, the cross-examination process is the most interesting for the expert witness, since this is when the fencing and sparring between attorney and witness take place. Can the expert defeat the attorney on cross-examination? No, never. Can attorneys defeat themselves? Yes, frequently. The witness should not attempt to win but should instead simply make an attempt to avoid losing too much.
If the witness did a good job on direct examination, it will be very difficult for the opposing attorney to convince the fact finders to reject the expert's opinion completely. In some cases, a skilled attorney will not cross-examine at all if the witness did not harm the cross-examiner's case or if the damage was so severe that keeping the witness in front of the fact finder to answer more questions can only further harm the case.
HOW EXPERT WITNESSES ARE IMPEACHED
The witness's credibility can be weakened in a number of ways, such as showing
* Bias on the expert's part due to a personal or business relationship with a party to the case or because of numerous prior appraisals done for the client's attorney.
* Prejudice due to an interest in the outcome of the case, such as a contingency fee arrangement.
* Negligence by, for example, failing to inspect the premises, interview a major player in the case, examine leases or to consider a generally applied industry method for sales of similar businesses.
* Carelessness in the application of professional judgment, such as selection of comparable businesses that still differ significantly from the subject business in terms of sales volume, number of employees, lines of business, capital structure, asset size, share of market, geographical location or operating characteristics.
* Unfamiliarity with technical aspects of the type of business being appraised.
* Incompetence through the misuse of a generally accepted valuation procedure, lack of understanding of valuation concepts and methodologies, unfamiliarity with applicable leading court decisions or ignorance of Internal Revenue Service rulings.
* A position that is inconsistent with the expert's testimony in other cases.
* A belligerent attitude toward the opposing expert's opinion or refusal to acknowledge that impartial professionals may properly differ in their opinions.
A skillful attorney does not have to attack the witness to discredit his or her opinion; an attack is actually a bad idea if it arouses the fact finder's sympathy. A long series of questions can display the many important facts and issues the expert did not consider. At the conclusion, the fact finder will have to question how the expert can be so sure of his or her opinion. With careful planning before trial, in consultation with his or her own expert, the cross-examiner can effectively use the opposition for his or her own case.
These are the kinds of leading questions that can help discredit a witness:
Q: You didn't examine the individual customer accounts receivable for each of the past five years, did you?
Q: You didn't discuss the sales contract with the company's largest customer, did you?
Q: You didn't apply the capitalization rate suggested by the IRS in revenue ruling 68-609, did you?
Q: You didn't use the capital asset pricing model, did you?
Q: You didn't actually count the cash on hand, did you?
Q: You didn't visit the warehouse in South America, did you?
The expert must wait until redirect examination to note that none of these questions was relevant to the appraisal. In the meantime, these questions might easily get the inexperienced witness visibly shaken, which may be taken as an admission of professional over-sight. A witness must never lose his or her temper during cross-examination. Any damage done-except a lie--can be addressed on redirect examination.
How to respond. The most important advice for an expert witness is always to tell the truth. The next most important advice on cross-examination is to answer the questions clearly, distinctly, with conviction and generally in one of four ways:
1. Yes. The witness agrees with the question in its entirety, absolutely and without reservation. The witness also can agree depending on certain circumstances.
2. No. The witness does not agree with the question in at least some degree. It's also possible to say that the question can't be answered with a simple yes or no.
3. I don't know. This is an acceptable answer, particularly when the question is too confusing or compound to answer.
4. I don't remember. This is a hedge to allow the witness an opportunity to remember the answer later, perhaps on redirect examination, and not be locked into a position that is adverse to his or her testimony.
It's important, too, to answer only the question asked, not the question the attorney meant to ask. Most attorneys are not prepared to cross-examine an expert effectively on a technical matter. As a result, an oversimplified question often leaves enough room for the expert to answer the question truthfully in the opposite manner from that expected. For example
Q: Isn't it true you reduced the officer salaries because you considered them to be unreasonably high?
This response confuses the attorney and breaks the chain of questioning. The appraisal report clearly reduced officer salaries from those reported on the financial statements. However, the attorney's question was not precise. It presumed the appraiser reduced the salaries because he or she found them unreasonably high. In fact, because of the officer's control over their compensation amounts, the appraiser actually substituted the reasonable cost of replacement personnel to perform the officer's services. The skillful attorney will recognize a potential problem and move on to other questions.
Another interesting and effective technique for technical questions is to answer the question with a question. The witness then appears helpful and gains another chance to express his or her opinion. For example
Q: Isn't it true you reduced the officer salaries because you considered them to be unreasonably high?
A: I don't understand the question. Do you mean to ask me why I reduced the officer salaries expense?
To prevent the witness from repeating and reinforcing his or her testimony, the attorney should thank the expert for the clarification and then ask another question. In framing their responses, witnesses should remember that attorneys are cautioned never to ask a question on cross-examination for which they do not know the answer.
After an attack. If cross-examination does damage the CPA's testimony, redirect examination by the client's attorney may help. An effective strategy is for the attorney to ask the expert a series of questions designed to remind the fact finders that business valuation is judgmental and that experts do differ in their assessments. Open-ended questions allow the expert to explain, without being led, why the procedure followed was reasonable and why the cross-examiner's question was misleading.
Helping the attorney. The expert should actively assist the client's attorney in his or her cross-examination of the other side by identifying flaws in the opposition's valuation and helping develop specific questions. CPAs can help prepare for their own cross-examinations by identifying any possible weaknesses in their own valuations and alerting the client's attorney to them.
HOW TO ENJOY EXPERT TESTIMONY
Litigation services can be interesting, challenging work. CPAs who offer expert testimony will benefit by following this advice:
Perform competent valuations. The work should be documented, assumptions should be clearly disclosed and the basis for conclusions should be supplied.
Study the company's business as thoroughly as possible. An appraiser's work shouldn't be confined to financial information. Experts will be vulnerable to questions about the company and its management if they don't perform thorough research.
Know the valuation literature. Valuation experts are expected to be familiar with accepted valuation methodologies. It's fine to confess ignorance of a particular publication on cross-examination if the CPA on redirect examination can cite other pertinent publications that were used.
Never be intimidated by cross-examination questions. Every question should be answered truthfully and with an expert's authority. CPAs should have confidence in their approaches and be prepared to support them. It's acceptable to acknowledge that a certain procedure wasn't performed, but the expert should have a knowledgeable explanation of why it was deemed unnecessary.
Maintain professional demeanor. A professional image is vital to the witness's credibility.
Well-prepared expert witnesses will be able to enjoy the many professional and personal rewards these engagements offer.
ALAN S. ZIPP, CPA, JD, CBA, is managing partner of Zipp & Stouffer, Rockville, Maryland. He is a certified business appraiser of the Institute of Business Appraisers, a candidate in the American Society of Appraisers and, in addition, holds memberships in the American Institute of CPAs, the American Bar Association and the bar associations of Maryland and the District of Columbia.
* CPAs WHO PERFORM business valuation and other litigation services often must appear in court as expert witnesses. The most exciting part of litigation services is the trial and, particularly, the cross-examination. Whether the CPA will be a shining or a falling star depends on his or her effectiveness on the witness stand.
* THE EXPERT and the attorney should work together to develop a draft of direct examination testimony, preparing specific questions that ensure the necessary elements of proof are presented in an effective order.
* IT IS IMPORTANT that the expert be able to explain even complex issues to a lay person. The appraiser should not volunteer on the witness stand what he or she didn't do or examine or what might have been done under different circumstances.
* IF THE WITNESS does a good job on direct examination, it is unlikely the judge or jury will reject his or her opinion completely.
* WITNESSES SHOULD ALWAYS tell the truth, answer cross-examinations clearly and succinctly and answer only the question asked, not the question the attorney meant to ask.
* IMPORTANT POINTERS FOR CPAs are to perform well-documented valuations, study the company's business as thoroughly as possible, know the valuation literature, never be intimidated by cross-examination questions and maintain a professional demeanor.
SOME PITFALLS TO AVOID
Strategies for discrediting an expert witness may depend on the circumstances of the case.
Divorce: Witnesses should know the state's marital property rules to avoid including a value for professional goodwill if the state doesn't recognize it as marital property.
A business sale: CPAs should consider elements of value outside the business itself, such as noncompete agreements.
Estate tax valuation: Experts must review the Internal Revenue Code, regulations, rulings and relevant cases to understand the various acceptable methods of business valuation.
Liquidation valuation: Appraisers shouldn't include going-concern issues in the valuation.
Experts should never use a method, rate, formula or procedure without understanding the principles involved. It's also a bad idea to use benchmarks blindly: Just because the IRS has a formula for business appraisal does not justify its use in every case. Even if it is the most appropriate method, the witness must be able to explain why it is applicable under the circumstances. He or she must be knowledgeable enough to discuss the theoretical under-pinnings of any method in general use among appraisers.
EXPERT TESTIMONY: HOW IT WORKS
Voir dire: The process of qualifying the witness to testify. Ordinarily, a witness may testify only on facts he or she knows from firsthand observation but may offer an opinion based on experience, education or training. The judge rules on whether the witness is qualified to provide evidence on the matter before the court.
Direct examination: The CPA gives his or her opinion in response to questions from the client's attorney.
Cross-examination: Questioning by the other side's attorney in an attempt to discredit the witness's testimony.
Redirect examination: The client attorney's chance to rehabilitate expert testimony discredited on cross-examination.
Recross-examination: The other attorney's opportunity to discredit testimony given in redirect examination.
The initial direct and cross-examinations usually are sufficient, but a request for redirect examination can spur a series of follow-ups.
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|Author:||Zipp, Alan S.|
|Publication:||Journal of Accountancy|
|Date:||Dec 1, 1992|
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