Are you an expert?

California CPA, August, 2004 by John F. Raspante

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Daubert v. Merrell Dow Pharmaceuticals superceded the Frye rule in 1993, when the court found that evidence must be supported by the scientific method, thereby placing more importance on methodology than on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.