Fall 2008
By Charles L. Kern, CPA, CVA, ABV
Litigation support work is a challenging and rewarding area of work, where you know you are helping a client solve a real problem, and not just fulfilling a regulatory obligation. What follows is a brief discussion of important issues and topics if you are considering the performance of litigation support work.
Litigation Support Practitioners
Litigation support practitioners are often engaged as either an expert or as a consultant. A project may begin with you as a consultant, but then evolve into a situation where your role is expanded to that of an expert. The work and workpapers of an expert are "discoverable," meaning you must be prepared to defend your work and workpapers in a deposition, at trial, or in arbitration. The attorney for the other side will try to prove that you and your work are inadequate. Consider this quote from the AICPA Practice Aid 06-4, Calculating Lost Profits:
"The practitioner is normally required to provide all records relating to the engagement, including correspondence, notes of meetings, reports, analyses, research, and documents or data that were reviewed or relied upon in reaching their conclusions or opinions. The practitioner may also be required to provide any drafts of reports, analyses, and other documents prepared. The practitioner should seek the advice of counsel regarding the discoverability of such information at the inception of the engagement and should remain cognizant of the requirements during the course of the engagement."
As an expert witness, you can testify about your opinion of the issues. Other witnesses can testify only as to fact. As an expert, you have special knowledge that members of the court - judge, jury, and attorneys - do not have. Therefore, your job is to educate the court. You are to be objective, and your opinion of the specific issues cannot be a function of who is paying your fee. Of course, you probably wouldn’t be testifying if the people paying you did not like your opinion of the issue. Also, be consistent. If you reported, testified, spoke, or wrote about similar issues in the past, opposing counsel will know. Inconsistency here, as in most areas of accounting, is not a good thing.
If engaged as a consultant, you might be asked to assist in developing strategies, pinpointing significant issues, fact-finding, or recommending when other experts are needed or might be helpful. The attorney with whom you are working might rely on you to do the following:
-- Suggest where the case is strong or weak relative to accounting issues
-- Suggest how an opposing expert or consultant might approach the issues
-- Suggest how an opposing expert or consultant might approach your opinions
Although your opinion should be respected because of your knowledge and experience, your opinion and techniques must be built on solid ground. Cite authority for your beliefs and opinions. Deviation from authoritative sources or industry best practices is a recipe for disaster.
Required Experience
In litigation support, it is important to stay within your comfort zone. If your comfort zone is not very big, you might need to expand it through a combination of continuing education and related experience. Among the critical areas of training and experience are the following:
-- Internal control evaluation
-- Accounting theory and pronouncements
-- Auditing theory and standards
-- Tax law and regulations
-- Financial analysis and modeling
-- Application of statistical methods, such as trend analysis, regression analysis, and Benford’s "Law"
Other helpful skills include these items:
-- Presenting complex issues and concepts in a clear and easily understood manner. Teaching experience would be helpful.
-- An ability to reconstruct financial data. Forensic accounting is the art of drawing reasonable conclusions from incomplete data.
-- Knowing where to get, and how to analyze and interpret, relevant economic, industry, and statistical data. The Internet makes this easier, but you must be sure that the source is sufficiently authoritative.
-- Understanding the relevant legal issues and rules of evidence. The attorneys you work with, continuing education programs, and the PICPA Forensic & Litigation Services Committee can all be helpful.
Other Considerations
Generally, the courts will not award damages based on speculation or if there are other probable causes for the damages. In addition, a damaged party is expected to take actions to mitigate their losses, if possible. Below are a few brief examples of a lack of care that I have run across:
-- An injured businessman, who operated the business out of his home office, submitted a series of tax returns as evidence of his loss in the year of his injury. He did his own returns, but in that injury year he had improperly calculated the "office in home" deduction. When corrected, his income for that year actually increased.
-- A revenue-base projection was based on a common regression analysis model found in commonly used software. The number of "data points" appeared to be very few, so it was determined to be insufficient to be statistically reliable. The person preparing the projection was unaware of how to, or was not careful to, test for reliability.
-- An automobile dealer claimed lost profits due to a spill of hazardous liquids in the sales lot just prior to a sales event, closing the dealership for days. It was determined that at the same time a blizzard covered the highways and sales lot with 18 inches of snow over the same period of time. Sales would have been diminished or lost even without the hazardous material spill. So cleanup costs to recover? Yes. Lost profits? Doubtful.
I hope this litigation services overview shed a little light on this practice specialty area. If interested, a lot more research needs to be done on your part. A great place to start is PICPA’s Forensic & Litigation Services Committee.
Charles L. Kern, CPA, CVA, ABV, is chair and chief executive officer of Kern and Company PC in Camp Hill, and chair of the PICPA Business Valuation Committee. He can be reached at kern@panetwork.com.
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