Choosing the Financial
Expert Witness© 2001
By David H. Goodman,
MBA, CPA, CVA
Attorneys often have needs for financial
expert witnesses: personal injury, damage awards, tax law, shareholder actions,
divorce, and other litigation matters. These cases may involve forensic
accounting, financial or economic analysis, business valuation services, tax
analyses, and so forth. Choosing the right expert is often one of the most
important decisions an attorney is faced with -- especially if the attorney is
not experienced in choosing an expert. To succeed an expert must be credible. A
credible expert will be knowledgeable, experienced, objective, and an effective
communicator. Attorneys looking for an expert often ask other attorneys for a
referral, but the process does not stop here. You must decide for yourself if
you have found the right expert for your needs.
Is your
"expert" in fact an expert?
What
constitutes knowledge, skill, experience, training or education?
Does your expert have
integrity and objectivity?
How well does
your expert communicate?
How much
experience should your expert have?
Is your
"expert" in fact an expert?
An expert must show that his testimony
“rests on a reliable foundation and is relevant to the task at hand.
Pertinent evidence based on scientifically valid principles will satisfy those
demands." This principle was set forth in a decision handed down by
the Supreme Court of the United States in William Daubert, et ux., etc.,et al.,
v. Merrell Dow Pharmaceuticals, Inc., , No. 92-102. In response to Daubert (pronounced "Dawbert"),
the Federal Rules of Evidence were amended.
Prior to the change, FRE 702 stated that an expert who was qualified by
"…by knowledge, skill, experience, training, or education may
testify…" To this was added that an expert’s testimony is admissible
"if (1) the testimony is based upon sufficient facts or data, (2) the
testimony is the product of reliable principles and methods, and (3) the
witness has applied the principles and methods reliably to the facts of the
case." While it is up to the
trial judge to determine what expert testimony is acceptable; clearly for an
expert’s opinion to be accepted, the expert will have to show that he/she has
complied with these criteria.
Many states follow the Federal rules
and testifying experts are accustomed to explaining how their process and
conclusions have been reached.
Massachusetts has not formally adopted FRE 702; however the SJC adopted
the Daubert decision in Commonwealth v. Lanigan, 419 Mass. 15, 24 - 27
(1994). As other states issue opinions
regarding the acceptance of expert testimony, these opinions are being cited by
the Massachusetts and other state courts in their opinions. For more on the ramifications of Daubert go
to www.daubertontheweb.com.
What constitutes knowledge, skill, experience, training or
education?
The "expert" who has taken
a four-hour course in business valuation, and uses a software program to
compute the value and to create his report, may not be capable of explaining
the basis for his report to a judge or jury. Will this expert be able to explain
the principles and methods he used to reach a conclusion? Can he explain the
underlying concepts and assumptions used to value a business? Can he explain
not just what data was used, but also why it was used and that its use is
consistent with the underlying principles?
Not every financial expert is
competent in all types of cases. Some people mistakenly believe a CPA is
qualified for any type of engagement. This may not be the case. Certain CPAs
may specialize in income taxation or gift and estate planning. Individuals or firms may specialize only in
a specific industry, such as medical practices or restaurants, and are known by
their peers to be experts in their industry. Some have general practices and
may only occasionally do a business valuation or work on a divorce case. Others
specialize in litigation support or business valuation and are highly competent
in a number of industries. It is
important to understand what type of practice your expert has.
All experts should be involved in a
regular program of continuing education.
It also helps if your expert has been certified by a credible
organization. These organizations have
standards for ethical behavior, accepted practices, and the content of reports.
Does your
expert have integrity and objectivity?
A few years ago, a Massachusetts
Judge discarded the testimony of and reprimanded a well-known expert for
testimony that contradicted testimony he had made in previous court
appearances. Not only did this expert
discredit himself; he left the attorney who engaged him with a very angry
client. An expert testifies to assist the court and to help the court
understand complex issues -- not to be an advocate for your client. In Wagner
Construction, Inc. v. CIR, T.C. Memo 2001-160, the Tax Court considered whether
the compensation paid to Wagner Construction's two shareholders was deductible
under IRC §162. Under §162 reasonable compensation is an allowed business
deduction; however "excess compensation" is treated as a taxable
dividend to the shareholder and is not deductible by the business. Both the IRS
and the taxpayer presented two experts. The Court rejected the testimony of all
four experts finding that the experts acted as advocates for their clients. The
Court went further to state:
"An
expert has a duty to the Court that exceeds his duty to his client; the expert
is obligated to present data, analysis, and opinion with detached neutrality
and without bias, regardless of the effect of such unbiased presentation on his
client's case."
While it does not guarantee
competence and objectivity, those who are certified by an accrediting
organization are bound by the ethics and standards of their organization.
How well does your expert communicate?
`
A good
report will allow another person to replicate the process and conclusions of
the writer. Check what societies the expert belongs to. Many have standards, especially
in business valuation, governing the contents of reports. A good way to
determine an expert's style and ability to communicate is to meet with them.
See for yourself how they present themselves. Certainly, if you find them
making you uncomfortable a judge or jury will also. Ask the expert for a sample
written report -- business valuation report, forensic report, or such other
report as may be relevant to your case. How well does the expert present
him/herself in writing? An expert who communicates well can greatly facilitate
the reaching of a settlement even before reaching the trial stage.
How much experience should your expert have?
The courts have rejected the
testimony of highly experienced and known experts. In the above Wagner
Construction, Inc. v. CIR case, one of the experts was nationally known and
published. Certain Massachusetts Family and Probate Court judges have told me
they know what some experts are going to say before they even testify. An
expert's credibility can be further eroded if they regularly appear as a
specific attorney's expert or if they only represent one side of a case. For
example, in divorce cases, do only attorneys representing wives engage the
expert? An expert who meets the criteria set forth in Daubert*, has integrity
and objectivity, and communicates well, will have credibility with the court.
* Please refer to the section "Is
your 'expert' in fact an expert?" above.
You cannot effectively choose or use a financial expert if you do
not know something about the type of services you are requesting. The Litigation Services Handbook, The Role of the Financial
Expert, by Roman L. Weil
(Editor), et al, John Wiley and Sons, is an excellent all around reference.
There are a number of excellent general texts concerning business valuation
including Lawyers Business Valuation Handbook,
by Shannon Pratt, published by the American Bar Association and The Business
Appraiser and Litigation Support, by Michele G. Miles, John Wiley
and Sons. Do your homework with
regard to knowing what positions your expert and the other side's expert have
taken in the past. Use your expert to help you prepare. Nevertheless, remember that your expert is
not your client's advocate and do not pressure him/her to take this role. In
conclusion, know what you need and what to expect from your expert. Make sure
that your expert is competent, objective, and an excellent communicator.
