Forensic and Investigative Accounting Evidence: Litigation Services and the Accountant C Delano Gray...

Forensic and Investigative AccountingForensic and Investigative Accounting

Evidence:

Litigation Services and the

Accountant

C Delano Gray

6-10-06

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Litigation Services and the Litigation Services and the AccountantsAccountants

ConsultantConsultant Expert witnessExpert witness Court-appointed experts and special Court-appointed experts and special

mastersmasters

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Accountants and Evidence.Accountants and Evidence.

First: What to Know about

evidence

Persuasiveness of EvidencePersuasiveness of Evidence

CompetenceCompetence

SufficiencySufficiency

Persuasiveness and costPersuasiveness and cost

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CompetenceCompetence

RelevanceRelevanceIndependence of providerIndependence of provider

Effectiveness of internal controlsEffectiveness of internal controlsAuditor’s direct knowledgeAuditor’s direct knowledgeQualifications of providerQualifications of provider

Objectivity of evidenceObjectivity of evidenceTimelinessTimeliness

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Accountants use Accountants use

ofof

EvidenceEvidence

in auditingin auditing

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Types of Audit EvidenceTypes of Audit Evidence

1. Physical evidence1. Physical evidence2. Confirmation2. Confirmation3. Documentation3. Documentation4. Analytical procedures4. Analytical procedures5. Inquiries of the client5. Inquiries of the client6. Reperformance6. Reperformance7. Observation7. Observation

RelationshipsRelationships

Types ofTypes ofevidenceevidence

AuditAuditproceduresprocedures

Items toItems toselectselect

Specificinstructions

SampleSamplesizesize

TimingTimingof testsof tests

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Now

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Standards of Conduct for Performing Standards of Conduct for Performing Litigation ServicesLitigation Services

Knowledge, skills, experience, training, and Knowledge, skills, experience, training, and educationeducation

Professional codes of conductProfessional codes of conduct Conflicts of interestConflicts of interest Written agreement to perform litigation Written agreement to perform litigation

servicesservices

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Expert vs. Lay WitnessesExpert vs. Lay Witnesses

A A laylay (or (or factfact) ) witnesswitness testifies as to facts. testifies as to facts. An An expert witnessexpert witness is an individual who, is an individual who,

because of specialized training or because of specialized training or experience, is allowed to testify in court to experience, is allowed to testify in court to help the judge or jurors understand help the judge or jurors understand complicated and technical subjects.complicated and technical subjects.

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Qualifying as an Expert WitnessQualifying as an Expert Witness

Under the Frye standard, the test for admitting expert Under the Frye standard, the test for admitting expert testimony is:testimony is:

– Whether the expert’s testimony will assist the Whether the expert’s testimony will assist the trier of fact in understanding the evidence or in trier of fact in understanding the evidence or in determining a fact in issuedetermining a fact in issue

– Whether the theories and/or techniques relied Whether the theories and/or techniques relied upon by the expert are generally accepted by upon by the expert are generally accepted by the relevant professional communitythe relevant professional community

– Whether the particular expert is qualified to Whether the particular expert is qualified to present expert testimony on the subject at issuepresent expert testimony on the subject at issue

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Qualifying as an Expert WitnessQualifying as an Expert WitnessUnder the Federal Rules of Evidence, a judge will Under the Federal Rules of Evidence, a judge will permit an accountant to testify as an expert witness only permit an accountant to testify as an expert witness only if the judge decides that:if the judge decides that:– The accountant’s testimony will help the jurors or The accountant’s testimony will help the jurors or

judge understand the evidence or determine a fact in judge understand the evidence or determine a fact in issueissue

– The accountant is qualified as an exert by knowledge, The accountant is qualified as an exert by knowledge, skill, experience, training or educationskill, experience, training or education

– The accountant can show that his or her testimony (a) The accountant can show that his or her testimony (a) will be based on sufficient facts or data and (b) will will be based on sufficient facts or data and (b) will be the product of reliable principles and methods that be the product of reliable principles and methods that have been applied reliably to the facts of the casehave been applied reliably to the facts of the case

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In In Daubert v. Merrill Dow Pharmaceuticals, Daubert v. Merrill Dow Pharmaceuticals, Inc.,Inc., the U.S. Supreme Court established the the U.S. Supreme Court established the rule for federal courts that trial judges have a rule for federal courts that trial judges have a special responsibility to ensure that scientific special responsibility to ensure that scientific testimony is not only relevant, but also reliable. testimony is not only relevant, but also reliable.

In In Kumho Tire Company, Ltd. v. CarmichaelKumho Tire Company, Ltd. v. Carmichael , , the Supreme Court decided that a judge’s the Supreme Court decided that a judge’s “gatekeeping” obligation applies not only to “gatekeeping” obligation applies not only to scientific testimony but to all expert testimony.scientific testimony but to all expert testimony.

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Qualifying as an Expert WitnessQualifying as an Expert WitnessIn In DaubertDaubert, the U.S. Supreme Court suggested that , the U.S. Supreme Court suggested that judges consider the following factors:judges consider the following factors:– Whether the theory or technique in question can Whether the theory or technique in question can

be (and has been) testedbe (and has been) tested– Whether the theory or technique in question has Whether the theory or technique in question has

been subjected to peer review and publicationbeen subjected to peer review and publication– The theory’s or technique’s known or potential The theory’s or technique’s known or potential

error rateerror rate– Whether the theory or technique has attracted Whether the theory or technique has attracted

widespread acceptance within the relevant widespread acceptance within the relevant communitycommunity

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Qualifying as an Expert WitnessQualifying as an Expert WitnessFiglewicz and Sprohge in their article, “The CPA’s Figlewicz and Sprohge in their article, “The CPA’s Expert Witness Role in Litigation Services: A Maze Expert Witness Role in Litigation Services: A Maze of Legal and Accounting Standards,” offer ten of Legal and Accounting Standards,” offer ten guidelines to help avoid legal challenges:guidelines to help avoid legal challenges:

1.1. Know the relevant professional standardsKnow the relevant professional standards

2.2. Apply the relevant professional standardsApply the relevant professional standards

3.3. Know the relevant professional literatureKnow the relevant professional literature

4.4. Know the relevant professional organizationsKnow the relevant professional organizations

(continued on next slide)(continued on next slide)

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5.5. Use generally accepted analytical methodsUse generally accepted analytical methods6.6. Use multiple analytical methodsUse multiple analytical methods7.7. Synthesize the conclusions of the multiple Synthesize the conclusions of the multiple

analytical methodsanalytical methods8.8. Disclose all significant analytical Disclose all significant analytical

assumptions and variablesassumptions and variables9.9. Subject the analysis to peer reviewSubject the analysis to peer review10.10. Test the analysisTest the analysis—and the conclusions—for —and the conclusions—for

reasonablenessreasonableness

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Preparing to Testify as an Preparing to Testify as an Expert WitnessExpert Witness

Maintaining independence from the clientMaintaining independence from the client Evidence upon which experts may relyEvidence upon which experts may rely Use of confidential client informationUse of confidential client information Expert reportsExpert reports Working papersWorking papers Evaluation of other expertsEvaluation of other experts Exhibits and other demonstrative evidenceExhibits and other demonstrative evidence

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Testifying at a DepositionTestifying at a Deposition

The scope of their assignmentThe scope of their assignment Their current employment (job title, duties)Their current employment (job title, duties) Their educational backgroundTheir educational background LicensesLicenses Work experienceWork experience Memberships in professional organizationsMemberships in professional organizations


Expert witnesses can expect to be asked about the Expert witnesses can expect to be asked about the following at a deposition:following at a deposition:

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Testifying at a DepositionTestifying at a Deposition

Publication and lecturesPublication and lectures Fields in which they are qualified as an expertFields in which they are qualified as an expert Other work they have performed as an expert Other work they have performed as an expert

or other litigation consultantor other litigation consultant What compensation they are receiving (and What compensation they are receiving (and

what percentage of their compensation is what percentage of their compensation is derived from testifying as an expert witness)derived from testifying as an expert witness)

What opinions they have formedWhat opinions they have formed The bases for their opinionsThe bases for their opinions

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Testifying at TrialTestifying at Trial

According to Bursztajn and Brodsky in their article, According to Bursztajn and Brodsky in their article, “Ethical and Effective Testimony During Direct “Ethical and Effective Testimony During Direct Examination and Cross-Examination Post-Daubert,” the Examination and Cross-Examination Post-Daubert,” the following should be the primary goals of an expert following should be the primary goals of an expert witness:witness:– To communicate the truth to the jury in an ethical, To communicate the truth to the jury in an ethical,

objective, and effective wayobjective, and effective way– To maintain your autonomy, authenticity, and To maintain your autonomy, authenticity, and

integrityintegrity– To uphold the values of your professionTo uphold the values of your profession


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Testifying at TrialTestifying at Trial

– To interact with attorneys and with the judge and To interact with attorneys and with the judge and jury in an atmosphere of mutual respectjury in an atmosphere of mutual respect

– To engage in an ongoing dialogue with your To engage in an ongoing dialogue with your attorney so that, together, you can educate as well as attorney so that, together, you can educate as well as learn from the judge and jury as to what questions learn from the judge and jury as to what questions each may haveeach may have

– To speak directly to the issuesTo speak directly to the issues– To make complex matters understandable without To make complex matters understandable without

oversimplifyingoversimplifying

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Liability of Expert WitnessesLiability of Expert Witnesses

Witness immunityWitness immunity

– Threat of lawsuitThreat of lawsuit

– Claims of negligenceClaims of negligence Bases for liabilityBases for liability

– Breach of contractBreach of contract

– NegligenceNegligence

– Criminal processCriminal process


Proper Evidence Management

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Rules of EvidenceRules of Evidence

The rules of evidence are the rules governing The rules of evidence are the rules governing the admissibility of evidence in a legal the admissibility of evidence in a legal proceeding and the weight to be given to proceeding and the weight to be given to evidence that is admitted.evidence that is admitted.

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What Is Evidence?What Is Evidence?

EvidenceEvidence is testimony, writings, and is testimony, writings, and material objects offered to prove an alleged material objects offered to prove an alleged fact or proposition.fact or proposition.

Direct evidenceDirect evidence is evidence that directly is evidence that directly proves a fact at issue, without the need for proves a fact at issue, without the need for any inference or presumption.any inference or presumption.

Circumstantial evidenceCircumstantial evidence is evidence from is evidence from which a fact at issue may be proved which a fact at issue may be proved indirectly.indirectly.

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Relevance RequirementRelevance Requirement

Circumstantial evidenceCircumstantial evidence Inflammatory evidenceInflammatory evidence Evidence about plaintiff’s characterEvidence about plaintiff’s character Evidence of habitEvidence of habit Exclusionary rulesExclusionary rules Evidence of liabilityEvidence of liability

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Privileged CommunicationsPrivileged Communications Attorney-client privilegeAttorney-client privilege

– Employee communicationsEmployee communications– Work product ruleWork product rule– Attorney-requested accounting workAttorney-requested accounting work

Medical privilegeMedical privilege Spousal privilegeSpousal privilege Other typesOther types

– ReligiousReligious– GovernmentalGovernmental

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Hearsay RuleHearsay Rule

HearsayHearsay is is an oral or written assertion, an oral or written assertion, other than one made by the declarant other than one made by the declarant while testifying at the trial or hearing, while testifying at the trial or hearing, offered in evidence to prove the truth of offered in evidence to prove the truth of the matter asserted.the matter asserted.

As a general rule, hearsay is not As a general rule, hearsay is not admissible as evidence in a legal admissible as evidence in a legal proceeding.proceeding.

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In some situations a statement that appears to In some situations a statement that appears to be hearsay is offered to prove a fact other than be hearsay is offered to prove a fact other than the matter asserted:the matter asserted:

– Legally operative fact: That the Declarant Legally operative fact: That the Declarant made a statement, not if the statement is made a statement, not if the statement is truetrue

– Effect on the listener: Effect on the listener: – State of mind of the declarantState of mind of the declarant– ImpeachmentImpeachment

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There are three concepts underlying the There are three concepts underlying the exceptions to the general rule barring hearsay:exceptions to the general rule barring hearsay:

– TrustworthinessTrustworthiness

– Unavailability of the declarantUnavailability of the declarant

– Practical considerationsPractical considerations

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Authentication RequirementAuthentication Requirement

To be admissible as evidence in a legal To be admissible as evidence in a legal proceeding, a document or other material proceeding, a document or other material usually must be authenticated or identified as usually must be authenticated or identified as to what its proponent claims it to be.to what its proponent claims it to be.

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Best Evidence RuleBest Evidence Rule

Under the Under the best evidence rulebest evidence rule (also referred to (also referred to as the as the original writing ruleoriginal writing rule), to prove the ), to prove the contents of a writing, recording, or contents of a writing, recording, or photograph, the original writing, recording, or photograph, the original writing, recording, or photograph usually must be presented.photograph usually must be presented.

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Demonstrative EvidenceDemonstrative Evidence

Demonstrative evidenceDemonstrative evidence is an item that is an item that illustrates testimony but has no probative illustrates testimony but has no probative value in itself (such as a chart, diagram, value in itself (such as a chart, diagram, photograph, video, or model).photograph, video, or model).

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Special RulesSpecial Rules

Criminal casesCriminal cases Administrative proceedingsAdministrative proceedings

– Tone of the proceedingsTone of the proceedings

– Residuum ruleResiduum rule

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Residuum RuleResiduum Rule

The residuum rule is that no finding may be The residuum rule is that no finding may be supported solely by hearsay evidence.supported solely by hearsay evidence.

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Maximizing Client ConfidentialityMaximizing Client ConfidentialityMichael Mostek, in Michael Mostek, in Expert Witnessing in Forensic Expert Witnessing in Forensic AccountingAccounting, provides the following advice for protecting , provides the following advice for protecting the work product privilege:the work product privilege:

– The attorney should directly retain the consultant.The attorney should directly retain the consultant.– The agreement should be between attorney and The agreement should be between attorney and

expert.expert.– The expert should obtain facts through, or at the The expert should obtain facts through, or at the

direction of, the attorney.direction of, the attorney.– The investigation should be done at the direction of The investigation should be done at the direction of

the attorney.the attorney.– The attorney should be present when the consultant The attorney should be present when the consultant

meets with the client.meets with the client.

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AICPA Top Technologies Task ForceAICPA Top Technologies Task Force

The task force found the following top ten The task force found the following top ten technologies for 2002 in descending order of technologies for 2002 in descending order of importance:importance:

1.1. Business and financial reporting applicationsBusiness and financial reporting applications

2.2. Training and technology competencyTraining and technology competency

3.3. Information security and controlsInformation security and controls

4.4. Quality of serviceQuality of service

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AICPA Top Technologies Task ForceAICPA Top Technologies Task Force

5.5. Disaster recovery (includes business Disaster recovery (includes business continuation and contingency planning)continuation and contingency planning)

6.6. Communication technologies bandwidthCommunication technologies bandwidth7.7. Remote connectivity toolsRemote connectivity tools8.8. Web-based and web-enabled applications Web-based and web-enabled applications

(Internet)(Internet)9.9. Qualified IT personnelQualified IT personnel10.10. Messaging applications (e-mail, faxing, Messaging applications (e-mail, faxing,

voicemail, instant messaging)voicemail, instant messaging)

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Using Technology to Gather EvidenceUsing Technology to Gather Evidence

Drill-down functionalityDrill-down functionality Electronic imagingElectronic imaging Digital Analysis Tests and Statistics (DATAS)Digital Analysis Tests and Statistics (DATAS) Data warehousing/miningData warehousing/mining

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Computer EvidenceComputer Evidence

Protecting data in hardware seizuresProtecting data in hardware seizures Insidious e-mailsInsidious e-mails Documenting computer evidenceDocumenting computer evidence

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Evidence ManagementEvidence Management

Do not mark, staple, or otherwise alter any Do not mark, staple, or otherwise alter any documents or other evidence that might find documents or other evidence that might find its way into courtits way into court

Record how the documents were obtained Record how the documents were obtained and who has handled itand who has handled it

Use see-through holders to avoid putting Use see-through holders to avoid putting fingerprints on documentsfingerprints on documents

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Evidence ManagementEvidence Management

Store original documents and working Store original documents and working papers in fireproof safes or locked cabinetspapers in fireproof safes or locked cabinets

Protect material stored on a computer with a Protect material stored on a computer with a passwordpassword

Make backup copies on a regular basis and Make backup copies on a regular basis and store in a separate locationstore in a separate location

Copy, inventory and index evidence so that Copy, inventory and index evidence so that it can be readily found when neededit can be readily found when needed


Litigation Support in

Some Special Situations

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Antitrust LawsAntitrust Laws

Antitrust laws are an outgrowth of the early Antitrust laws are an outgrowth of the early years of the Industrial Age in the United years of the Industrial Age in the United States when a small number of powerful States when a small number of powerful businessmen used any tactic at their disposal businessmen used any tactic at their disposal to force competitors out of business. Because to force competitors out of business. Because such business practices were not in the best such business practices were not in the best interest of the country, federal legislation was interest of the country, federal legislation was passed that prohibits the formation and passed that prohibits the formation and continuation of monopolies except when in continuation of monopolies except when in the best interest of the public.the best interest of the public.

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Role of Accountants in Role of Accountants in Antitrust LitigationAntitrust Litigation

Accountants may be called upon to Accountants may be called upon to determine whether there is liability under determine whether there is liability under the antitrust laws. The primary issue that the antitrust laws. The primary issue that forensic accountants address is whether the forensic accountants address is whether the defendant has engaged in predatory pricing.defendant has engaged in predatory pricing.

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Predatory PricingPredatory Pricing

Predatory pricing is the act of pricing a Predatory pricing is the act of pricing a product so low that the only logical product so low that the only logical explanation is that the pricing is designed to explanation is that the pricing is designed to drive competitors out of business.drive competitors out of business.

The operational definition is whether a The operational definition is whether a company prices its products or services company prices its products or services below “average variable cost” and, if so, below “average variable cost” and, if so, predatory pricing is present.predatory pricing is present.

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Federal False Claims ActFederal False Claims Act

The Federal False Claims Act was passed to The Federal False Claims Act was passed to protect the government from the unscrupulous protect the government from the unscrupulous acts of a few government contractors that acts of a few government contractors that intentionally or carelessly overcharge the intentionally or carelessly overcharge the government for goods or services.government for goods or services.

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Accountant’s Role in Federal False Accountant’s Role in Federal False Claims Act LitigationClaims Act Litigation

Typical questions that accountants help courts to answer Typical questions that accountants help courts to answer are:are:

– What costs should be included in the contract?What costs should be included in the contract?– How should costs be measured under the contract?How should costs be measured under the contract?– What is the correct timing of the costs and/or What is the correct timing of the costs and/or

revenues under the contract?revenues under the contract?– What accounting concepts, rules, etc., apply under What accounting concepts, rules, etc., apply under

this contract?this contract?– What is the magnitude of the damages that occurred What is the magnitude of the damages that occurred

because of the fraud that took place?because of the fraud that took place?

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Accountant’s Role in Federal False Accountant’s Role in Federal False Claims Act LitigationClaims Act Litigation

Under the Federal False Claims Act, a person Under the Federal False Claims Act, a person acts knowingly with respect to information if the acts knowingly with respect to information if the person has:person has:

– Actual knowledge of informationActual knowledge of information

– Acts in deliberate ignorance of the truth or Acts in deliberate ignorance of the truth or falsity of the informationfalsity of the information

– Acts in reckless disregard of the truth or Acts in reckless disregard of the truth or falsity of the informationfalsity of the information

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The End The End

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