Forensic and Investigative Accounting

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2. Chapter 8 Forensic and Investigative Accounting 2 Litigation in the United States The U.S. tort system cost $252 billion in 2007, which was $835 per U.S. citizen ($12 in 1950). Medical malpractice costs totaled nearly $30.3 billion in 2006, or about $101 per person (compared to $5 per person in 1975). Some of these costs are expert witnessing fees. (continued on next slide)

3. Chapter 8 Forensic and Investigative Accounting 3 Litigation in the United States The five major phases of litigation are: Pleadings. Discovery. Trial. Outcome. Possible appeal. Much of the work for forensic accountants occurs in the discovery stage.

4. Chapter 8 Forensic and Investigative Accounting 4 Forensic Report

5. Chapter 8 Forensic and Investigative Accounting 5 Body of rules and practices by which justice is handed out by the legal system. Federal Rules of Civil Procedure (FRCP): governs U.S. district courts.* Federal Rules of Criminal Procedure. Federal Rules of Evidence. * Find at www.law.cornell.edu/rules/frcp/overview.htm Civil Procedure

6. Chapter 8 Forensic and Investigative Accounting 6 Types of Litigation Services Provided by Accountants Consultant Expert witness Court-appointed experts and special masters

7. Chapter 8 Forensic and Investigative Accounting 7 Standards of Conduct for Performing Litigation Services Knowledge, skills, experience, training, and education. Professional codes of conduct. Conflicts of interest. Written agreement to perform litigation services.

8. Chapter 8 Forensic and Investigative Accounting 8 Expert vs. Lay Witnesses A lay (or fact) witness testifies as to facts. An expert witness is an individual who, because of specialized training or experience, is allowed to testify in court to help the judge or jurors understand complicated and technical subjects.

9. Chapter 8 Forensic and Investigative Accounting 9 Qualifying as an Expert Witness Under the Frye standard, the test for admitting expert testimony is: Whether the expert�s testimony will assist the trier of fact in understanding the evidence or in determining a fact in issue. Whether the theories and/or techniques relied upon by the expert are generally accepted by the relevant professional community. Whether the particular expert is qualified to present expert testimony on the subject at issue. (continued on next slide)

10. Chapter 8 Forensic and Investigative Accounting 10 Qualifying as an Expert Witness Under the Federal Rules of Evidence, a judge will permit an accountant to testify as an expert witness only if the judge decides that: The accountant�s testimony will help the jurors or judge understand the evidence or determine a fact in issue. The accountant is qualified as an expert by knowledge, skill, experience, training, or education. The accountant can show that his or her testimony (a) will be based on sufficient facts or data and (b) will be the product of reliable principles and methods that have been applied reliably to the facts of the case. (continued on next slide)

11. Chapter 8 Forensic and Investigative Accounting 11 Qualifying as an Expert Witness In Daubert v. Merrill Dow Pharmaceuticals, Inc., the U.S. Supreme Court established the rule for federal courts that trial judges have a special responsibility to ensure that scientific testimony is not only relevant, but also reliable. In Kumho Tire Company, Ltd. v. Carmichael, the Supreme Court decided that a judge�s �gatekeeping� obligation applies not only to scientific testimony but to all expert testimony. (continued on next slide)

12. Chapter 8 Forensic and Investigative Accounting 12 Qualifying as an Expert Witness In Daubert, the U.S. Supreme Court suggested that judges consider the following factors: Whether the theory or technique in question can be (and has been) tested. Whether the theory or technique in question has been subjected to peer review and publication. The theory or technique�s known or potential error rate. Whether the theory or technique has attracted widespread acceptance within the relevant community. (continued on next slide)

13. Chapter 8 Forensic and Investigative Accounting 13 Qualifying as an Expert Witness Figlewicz and Sprohge in their article, �The CPA�s Expert Witness Role in Litigation Services: A Maze of Legal and Accounting Standards,� offer ten guidelines to help avoid legal challenges: Know the relevant professional standards. Apply the relevant professional standards. Know the relevant professional literature. Know the relevant professional organizations. (continued on next slide)

14. Chapter 8 Forensic and Investigative Accounting 14 Qualifying as an Expert Witness Use generally accepted analytical methods. Use multiple analytical methods. Synthesize the conclusions of the multiple analytical methods. Disclose all significant analytical assumptions and variables. Subject the analysis to peer review. Test the analysis�and the conclusions�for reasonableness.

15. Chapter 8 Forensic and Investigative Accounting 15 Preparing to Testify as an Expert Witness Maintaining independence from the client. Evidence upon which experts may rely. Use of confidential client information. Expert reports. Working papers. Evaluation of other experts. Exhibits and other demonstrative evidence.

16. Chapter 8 Forensic and Investigative Accounting 16 Testifying at a Deposition The scope of their assignment. Their current employment (job title, duties). Their educational background. Licenses. Work experience. Memberships in professional organizations. (continued on next slide)

17. Chapter 8 Forensic and Investigative Accounting 17 Testifying at a Deposition Publication and lectures. Fields in which they are qualified as an expert. Other work they have performed as an expert or other litigation consultant. What compensation they are receiving (and what percentage of their compensation is derived from testifying as an expert witness). What opinions they have formed. The bases for their opinions. Almost anything.

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20. Chapter 8 Forensic and Investigative Accounting 20 Testifying at Trial According to Bursztajn and Brodsky in their article, �Ethical and Effective Testimony During Direct Examination and Cross-Examination Post-Daubert,� the following should be the primary goals of an expert witness: To communicate the truth to the jury in an ethical, objective, and effective way. To maintain your autonomy, authenticity, and integrity. To uphold the values of your profession. (continued on next slide)

21. Chapter 8 Forensic and Investigative Accounting 21 Testifying at Trial To interact with attorneys and with the judge and jury in an atmosphere of mutual respect. To engage in an ongoing dialogue with your attorney so that, together, you can educate as well as learn from the judge and jury as to what questions each may have. To speak directly to the issues. To make complex matters understandable without oversimplifying.

22. Chapter 8 Forensic and Investigative Accounting 22 Liability of Expert Witnesses Witness immunity Threat of lawsuit Claims of negligence Bases for liability Breach of contract Negligence Criminal process

23. Chapter 8 Forensic and Investigative Accounting 23 Searchable Databases of Daubert Decisions Daubert Tracker (launched August 2002) 570 accounting decisions (mid-July 2006). 314 accounting experts admitted, 203 denied, 53 admitted/denied in part. 55%, 36%, and 9.3% ratios 14,000 trial and appellate opinions. 21,000 expert reports. Composed of five distinct services. The searchable database of all reported cases. Core documents � docket sheets, briefs and transcripts � for each case. An e-mail update of new cases from the previous week. A quarterly journal with articles by trial attorneys, law professors, judges and experts. A series of �Web lectures� delivered by authorities on Daubert and scientific evidence. www.dauberttracker.com. A year subscription is $295.

24. Chapter 8 Forensic and Investigative Accounting 24 Daubert

25. Chapter 8 Forensic and Investigative Accounting 25 Searchable Databases of Daubert Decisions �Daubert on the Web� Online free tracking service. www.daubertontheweb.com. In July, 2009, 87 cases were under the field �Accountants and Economists� with an admissibility rate of .598. There are a total of 25 fields with various �admissibility rate,� such as Appraisers 0.800 Computer experts, 0.667 Criminologists, 0.847 Marketing experts, 0.333 Polygraphers, 0.121 Statisticians, 0.625

26. Chapter 8 Forensic and Investigative Accounting 26 Written Reports An expert should never draft a written report of any kind unless he or she has been expressly directed to do so by hiring counsel. Federal Rules of Civil Procedure 26(a)(2)(B) requires a written report. Keep a diary of interview dates, etc. Do not destroy interview notes.

27. Chapter 8 Forensic and Investigative Accounting 27 Written Report Contents(FRCP 26(a)(2)(B)) All opinions to be expressed and the bases for them. Data or other information considered in forming the opinions. Any exhibits to be used as a summary of or support for opinions. Witness qualifications, including a list of all publications authored within the last 10 years. Witness compensation. List of other disputes in which the witness has testified at deposition or trial during the last 4 years. Signature of the expert testifying. Note: Federal Rule of Civil Procedure 27(e)(1) indicates that an expert must update a written report or disposition.

28. Chapter 8 Forensic and Investigative Accounting 28 Types of Expert Reports Fact-oriented report � gathers and evaluates facts and uses them to prepare a report. Check and re-check the numbers and the facts. Opinion report (e.g., valuation report) � more subjective and rely more on the professional judgment of the expert. Combination of above types.