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Litigation Support
LITIGATION SUPPORT "ETHICS OF A CPA EXPERT WITNESS: SWIMMING WITH THE SHARKS" Copyright . James J. Rigos. All Rights Reserved. Table of Contents A. INTRODUCTION
B. INDEPENDENCE PROBLEMS
1. AICPA View
2. Opposing Attorney's Position
C. CONFLICTS OF INTEREST PROBLEMS
1. AICPA Rule 102
2. Conflict Check
3. Subtle Conflicts
4. Position Conflicts
D. EXPERT QUALIFICATION PROBLEMS
1. Court Rule
2. Application to Details
3. Legal Analysis Testimony
E. MULTIPLE CLIENT PROBLEMS
F. SHIFTING ATTORNEYS PROBLEMS
G. COMPENSATION PROBLEMS
H. LEGAL LIABILITY
1. Client-Based Litigation
2. Judicial Immunity
3. Opposing Party Litigation
4. Expert - Factual Distinction
5. Expert Witness Dilemma
I. ENGAGEMENT LETTER CONSIDERATIONS
1. Formal Document Useful
2. Modifications in Writing
3. Dis-Engagement Letter
4. Non-Engagement Letter
J. CONCLUSIONA. INTRODUCTION
When a CPA performs litigation support services for a client they are swimming with the sharks; a litigation environment breeds litigation. Expert witness testimony may be the most dangerous of all litigation support engagements; this article examines only the legal considerations facing such a CPA.
B. INDEPENDENCE PROBLEMS
1. AICPA View: The AICPA official position is that the performance of consulting services for an attest client does not, in and of itself, impair independence. However, this situation is circular because audit independence is put at risk if the same practitioner becomes an advocate of management assertions in the role of an expert witness.
2. Opposing Attorney's Position: The opposing attorney will exploit the CPA "wearing two hats" or "testifying about their own work." In the expert witness arena, opposing counsel may use the two roles to show you are not objective. This suggests that a client's on-going CPA may be neither independent nor objective in a case involving the same client. While it may cost more, the client should normally hire an independent CPA to perform expert witness functions.
C. CONFLICT OF INTEREST PROBLEMS
1. AICPA Rule 102: This rule applies to all professional services and requires objectivity, integrity, and that the CPA be free of conflicts of interest. It further states that a member shall not knowingly misrepresent facts. This prohibition also applies to experts and seems to require a reasonable basis for the testimony. A CPA can not testify that non-GAAP treatment is GAAP or visa- versa. This standard may restrict the advocacy ability of the CPA.
2. Conflict Check: The first step in any litigation engagement is to do a conflict of interest check. Obviously if one of the opposing parties is your firm's client, you have a conflict. Are there firm clients that could be potential third-party defendants or that might otherwise be brought into the lawsuit? Do you regularly do work for opposing counsel?
3. Subtle Conflicts: Prudence suggests the conflict analysis should go beyond the actual or potential parties to the lawsuit. Does your firm have an important client who may perceive his interest as adverse to the litigation client? Does the lawyer have a bad name? Will the suit draw publicity? For example, if you are asked to give expert malpractice testimony against another CPA, do you want to get a reputation as a hired gun suing your own peers? If so, your own self-interest may create a conflict.
4. Position Conflicts: Are you comfortable with the position the lawyer wants you to take? How aggressive is it? Remember Rule 102 does not allow you to knowingly misrepresent facts or GAAP. Have you taken a contrary position in previous litigation or a publication? If so, you may end up helping the opposing party.
D. QUALIFICATION PROBLEMS
1. Court Rule: Evidence Rule 702 requires that an expert accountant must have specialized knowledge, skill, experience, training or education. The opinion must be helpful and meaningful to the trier of fact; usually this implies recent experience in the area. The trial judge makes this threshold determination prior to the jury hearing the testimony. While the judge can hold that insufficient qualifications go to the weight to be afforded the testimony, they also may refuse to allow the CPA to take the stand.
2. Application to Details: The mere fact that one is a CPA is not normally enough. The expert must have actual recent experience in applying the expertise. A college professor who has not had recent experience may not qualify. Similarly, the experience should be related to the question at issue. The fact you have done a thousand individual tax returns does not necessarily make you an expert in discussing a complex corporate tax reorganization question.
3. Legal Analysis Testimony: Testimony applying the law to the facts may not be allowed; the judge has the exclusive role to instruct the jury on the applicable law. The CPA cannot testify he "believes the defendant violated the law." See Garnac Grain v. Blackley, 932 F.2d 1563, 1567 (8th Cir. 1991) which disqualified two of the three plaintiff's accounting experts. There may also be local court rules here and the CPA should check the details with local counsel. If you are disqualified and no other expert has been identified and can testify, the client may blame you if they lose the lawsuit.
E. MULTIPLE CLIENT PROBLEMS
If you are representing multiple parties, trouble with one can be trouble with all. Suppose you have three clients and one out of the three refuses to pay you the fee or gets dismissed from the lawsuit. This does not extinguish your duty to the remaining two. If one gets dismissed out, do the other two go from 1/3 to 1/2 of the obligation? They may not agree to assume the extra portion. Prudence suggest all parties in a multiple-party engagement jointly and severally guarantee the whole bill.
F. SHIFTING ATTORNEYS PROBLEMS
Usually the CPA expert's contract is directly with the attorney to provide the attorney-client and work-product privileges. The party plaintiff or defendant may change attorneys during the engagement. Is the new attorney responsible for your past or future bill? Prudence suggests that both parties and attorneys agree to assume joint and several responsibility for your payment.
G. COMPENSATION PROBLEMS
There are always potential fee collection problems that should be addressed in the engagement letter. Beyond that, the fee calculation process may be subject to restrictions. AICPA Rule 302 would only prohibit compensation on a contingent fee basis (finding or result determines compensation level) if the CPA is in an attest function. Many states hold to the contrary and outright prohibit contingency fees for expert testimony work. See, for example, Washington Administrative Code 4-25-627 for a restrictive State Board statutory scheme. Practitioners should check with their own State Board.
H. LEGAL LIABILITY OF THE EXPERT CPA
1.Client-Based Litigation
a. Mattco Case 1: Mattco had engaged the CPA firm to prepare cost sheets and related evidence to support a sub-contracting and racial discrimination lawsuit asserted against General Electric (GE). The new cost sheets were materially inaccurate and not properly labeled as replacement documents. The trial court judge concluded the CPA's work product was an attempt to manufacture documentary evidence. An order was entered requiring Mattco to either pay GE $1.4 million or face dismissal of their lawsuit.
b. Mattco Case 2: Mattco then dismissed their case against GE and initiated a malpractice action against the CPA firm. Mattco v. Arthur Young, 273 Cal. Rptr. 262 (Cal. App. 2 Dist. 1990) reversed a summary judgment dismissing the CPA thus allowing the client's case to go forward to trial. In the subsequent jury trial in 1994, a Los Angeles jury awarded Mattco a $42 million verdict against the CPA firm. The judgment amount was their underlying claim against GE - $14 million - and $28 million in punitive damages.
c. Mattco Case 3: Three years later, the California Court of Appeals reversed the jury verdict and remanded the case for a new trial. The opinion, at 60 Cal. Rptr.2d 780 (Cal. App. 2 Dist. 1997) held that the jury instruction given was in error because it omitted the essential element of causation between the negligence and harm suffered. The remand specified that the substantial factor instruction was insufficient; the instruction must include the requirement that the proper services by the CPAs would have resulted in a collectable judgment in Mattco's favor.
2. Judicial Immunity: There is a general judicial immunity that applies to a Judge, Arbitrator, attorney, and fact witness. Immunity is normally extended no further than is necessary to keep the participant independent. Levine v. Wiss, 478 A.2d 397 (N.J. 1984), was a case in which the CPA was retained in a dissolution to act as the sole expert in rendering a binding valuation of a marital business. The husband later sued the CPA when he was forced to accept an unfavorable divorce settlement because of an alleged overvaluation. Judicial immunity was held not to apply because the CPA did not determine any legal rights or obligations, but rather was operating as an appraiser involving accounting judgment.
3. Opposing Party Litigation: Carden v. Getzold, 235 Cal. Rptr. 698 (Cal. 1987) held that even though the CPA prevailed on appeal, no sanctions or costs to either party were to be awarded. The case involved an anesthesiologist's lawsuit against a CPA who had previously testified regarding the value of his medical practice's goodwill in a divorce proceeding. The doctor's allegation was that the CPA's expert testimony was fraudulent and perjurious. The court stated this result (no reimbursement for the CPA's time, costs, or attorney fees) was necessary as part of the price which must be paid for affording litigants the utmost freedom of access to the courts.
4. Expert-Factual Distinction: Some attorneys will attempt to convert an opposing party's early dispute expert witness into a factual witness. This may reduce the effectiveness of the CPA's testimony. It may also mean the CPA's compensation is reduced to the minimum required under the law. Unsuccessful mediation documents and related exhibits may become part of the legal case.
5. Expert Witness Dilemma: Because of cases similar to the above, a CPA that works in the litigation support area is faced with an additional complexity. It is prudent to gain economic protection in the engagement letter against the wrath of a dissatisfied client or the opposing party. However, blanket indemnification provisions may be attacked by the opposing attorney as an indication that your opinion is inaccurate or questionable. The trade-off between these two objectives is an uneasy area. Most E & O policies have expert testimony coverage regardless of the source of the claim.
I. ENGAGEMENT LETTER CONSIDERATIONS
1. Formal Document Useful: It is difficult to generalize about the contents of an expert witness engagement letter because every case and every attorney is different. Nonetheless, an engagement letter is your front-line of defense against a client-based lawsuit and litigation breeds litigation. We suggest you purchase the CPA LOSS CONTROL MANUAL contained in our 4-hour NASBA-approved CPE course. This product can be ordered by returning to the main index page under this www.CPALossControl.com site. Useful ingredients discussed there with recommended language include a one-year statute of limitations and a damage limitation to the fee collected form the engagement. Often the best fee approach is a cash retainer that is to be re-filled when it reaches a certain level.
2. Modifications in Writing: A frequent area of client disagreement involve the charges for extra work which exceed the original estimate. Litigation can be very unpredictable. A case that starts out relatively simple may become quite complex. Parties may change attorneys. Theories may change or otherwise be modified as litigation evolves. Substantial expansions in work and the reasons for the increased cost should be documented in writing as soon as they become apparent. Similarly, if the parties and/or attorneys change, there should be a writing addressed to this aspect. These "add-on" items should be specified in a short modification memorandum. It is best if a representative of the client signs the document.
3. Dis-Engagement Letter: Occasionally, the CPA may conclude that the safest course to follow is to withdraw rather than complete an engagement. This may also be appropriate when the client has not paid the bill or there are multiple parties responsible and one will not pay their share. The difficulty is that the client may be prejudiced because of the withdrawal and later take the position that his loss at trial was due to the CPA's withdrawal and hire a different lawyer to turn on you. A writing is almost always the best insurance. The dis-engagement letter should not normally disclose client confidences but sometimes stating the reason for the withdrawal is prudent. If significant issues are at risk (or the client is talking about malpractice), the matter should be discussed with your own independent counsel.
4. Non-Engagement Letter: Occasionally, it may be prudent to document a client understanding that you will not perform a particular engagement until you have received a substantial retainer. Some lawyers may talk to you on the phone and then designate you as their expert without even a formal engagement letter or your understanding of the details and facts of the case. This can be troublesome since you may not have done a conflict check or even be sure that you are competent to handle the job. If there is any question, the prudent posture is to write the attorney a letter stating you are not their expert until you:
a) do a conflict check,
b) receive an investigatory retainer amount,
c) do sufficient research to satisfy yourself you can be useful to their case, and
d) execute a proper engagement memorandum.
5. Well-Poisoning Techniques: The above procedures will protect you against another problem that is especially prevalent in smaller communities. One side's attorney may be trying to "poison the well" against your working for the other side. Better not to learn the confidential details until you are sure you have been retained. The danger is that the client may allege you learned sufficient secrets so he would be damaged if you worked for the other side.
J. CONCLUSION
Litigation support and expert witness work can be interesting, challenging and, in the right case, a lot of fun. But there are perils lurking there that a CPA is not exposed to in our normal type of attest work. CPAs should purchase the Rigos video and study chapter 6 and 11 for detailed shark repellent techniques.
Rigos Professional Education Programs and those insurance carriers and professional associations that sponsor this web-site, related seminars, material and protective forms do not intend any part of this information to create professional standards or constitute formal legal advice. Every case is different and these general loss control principles may not control or even apply to a particular situation. State and national laws may also vary between jurisdictions. Accountants should contact their personal attorney or insurance claim agent for professional advice regarding the application of these principles to the specific facts of each case.
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