CPAs As Expert Witness:  The Challenges Ahead

By Patrick O'Keefe
Principal
O'Keefe & Associates

The importance of CPAs as expert witnesses in cases ranging from lost profits and shareholder disputes to valuing the estate in marriage dissolution cannot be overestimated. After all, the ability to convey complicated financial issues clearly and concisely to less versed courts and jurors is essential to winning or defeating damage claims. 

In the past, the words of an expert witness were merely accepted on account of his expertise. The court viewed these professionals as friendly volunteers wishing to offer their knowledge in the legal realm. As a result, they were not held liable for the consequences of their testimony. A handful of lawsuits, however, have surfaced around the country indicating otherwise. 

For example, a lawsuit was recently brought against an expert in Pennsylvania who negligently underestimated losses in a troubled real estate venture due to a mathematical error. 

Several prominent Supreme Court cases such as Daubert v. Dow Pharmaceuticals Inc. and Kumho Tires v. Carmichael have also brought the validity of expert testimony under intense scrutiny. All of these cases suggest a growing movement towards holding experts under the same standard of care as doctors and lawyers. As a result, the CPA has a more challenging role as an expert. 

The Daubert case presented an interesting scenario where testimony from highly credentialed medical experts was deemed inadmissible by the District Court and the Court of Appeals because it was not “sufficiently established to have general acceptance in the field to which it belongs”. The Supreme Court, however, ruled that general acceptance is not a necessary precondition to the admissibility of scientific evidence. 

Instead, to ensure reliable testimony, the trial judge has the task of strictly accepting evidence pertinent to the case that is based on scientifically valid principles. In addition, the Court gave a non-exclusive checklist for determining expert reliability. 

A theory or technique is valid if 1) it can be tested and challenged in some objective sense 2) it has been subjected to peer review and publication 3) the potential rate of error of a particular technique is known 4) standards and controls exist, and 5) the technique has been generally accepted in the scientific community. 

Paralleling the Daubert case was the Kumho case in which the Supreme Court evaluated the trial judge’s gate-keeping options in regards to testimony of other “non-scientific” experts such as engineers or accountants. The Court concluded that the aforementioned Daubert factors apply to all expert cases, not just those dealing with science. Thus, this decision expanded the gate-keeping function of trial judges. 

These two cases present several implications for CPAs offering litigation support. First, the Supreme Court rulings give a clearer definition of an “expert”, which is no longer just an individual with an expert cap who presents his findings once and for all to a jury who blindly accepts it. 

Rather, an expert is a person who can clearly explain the methodology behind his conclusion and who can withstand objective criticism from a trier of fact. As a result, his skill and experience take precedence to his findings. 

Therefore, an expert today must be better qualified and must be up to date with current analytical methods in his field. 

Second, the new rules create a different relationship with legal counsel. The CPA must now be more engaged in the litigation process and must employ in the courtroom “the same level of intellectual rigor” as in his professional work. If his work is faulty or does not meet Daubert standards, not only does the court exclude his testimony, but his reputation is tarnished as well. 

The future for CPAs as expert witnesses remains bright because the need for reliable financial analysis in the litigation process will always exist. Practitioners, however, should be prepared to defend their methodology against any of the so-called Daubert challenges. CPAs as expert witnesses can continue to expect Daubert challenges. Understanding Daubert and the judge’s role as gatekeeper puts the onus on the CPA expert to utilize methodologies that have general acceptance and have been tested. 

Patrick O’Keefe is founding principal of Bloomfield Hills, Michigan-based O’Keefe & Associates, a financial and operational management consulting firm specializing in creditor and bankruptcy services; business valuation; turnaround consulting and debt restructuring; litigation support; forensic accounting; and due diligence on strategic transactions. He can be reached at: pokeefe@okeefac.com. 

Patrick O’Keefe is founding principal of Bloomfield Hills, Michigan-based O’Keefe & Associates, a financial and operational management consulting firm specializing in creditor and bankruptcy services; business valuation; turnaround consulting and debt restructuring; litigation support; forensic accounting; and due diligence on strategic transactions. He can be reached at: pokeefe@okeefac.com.  Craig Baker also contributed to this article.