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Know Thy Opposing Expert and Thy Standards
By Howard Zandman, CPA, CFFA
In my career as a forensic accountant, which has now spanned over 35 years, I have been up against many a formidable opponent; from the non-credentialed but heavily experienced to the credentialed with much or no experience or somewhere in between. Each, bring along with them the many challenges that we are constantly faced with in our work.Just recently I became involved in just such a situation.
The matter involved a contract between a state department of transportation (DOT) and a supplier / manufacturer of asphalt.The contract was entered into for resurfacing of roadbed on part of the interstate highway system.Among other things, the contract called for the use of a defined quantity of lime within the mix.As I understand the chemical compound, a certain amount of lime is required within the asphalt mix in order to aid in the curing and longevity of the top layer of the roadbed.
Sometime during the course of the construction, maybe even post completion, the contractor submitted its final requests for payment to the DOT.Apparently, as part of the due diligence performed by the DOT, sample cores are typically taken of different areas of the roadbed.These cores are then tested to ascertain if the material specs called for within the terms of the contract are present.In the particular contract in question, the core samples did not test to spec and, therefore, the DOT withheld the final payments claimed by the asphalt contractor.After failing to resolve this dispute through any alternative forum, the asphalt contractor filed suit in Federal Court for the fees claimed as still owing.
Needless to say, the contractor claimed that it had performed in accordance to the terms of the contract while the DOT relied on its core samples for its evidence.As the case progressed, and for the exact reasons that are not truly germane to this article, the plaintiffs were able to get the core samples thrown out through a Daubert challenge as lacking in its scientific basis.The DOT, though, did not give up its defense as it truly believed that the plaintiff did not comply with the lime requirement as called for in the contract.This is where the story becomes more interesting.
The DOT, through its attorneys, decided to hire a forensic accountant to approach the claim from a different angle.The DOT hired a forensic accountant, credentialed as CPA and CVA, to review the books and records of the plaintiff to determine whether sufficient lime was purchased and used in the production process of the asphalt for the roadway bed.The paving work was performed over a 15 - 18 month period, but, for simplicity purposes, the counsel for the defendants decided to concentrate the analysis over the one calendar year that included the project.
The forensic accountant (expert) hired reviewed the documents collected by the DOT and the attorneys and was able to assemble the following:
- Lime suppliers sales invoices;
- Plaintiffs vendor payment ledger;
- Shippers signed and dated delivery tickets;
- Information regarding the size of the available on-site storage facilities;
- Internal DOT information as to the required blended formula mix of lime to asphalt;
- Plaintiffs manufacturing information as to quantities produced by date and lot number; and,
- Additional DOT information necessary to properly interpret the contracted mix formula to tons of lime and
asphalt needed.
The Expert, with the aid of the above documents, assembled what became a monstrous spreadsheet to perform a glorified inventory rollforward.The results, not surprisingly, resulted in the conclusion that the plaintiff did not purchase sufficient lime over the year in question to have inserted the necessary quantities of lime into the asphalt roadbed produced.Even allowing for the allowed contract variance of plus or minus ten percent, the quantities fell significantly short.
You are now thinking that would be the end of the case and the end of this article.Not so.Though the evidence appeared to be so overwhelmingly in favor of the DOT, the plaintiff did not drop the case.Instead, .the plaintiff hired its own expert, not to refute the results of the DOTs expert, but, rather to attack the methodologies utilized.The plaintiffs hired as an expert an accountant that holds a Ph.D. in accounting and teaches at a local University.While the credentials that this expert held, the number of articles that he had written, the number of presentations that he had both given and attended, were all very impressive, he had only testified twice before; both of those at depositions and none at trial.A review of those references proved to be very revealing.He had spoken and written on accounting issues many times, his CV never indicated any references to forensic accounting matters or issues.None the less, this expert came forward with an expert report, upon review of the DOTs expert deposition (which, by the way, it was evident that based on the line of questioning the plaintiffs expert assisted with behind the scenes), to criticize the work performed for:
- Not following generally accepted accounting principles (GAAP);
- Not doing a study of internal controls of the subject asphalt manufacturer;
- Not properly planning the engagement as the working papers contained no checklist of the work to be
performed; and Questioning whether the DOT gathered sufficient evidence when performing its forensic lime
audit of the asphalt company.
In addition, he gave as references for his criticism (i.e., documents relied upon) the following sources:
- Statements of Financial Accounting Concepts;
- Accounting Research Bulletin 43; and,
- Forensic Services, Audits, and Corporate Governance: Bridging the Gap.
To further illustrate that the highly credentialed expert accountant for the plaintiff knew not about the field of forensic accounting that he was criticizing, his Rule 26 (a)2(b) report consisted of a format and words that were totally scripted by the attorney(s) that hired him.It did contain his signature, however.Then, based on the content of their accounting experts report, the plaintiffs counsel filed a Daubert motion against the DOT expert and moved to hold a hearing on the matter.
Due to this controversy over the proper standards to be utilized and relied upon in a forensic accounting assignment, I was hired by the DOT counsel to review the work performed by their expert and opine on whether the proper methodologies and standards were utilized during the course of the engagement.Subsequent to my review I was asked to prepare an affidavit affirming my findings.Following are excerpts from that affidavit.
Defendants experts work in this matter consisted of a forensic investigation as part of a litigation engagement. The work in this matter therefore is subject to the American Institute of Certified Public Accountants (AICPA) Standards for Consulting Services (SSCS) No. 1 (January, 1992) Consulting Services Special Report 03 -1 Litigation Services and Applicable Professional Standards (2003) and the NACVA Standards (May 31, 2002 and January 1, 2008).
Litigation services are professional services rendered by a practitioner in accordance with the AICPAs SSCS.Litigation services differ in several ways from services provided in attestation engagements.In attestation engagements, the CPA assesses the fairness of the written assertions of others, which may be in the form of financial statements, parts of such statements, or information not of a financial natureIn litigation engagements, the practitioner typically renders an expert opinion or provides other consulting services based upon expert judgment, experience, education, training, and analysis in compliance with applicable professional standards.The foundation of and audience for this opinion are different from those addressed by the attestation standards.[1]
A forensic investigation is defined as an engagement to analyze, interpret, summarize, and present complex financial and business related issues in a manner that is both understandable to the trier of fact and properly supported. A forensic accountant is often involved in the following:
- investigating and analyzing financial evidence;
- developing computerized applications to assist in the analysis and presentation of financial evidence;
- communicating these findings in the form of reports, exhibits and collection of documents; and,
- assisting in legal proceedings, including testifying in court as an expert witness and preparing visual aids to
support trial evidence.
The NACVA professional standards as revised for engagements accepted after January 1, 2008, describes its member services under the general context of Valuation Services (Sec 2.1) and Other Services (Sec 2.2)
A member may perform other services, such as consulting, fraud and damage determination, and other non-valuation services.When performing such services all standards promulgated by NACVA shall apply to the members work except for the Development and Reporting Standards.
Defendants experts work in this matter was not a financial audit(attestation engagement) and, therefore, was not subject to the AICPA Generally Accepted Auditing Standards (GAAS), Statements on Auditing Standards (SAS), Statements on Standards for Attestation Engagements (SSAEs), or Statements on Standards for Accounting and Review Standards (SSARs).The CPA engaged in litigation services must comply with the general standards of the AICPA Code of Professional Conduct which include
- professional competence,
- due professional care,
- planning and supervision and
- sufficient relevant data.
To the extent that generally accepted accounting principles (GAAP) are applicable, the practitioner shall apply the appropriate principles.GAAS is not applicable to a forensic investigation, but rather only applies to audits of financial statements.
Litigation services specifically do not involve or require the application of GAAS. Rather, the professional accounting standards of the AICPA known as the SSCS apply in litigation services. Litigation services are professional services rendered by a practitioner in accordance with the AICPAs SSCS No. 1. In litigation engagements, the practitioner typically renders an expert opinion or provides other consulting services based on expert judgment, experience, education, training, and analysis in compliance with applicable professional standards.
In performing the work in this matter, Defendants expert applied practices, procedures, rules, regulations, conventions, standards, principles, methods, and guidance from authoritative publications generally accepted within the profession as a Certified Public Accountant and forensic accountant, including the AICPA Professional Standards (including its Code of Professional Conduct and Bylaws and Statements on Standards for Consulting Services).
In my professional opinion as a forensic accountant and CFFA, Defendants expert, in performing her work in this matter, followed all applicable standards as provided by the AICPA and NACVA relating to a forensic investigation.
Armed with the above affidavit and discussion with counsel, I was prepared to appear before the judge and testify, as necessary, on these standards.The day before I was set to travel to the court with counsel, I received a call from counsel stating that the Daubert challenge against the DOTs expert was dropped and we did not need to appear.
The moral of this story:it is not necessarily the credentials of the expert that matters, but rather the experts understanding of the standards under which they operate in a litigation environment.
Howard A. Zandman, CPA, CFFA is a shareholder of the Forensic Accounting Services Team of Tauber & Balser, P.C., a Top 25 Atlanta, Georgia CPA firm, recently named one of the Best of the Best firms by Inside Public Accounting for the second year in a row. Mr. Zandmans practice focuses on economic damages, forensic accounting and business valuation services. He has qualified and testified as an expert witness in a variety of courts across the country and is a frequent public speaker. Mr. Zandman can be reached at 404-814-4915 or by email at hzandman@tbcpa.com.
This article has been submitted for publication in the National Litigation Consultants Review.
[1] Litigation Services and Applicable Professional Standards, Consulting Services Special Report 03-01, p. 9, par 44
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