A lawsuit is started by a complaint that is filed with the clerk of the trial court and served on the defendants. The complaint lays out the facts and causes of action alleged by the plaintiff. The defendants may file a motion to dismiss (arguing that the defendant is not legally liable even if the alleged facts are true) or an answer to the complaint. The answer may contain a denial of the allegations or an affirmative defense (e.g., statute of limitations has expired). The defendant also may file a counterclaim which presents a claim by the defendant (counterplaintiff) against the plaintiff (counterdefendant).

The purpose of pretrial discovery is to narrow the issues that need to be decided at trial and to obtain evidence to support legal and factual arguments. It is essentially an information-gathering process. Evidence is obtained in advance to facilitate presentation of an organized, concise case as well as to prevent any surprises at trial. This sharing of information often will result in the settlement of the case before trial.

The first step in discovery typically involves the use of interrogatories and document requests. Interrogatories are sets of formal written questions directed by one party in the lawsuit to the other. They are usually broad in nature and are used to fill in and amplify the fact situation set out in the pleadings. Interrogatories are also used to identify individuals who may possess unique knowledge or information about the issues in the case.

Requests for production of documents identify specific documents and records that the requesting party believes are relevant to its case and that are in the possession of and controlled by the opposing party. The opposing party is only required to produce the specific documents requested. Accordingly, when drafting these requests, care must be taken to be as broad as possible so as to include all relevant documents but narrow enough to be descriptive. It is not unusual for more than one set of interrogatories and document requests to be issued during the course of a lawsuit. The accountant is often involved in developing interrogatories and document requests on financial and business issues.

Depositions are the second step in the discovery process. They are the sworn testimony of a witness recorded by a court reporter. During the deposition, the witness may be asked questions by the attorneys for each party to the suit. The questions and answers are transcribed, sworn to, and signed. The testimony will allow the party taking the deposition to better understand the facts of the case and may be used as evidence in the trial. The accountant expert witness may be heavily involved at this stage, both in being deposed and in developing questions for the deposition of opposing witnesses.

The third stage of the litigation/adversarial process is the trial. It is the judicial examination and determination of issues between the parties to the action. In a jury trial, the trial begins with the selection of a jury. The attorneys for each party then make opening statements concerning the facts they expect to prove during the trial. Then the plaintiff puts forth its case, calling all of the witnesses it believes are required to prove its case. Each witness will be subject to direct examination and then cross-examination by the opposing party's attorney. After the plaintiff has called all of its witnesses and presented all of its evidence, the defendant will then present its case in the same manner. The plaintiff then has an opportunity to present additional evidence to refute the defendant's case in a rebuttal. The defendant can respond in a surrebuttal. Finally, each party has the opportunity to make a closing statement before the court.

At any time in the litigation process, the parties can attempt to settle the dispute without the intervention of the court. This can be accomplished by participating in settlement discussions or by using alternative methods of dispute resolution.

The plaintiff must prove that one of its legal rights has been transgressed by the defendant. It will present evidence attempting to prove that the actions of the defendant were in violation of the plaintiff's legal rights. Similarly, the defendant will present evidence in an effort to prove that the plaintiff's rights were not violated, or at least were not violated by the defendant.

If the plaintiff proves that the defendant has violated one of its legal rights, it must be shown that this violation resulted in some harm to the plaintiff. Here, attorneys for the plaintiff and defendant will try to prove or disprove the nexus between the defendant's actions and some harm to the plaintiff.

After presenting the evidence relating to the liability and causation issues, the parties' next step in most cases is to prove damages.

Damages are one of a number of remedies that may be available to a prevailing plaintiff. Other types of remedies include specific performance (performance of the act that was promised), injunctions (an order by the court forbidding or restraining a party from doing an act), and restitution (the return of goods, property, or money previously conveyed). Damages are the only type of remedy discussed in this chapter.

The general principle in awarding damages is to put the plaintiff in the same position it would have been in if its legal rights had not been transgressed. There are three main categories of damages: compensatory, consequential, and punitive. Compensatory damages compensate the injured party only for injuries or losses actually sustained and proved to have arisen directly from the violation of the plaintiff's rights. Consequential damages are foreseeable damages that are caused by special circumstances beyond the action itself. They flow only from the consequences or results of an action. Punitive damages are intended to penalize the guilty party and to make an example of the party to deter similar conduct in the future. They are awarded only in certain types of cases (e.g., fraud).

The quantification of damages is primarily a question of fact. The burden of proving the damage amount normally falls on the plaintiff. Although accountants can be used in cases in which damages are not an issue, accountants are most frequently used in cases in which damages are an issue.

The expert or consultant in a litigation case brings to the table their skills and past experience. Increasingly, individuals are obtaining professional certifications to reflect those attributes. Along with societal and regulatory increased attention to fraud, as evidenced in the passage of the Sarbanes-Oxley Act of 2002, various professional organizations are increasingly offering professional certifications in forensic and fraud related subject matters. Fraud specific specialty certifications, in most instances, are obtained as a supplement to the widely recognized designation of CPA, but holding a CPA designation may not be a prerequisite to holding other certifications.

One of the best recognized certifications is the Certified Fraud Examiner (CFE) designation of the 36,000 member Association of Certified Fraud Examiners (ACFEs). The American Institute of Certified Public Accountants (AICPA) and ACFE have been working together for some years to leverage expertise and develop joint training programs. The American College of Forensic Examiners Institute of Forensic Science (ACFEI) offers certifications such as the Certified Forensic Consultant (CFC) and Certified Forensic Accountant (Cr.FA), as well as specialized certifications in Homeland Security and aspects of forensic medical practice. The National Association of Certified Valuation Analysts (NACVA) supports the business valuation, litigation consulting, and fraud deterrence disciplines. It offers the Certified Forensic Financial Analyst (CFFA) and Certified Fraud Deterrence (CFD) Analyst credentials. The Forensic CPA Society was founded 2005, and offers a Forensic Certified Public Accountant certification to those CPAs passing an examination who also demonstrate relevant practical experience. There are other certification organizations other than those mentioned here.

Most certifications require candidates to pass a written examination, have prerequisite experience requirements and annual continuing education requirements as well as requiring adherence to a code of professional ethics.

Typically, the plaintiff has a contract with the defendant that the defendant is accused of breaching. For example, the contract may call for the defendant to buy a certain quantity of product for a certain price. The defendant, however, fails to make the required purchases. Or the defendant may be accused of breaching a warranty on its goods or services. The accountant may be asked to quantify the damages suffered by the plaintiff as a result of the breach. Usually, the damages are measured by lost profits, that is, the additional profits the plaintiff would have earned but for the defendant's breach. Among the issues the accountant may address are lost revenues, avoided costs, available capacity, and possible mitigating actions, including sale of the product to others.

A business interruption claim may arise from an accident, fire, flood, strike, or other unexpected event. It may even arise from a contract or warranty claim where the defendant's breach has caused the plaintiff to suspend operations. Typically, these claims are filed by a business against its insurance carrier, though a claim against the entity causing the event is possible. In a business interruption case, the plaintiff claims the event caused the business to suffer losses.

Often, the accountant is asked to quantify the loss. Elements to be considered may include lost profits, loss of tangible assets, loss of intangible assets (including goodwill), loss of an entire business or business line, cost to repair or reestablish the business, cost of downtime, or cost of wasted effort (time spent fixing the problem instead of generating operating profits).

Intellectual property disputes involve the rights to use patents, copyrights, and trademarks. The plaintiff claims that the defendant infringed on the plaintiff's intellectual property by illegally using the patent, copyright, or trademark. For patents, damages are defined by law to be plaintiff's lost profits (if reasonably provable), but not less than a reasonable royalty. Damages in a copyright case are the market value of the infringed work, the profits that the owner lost or will lose as a result of the infringement, or the defendant's profit. In a trademark case, where the mark has been registered with the Patent and Trademark Office, the owner may recover actual damages and also the infringer's profits.

Often computations are made separately for lost profits and for reasonable royalties. Sometimes the accountant can perform both analyses. Other times the accountant's opinion on reasonable royalty may be supplemented by another expert with experience in negotiating royalties in the particular industry.

The plaintiff in antitrust litigation may be either the government or a private party. The government usually brings suit to oppose a merger or to break up a monopolist. Government suits are usually not for monetary damages. Experts in these suits, particularly in liability issues involving monopolistic practices, relevant market share, and the like, are often economists, not accountants.

In a private suit, the plaintiff accuses the defendant of violating antitrust laws, resulting in injury to competition, including (or especially) injury to the plaintiff. The accountant's role again may be the computation of lost profits.

A company may be accused of violating antitrust laws by selling the same goods at different prices to different parties in the same channel of distribution. This ostensibly discriminatory pricing may be refuted if the defendant can show that the price differences are justified by differences in cost of production, service, freight, and so on. An accountant may conduct these cost justification studies.

Accusations of predatory pricing also fall under the antitrust laws. The defendant in a predatory pricing case is accused of pricing so low that competitors lose money and are driven out of business. Once the competition is eliminated, the defendant presumably raises prices and enjoys monopoly profits. One legal standard for predatory pricing is pricing below cost of production. Depending on the law, the standard may be either incremental costs or fully allocated costs. An accountant may help establish or refute this claim by studying product pricing and production costs and measuring the resulting profit margins.

This is a growing field within the area of litigation consulting and covers a wide range of cases. Examples of fraud and white-collar crime cases are schemes by executives, employees, and customers to siphon funds from financial institutions for their personal use, check kiting, lapping, computer fraud, embezzlement, defense procurement fraud, costing fraud, schemes involving kickbacks, income tax frauds, charity and religious frauds, money laundering, insider trading cases, and fraudulent bankruptcy actions. Additional examples include investigations of "boiler room" operations that solicit funds from investors based on promises of high investment return and Ponzi arrangements (i.e., arrangements in which there are no real profits; instead, funds from new investors are used to pay investment returns to existing investors, giving the impression of profits).

The accountant's work in this area centers on investigating what happened and establishing liability. After the investigation is completed, the accountant may be asked to quantify the amount of the loss attributable to the fraud or crime.

The accountant will typically review and analyze many types of data, including correspondence, e-mail, journal entries, financial statements, and financial schedules. Many times, the accountant commences his investigation with little to no detail as to the extent of the situation and must put the pieces of a puzzle together. This involves developing and testing hypotheses throughout the investigation. Therefore, when reviewing documents and other data, it is important to keep an open mind and not dismiss any reasonable possibilities. Very often, an investigation in one area will lead to other problem areas.

Although most litigation takes place in an unfriendly environment, this is especially true in cases involving white-collar crime or fraud. The accountant may conduct or assist the attorney in conducting interviews of relevant parties. Often, the accountant or attorney is attempting to obtain information from the persons who are the subject of the investigation and are attempting to conceal their activities. As such, the accountant should maintain the highest level of professional skepticism throughout the investigation.

Since the accountant's investigation, work product, and conclusions may form the basis of evidence in the case, it is critical to understand the importance of obtaining and preserving evidence and seek guidance from the retaining attorney about such matters whenever necessary. In addition, the accountant may have to coordinate efforts with other areas of law enforcement that may have an interest in the matter.

The circumstances of each engagement are unique. Depending on the circumstances, the accountant or retaining attorney may need to engage other specialists or experts. Computer specialists are frequently used in these types of cases to extract data that have been removed from computer drives or to search the contents of computer disks using key word searches. Private investigators can also be of great assistance in performing detailed background checks or surveillance of potential suspects.

The following are specific examples of tasks that the accountant might perform in different types of white-collar crime cases.

In white-collar crime cases where Ponzi schemes are suspected, the accountant will want to document how the enterprise was structured and to develop organizational charts and flow charts. Tracing transactions from the receipt of investor funds to their ultimate investment or disposition will be required. Analyses that illustrate the lack of any positive cash flow other than by raising additional investor funds will be useful to the attorney in proving liability. Documenting the flow of all cash transactions or custodial arrangements is all within the accountant's scope.

The accountant should also analyze cash disbursements to see whether any patterns indicating self-dealing emerge or to identify possible related entities or personal use or benefit of company assets. Unusual expenses should be vouched, and particular attention should be devoted to traditionally sensitive areas, such as travel and entertainment expenses. Some suspicious transactions are easily detected. Many illegal activities involve disguised transactions, but it is just as likely that the paid bills and supporting evidence will be fairly explanatory.

In the case of a penny stock fraud scheme, the accountant may shift greater attention to the financial results and reports to shareholders, press releases, and the like to determine if evidence exists that such data were incorrect or inaccurate. Income recognition abuses or improper capitalization of expenses are typical categories of abuses used by penny stock promoters to misstate the operating results and mislead investors. In addition, the accountant should analyze key contracts, employment agreements, and other consulting arrangements. A time-line analysis that reflects all key "publicized events" should be developed and used to determine if such events did occur. From the time line it can be determined whether, in the same time frame, all acquisitions or dispositions of assets and other financial transactions were accounted for properly.

Lawsuits in this area usually involve alleged violations of the federal acts, specifically Sections 11 and 12(2) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934. These sections concern making false or misleading public statements about a company or omitting a material fact (either in a prospectus or in public statements, including financial statements), resulting in an alleged overvaluing of the company's stock. Typically, when the correct information becomes public, the value of the stock drops. Plaintiffs claim that, but for the misleading statements, they would not have bought the stock or they would have bought at a lower price. These lawsuits are often brought against Officers, directors, investment bankers, lawyers, accountants, and others who may have been party to misstatements.

Accountants may be involved in the liability, causation, and damages portions of securities cases. Involvement with liability issues is most common when an auditor has been accused of violating Section 10(b)5 by failing to perform a generally accepted auditing standards (GAAS) audit and/or by giving a clean opinion to non- generally accepted accounting principles (GAAP) financial statements. Cases involving public company audits dated after the effective date of PCAOB Auditing Standard No. 1 "References in Auditor's Reports to Standards of the Public Company Auditing Oversight Board" will reference the standards of the PCAOB in lieu of GAAS. The accountant will review the auditor's work papers and other relevant materials to reach a conclusion as to the adequacy of the audit of the financial statements.

The causation and damages phases of securities cases are closely linked. They consist of determining whether the information had any impact on the stock price and quantifying the losses suffered by the plaintiff investors as a result. Typically, this involves determining what the stock price would have been if the proper information had been released at the proper time. The methods for doing this are beyond the scope of this chapter; see de Silva et al. for a treatment of this subject.^[75]

Bankruptcy matters may require an accountant's services for many different tasks. The role of the accountant and scope of services to be performed are influenced by the size of the company and by whether the accountant is working for the trustee, debtor in possession, secured creditors, or the creditors' committee(s).

Accountants for the debtor in possession may be asked to prepare analyses supporting the solvency or insolvency of the debtor, which may affect creditors' claims, recoveries, or security interests. Such accountants also may be involved in preparing prospective financial information filed with the U.S. Trustee's Office or used in negotiating plans of reorganization with the parties of interest. Another important role may require making analyses to support a debtor's use of cash collateral and analyses showing that adequate protection is available to the secured creditor.

An accountant for the creditors' committee, in addition to reviewing any analyses prepared for the debtor, will have additional responsibilities. The accountant may initially be asked to determine the cause for the business failure and may need to determine quickly whether the debtor's operation may be further depleting the assets available for creditors. The creditors' accountants also may need to investigate the conduct of the debtor. The scope and depth may vary significantly based on the relationship and confidence the creditors have with existing management. At a minimum, a review to determine possible preferential payments, fraudulent conveyances, and insider transactions is usually performed. The roles, definitions, and exceptions to preferences and fraudulent conveyances are detailed in the Bankruptcy Code as well as in Newton.^[76]

The work required to establish liability in bankruptcy cases is similar to that discussed in the subsection on white-collar crime. One difference is that liability issues in bankruptcy have the benefit of explicit rules in the Bankruptcy Code (Title 11 USC, more specifically, Subsections 543–549). These sections of the Bankruptcy Code detail the powers of a trustee to avoid transfers that defraud, hinder, or delay creditors, give preferential treatment to certain creditors, or do not give the bankrupt person or entity fair value for the transfer. Since these Code sections define the scope of the trustee's power, an accountant engaged by the trustee should first read and understand the relevant provisions before planning the work. In addition, an accountant must obtain an understanding of certain sections of the Uniform Commercial Code and in particular the Uniform Fraudulent Transfer Act of the state where the business is situated. The location of the business may influence the scope of the work since the time period under the bankruptcy statute only allows for recovery one year prior to the bankruptcy, whereas state laws vary from 3 to 10 years.

Once the appropriate time period and scope have been determined, the accountant needs to review all material transactions to gain an understanding as to the economic benefit of the exchange to the bankrupt, including all monetary and nonmonetary exchanges. In addition, the accountant needs to determine the timing and explanation for any liens or other security interest granted or recorded during the time period. This review should include any asset sales, purchases, foreclosures, and tax assessments. Transactions between related entities or commonly controlled entities or their affiliates must be reviewed. In a bankruptcy case, the accountant is trying to develop any evidence that might show fraud or fraudulent intent.

A preferential payment analysis covers a review of transactions within 90 days (one year for insiders) prior to bankruptcy wherein a creditor is paid for an antecedent debt at a time the debtor is insolvent and such payment is not in the ordinary course of business. The definition of insolvency for this purpose is the fair value of assets compared with the fair value of liabilities—a balance sheet approach. "Ordinary course of business" is not defined except by reference to case precedents. For example, if creditors are routinely paid in 90 days but certain creditors get paid just before bankruptcy within 30 days, such payments are probably not in the ordinary course of business.

Certain leveraged buyouts (LBOs) have encountered financial difficulty shortly after consummation, and some creditors have used various security law and bankruptcy law theories to unwind these transactions and seek recoveries from selling shareholders, secured creditors, and others.

The accountant's work in establishing or defending liability is critical. Analyses that show the cash flow of the entity before and after the LBO help establish whether sufficient capital or working capital was available to the company. Changes in a company's borrowing, especially where a significant amount of assets have been recently pledged, also illustrate the potential damage to unsecured creditors. The accountant's ability to distinguish operating losses caused by the form and structure of the buyout from losses due to the economy or other competing companies will also assist counsel in determining whether the LBO can be attacked as a fraudulent transfer.

Common law verdicts in numerous states have established a duty requiring banks to act in good faith and to provide a reasonable time period for a customer to arrange alternative financing should the bank no longer wish to continue the relationship. Other cases involve inaccurate or incomplete responses from banks to inquiries by third parties or failure to honor financing commitments. In some situations the bank's activity, either as a member of the business's board of directors, or in selecting those members, or the bank's insistence on designating workout consultants, places them in a position of being too close to operating the business; and they may find themselves accountable for its losses or ultimate bankruptcy.

The accountant's role is to assist with liability, causation, and damage issues. With respect to liability issues, the accountant may develop financial data to determine whether the borrower was in compliance with various loan covenants at various intervals during the banking relationship, including at its commencement. A review of debt and equity items in the financial statements could identify differences in definitions or inconsistencies between GAAP and the bank loan document terminology.

Accounting consultants working with defendants to lender liability actions may provide useful information to show the bank was acting prudently in calling a loan or in refusing to extend it based on the results of a financial analysis of the debtor. On the causation issue, the accountant can determine whether the bank's actions caused the business failure or whether other circumstances were involved.

The accountant's role in damages is important for both the plaintiff and defendant. Damage theories may include both the actual cost of the termination of the credit relationship and more complex damages, including punitive and racketeer influenced corrupt organizations (RICOs) claims where business failure occurs.

Employment litigation typically involves claims of employment discrimination (including discrimination on the basis of age, race, or gender) or wrongful discharge. Claims may involve discrimination in hiring, promotion, or wages.

The accountant may be involved in both liability and damages phases of employment claims. For liability, the accountant may compile hiring rates, promotion rates, salary levels, or similar historical information to prove or refute a claim of differential treatment. This liability work often may be performed in conjunction with a statistician.

On damages, the accountant may determine what the plaintiff's income would have been had the alleged discrimination not occurred. The accountant will consider the proper level of earnings, the likely duration of the earnings, and any offset from amounts actually earned. The issues are very similar to loss of earnings claims in personal injury cases. Although specific approaches are not discussed in this chapter, the methods are logically similar to lost profits claims.

Most litigated claims against accountants have arisen from audit work. Recently, significant litigation has come from compilation, review, and prospective financial statement engagements.

Litigation over audited financial statements generally involves allegations that GAAP was not applied or that the audit was not conducted in accordance with GAAS, or both. In class action securities litigation, noncompliance with Securities and Exchange Commission (SEC) Regulations S-X and S-K as well as Financial Reporting Releases may also be alleged.

During the discovery process, the accountant has the opportunity to explore the underlying documents and associate the facts with the accounting pronouncements. The accountant will refer to a company's general accounting records and documents as well as to the work papers of the independent auditor. Such a review process requires the expert either to be an auditor or to have some auditing background. Issues related to the auditing firm's consideration of GAAP, their consultation with parties in their firm who provide technical expertise, and the extent to which they have researched a specific area of accounting should be documented in the auditor's work papers.

The accountant may review and assess potential violations of GAAS or other applicable professional standards. Such violations may range from the failure of the defendant auditing firm to adequately observe the physical inventory, to not confirming sufficient accounts receivable, to not performing an adequate subsequent events review. Liability issues related to a failure to perform an audit in accordance with GAAS are usually not unearthed until a review of the auditing firm's work papers has taken place.

In order to adequately address GAAP and GAAS issues, the accountant must stay current with accounting and auditing literature issued by the Financial Accounting Standards Board (FASB), the AICPA, and the SEC. With these types of cases, it often becomes necessary to consult with an accountant with relevant industry expertise.

Litigation often results from the purchase of a company. With such purchases, the audited financial statements are used as the basis for the purchase or condition of the sale. The issues often center on the valuation of assets or the quantification and disclosure of liabilities in those financial statements. Asset values in dispute may include such issues as proper use of last-in, first-out (LIFO) or first-in, first-out (FIFO), inventory write-downs, unrecorded liabilities, accounting for impaired assets, amortization of goodwill, replacement cost versus book value, and realizable value of accounts receivable.

Many purchase and sale agreements contain a "postclosing adjustment" provision. This provision allows for the purchase price to be adjusted based on events that occur or become known after the closing. The accountant can serve as the expert for the buyer or seller with respect to the arguments as to why the purchase price should or should not be adjusted. The accountant can also serve as the arbitrator or mediator on such cases.

The expert in these cases is usually called on to review the working papers of the independent auditor of the financial statements. From these working papers and the notes to the financial statements, the expert can determine what accounting methods were employed and whether they are in conformity with GAAP and common industry practice.

Liabilities are of critical importance since the buyer needs to be alerted to all potential and contingent debts and encumbrances. The accountant would determine whether there was adequate disclosure of the liabilities in the financial statements that were either issued or relied on by the buyer. The accountant may also need to evaluate whether subsequent events were reasonably foreseeable.

Contracts for the purchase and sale of a company sometimes include a provision regarding a material adverse change in the business. In these cases, an accountant may be asked to review the financial records of the company to search for any adverse changes in the business.

These cases involve the issue of whether a trustee, executor, Officer, director, or other fiduciary has breached his fiduciary duties, thus causing damages to the trust estate or corporation. The accountant can play a vital role in proving or rebutting liability on the part of the fiduciary by demonstrating that the fiduciary acted correctly or incorrectly with respect to accounting, financial, or economic issues or transaction.

(a) NonBusiness Cases. Important nonbusiness issues include marital dissolution, and personal injury matters.

In many states, the financial aspects of a marital dissolution are governed by family law statutes that establish rules for sharing of income and the division of property. The tax laws have also greatly influenced the allocation of income and assets during and after a marital dissolution. Most states divide assets "equitably"; a few states are governed by community property rules. Awareness of the local rules and practices is of critical importance to accountants in their financial analyses.

In cases governed by community property laws, the accountant's role is often to trace assets, receipts, and disbursements to determine which assets are community property. In cases governed by equitable distribution law, the accountant may be asked to analyze the assets in order to determine which assets are subject to equitable distribution. He may also be asked to help an equitable distribution of marital assets.

The "liability" role of the accountant is to identify all assets and liabilities of the parties so that a fair and equitable distribution of assets results. Most family law courts are equity oriented, so the substance of transactions should carefully be considered when analyzing financial data. The forensic accountant has to examine financial data with concern for diversion of assets, improper cash transactions, and padded payroll and other fringe benefits and perks that may deprive the nonworking spouse of a fair share of the business's net worth as well as a share of spousal support.

If financial statements do not exist for closely held companies, such financial statements may need to be prepared. The accountant must be familiar with the local state family law. The accountant must also be familiar with tax implications of various asset transfers or split-ups so that neither spouse later finds unexpected tax consequences. The accountant should be aware of the proper handling of pension plan assets, individual retirement accounts, 401(k) plans, and the like, so that each party receives a fair share of assets and so that income tax or excise taxes are not triggered unnecessarily.

In community property states, the existence of separate property and the impact of prenuptial agreements may also require analysis. significant tracing of funds may become necessary if a total segregation of separate property assets has not been maintained. The marital community may have rights to a contribution for increased value of separate property that arises from services provided by the community after marriage. Lastly, the community may have some interest in separate property if joint tax returns have been filed and no separate tax cost was allocated to each category of assets.

Accountants often are asked to determine the value of the assets owned by the litigants as well as the income sources from which spousal and child support can be calculated. The valuation of assets often includes business valuation and, in the case of professionals, the value of their shareholdings, partnership interest, or professional licenses. Issues such as professional goodwill or celebrity goodwill are important and contested often in marital dissolution litigation.

Partnerships sometimes break up in a manner similar to a divorce. The accountant's work is also similar, focusing on tracing, valuation, and fair apportionment of assets and liabilities, usually pursuant to the terms of the partnership agreement, if one exists.

Personal injury cases stem from automobile accidents, slip-and-falls, and the like. Typically, damage components include medical expenses, pain and suffering, lost earnings, and loss of consortium to the injured party's spouse. The accountant is usually involved in the calculation of lost earnings and in calculations regarding the interest components of the judgment. For identification of the issues involved, see Subsection 46.4(b)(ix).

The objective of direct testimony is to present an opinion in a manner such that it will be understood and believed by the judge and jury or other trier of fact. The testimony will begin by reviewing the witness's qualifications, which provide the prerequisite skill and training enabling the witness to provide the court with expert testimony. Opposing counsel will then have the opportunity to "voir dire" the expert and to challenge his qualifications as an expert. The judge will then decide if the court will qualify the accountant as an expert.

The expert's opinions then will be solicited. It is imperative that the expert not appear to be an advocate for the plaintiff or defendant but rather appear fair and unbiased. The job of advocacy should be reserved for the attorney. Violation of this precept will tend to undermine the expert's credibility.

Finally, the basis for the expert's opinion will be presented. The engagement scope is reviewed, including who retained the expert and why, documents reviewed, interviews conducted, the engagement team, manner of supervision and time spent, compensation, and any engagement scope limitations imposed. Next the methodology employed is explained, which leads to the conclusions and opinions reached. Typically any weaknesses are acknowledged and explained in a preemptive fashion to reduce potential damage on cross-examination.

The key to persuasive and effective testimony is communication. The expert's position may be a technical marvel, but it is worthless if the jury does not understand the testimony or is not convinced. Therefore, the expert should speak English and eliminate accounting and financial jargon. Concepts should be explained by way of common, everyday occurrences. Condescending or patronizing speech is inappropriate.

The expert's job is to educate the jury and the court in an interesting fashion. This job can be facilitated by the use of and reference to trial exhibits. Trial exhibits are used to lead the jury, court, and the expert himself through the basis of the opinion, as well as to keep everyone's attention focused. Like the language used in testimony, the exhibits should be kept clear and simple so the point is unmistakable and memorable. In many jurisdictions, the jury cannot take notes, and visual exhibits are the most effective method to ensure a point or conclusion is remembered.

The purpose of cross-examination is to cast doubt on or, if possible, undermine the expert witness's credibility and testimony. One of the simpler ways to accomplish this objective is through impeachment. Consequently, a thorough review of prior testimony, writings, and the deposition transcript is required. The expert must make sure not to be on record as holding a view that is or appears to be contrary to the one he is now presenting, or he must be able to provide an explanation.

Be calm and polite, even if opposing counsel is manipulating responses. The expert is in the attorney's ballpark, and any anger will be turned against the witness. Cross-examining attorneys will frequently use "yes/no" questions to manipulate an opposing expert. The expert should generally resist the tendency to provide lengthy qualifications to such questions, as a skilled attorney may succeed in having the expert admonished by the court to answer only the question asked. An admonishment will taint the expert in the jury's mind as well as leave the expert with less maneuvering room during the remainder of cross-examination. However, this is not to suggest the expert should timidly follow the yes/no trail. Make explanations when necessary.

Another favored approach is the hypothetical question. Care must be taken not to appear too defensive or restrictive when answering a hypothetical question. Select the appropriate moment to cleanly sever the link between the hypothetical and the reality of the case at hand. Finally, remember that redirect examination can rehabilitate mischaracterizations by opposing counsel. So even if the expert must admit something that appears damaging, he will have a chance to explain why the admission is irrelevant in the current context.

If opposing counsel has discovered an error, the expert should acknowledge the error, but not necessarily the implications or conclusions drawn by counsel. Again, redirect examination can salvage errors, especially immaterial errors.

It is important to know the opposing expert's opinion and basis and the key differences between both experts' work. The ultimate objective of cross-examination is to get the expert to agree with the opposing expert's opinion and basis. Nearly as damaging is an acknowledgment that the opposing expert is a leading expert in the field. Failing this, an admission that reasonable minds can differ is a likely parting shot.

The expert must also be prepared for questions concerning fees and any scope limitations, especially if opposing counsel has not engaged an expert witness. A comfortable, matter-of-fact response is called for. The expert is a professional who has been asked to conduct certain analyses and offer an opinion. This is not unlike any other engagement an accountant conducts, and the expert should not feel guilty about being compensated for his time and effort.

Finally, the expert must stay within his field of expertise. By straying, the expert will end up in unnecessary difficulties.

The purpose of redirect examination is to rehabilitate points made by the opponent and clarify responses and mischaracterizations. It is generally counterproductive to a witness's credibility to argue with opposing counsel or to resist answering questions that, to the jury, appear reasonable and straightforward. An evasive witness generally is a less credible witness. The expert is back in friendly hands during redirect, and this is the time to mitigate real or perceived damage.

During the redirect examination, the attorney will typically select two or three areas where additional explanation is necessary to counter the points made on cross-examination. This is the witness's opportunity to clearly explain why the points made during cross-examination are irrelevant and have no bearing on the expert's opinion.

When performing a litigation service engagement, independence is not required. However, the practitioner should be sensitive to the appearance of independence so that the trier of fact will accept conclusions and judgments as objective and impartial.

Although independence is not required in a litigation consulting engagement, the accountant is required to comply with Rule 102 of the AICPA Code of Professional Conduct. Rule 102 requires that members shall, in the performance of any professional service, maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate their judgment to others. The accountant should be aware of situations that would cause the trier of fact to question his integrity and objectivity; for example, current, prior, or possible future relationships with either the attorneys or the parties to the dispute, the rendering of contradictory opinions on the same subject matter at issue in the litigation, or having knowledge of facts obtained outside the normal discovery process could impair integrity and objectivity.

The accountant must also recognize how the roles and responsibilities of attorneys differ from those of CPAs in the litigation process. The litigating attorney is the client's advocate. "The litigation process demands that the attorney take every available advantage for the client, put the client's case in the best possible light, not offer evidence that is harmful to the client (with some exceptions) and challenge everything possible in the opponent's case."^[78]

The accountant as an expert witness has a role that differs from that of an attorney. The accountant-expert does not serve as an advocate but rather is presented to the trier of fact as someone with specialized knowledge, training, and experience in a particular area and presents positions with objectivity. The function of the accountant as an expert witness is to assist the trier of fact in understanding complex or unfamiliar concepts. The accountant-expert is not expected to single-mindedly and one-sidedly offer only evidence and opinions that help the client. The accountant expert is expected to offer an objective opinion, based on knowledge and experience, of how the issues at hand should be interpreted by the trier of fact.^[79] When acting as a consultant, the accountant can provide assistance that is more like that of an advocate.

In a litigation services engagement, a conflict of interest exists when a litigation consulting practitioner's ability to objectively evaluate and present an issue for a client will be impaired by current, prior, or possible future relationships with parties to the litigation. The criterion for evaluating whether a conflict of interest is involved in a litigation services engagement is the ability of the accountant to maintain integrity and objectivity. A conflict of interest is based in fact, rather than appearance. However, the accountant should be mindful of and deal with appearances of conflicts before accepting the engagement.

Unlike the legal profession, the accounting profession has developed little formal guidance on conflicts of interest. An attorney has a well-defined and documented concept of what constitutes a conflict in the legal profession. Consequently, this concept may be applied inappropriately to the accountant. The standards of the legal profession concerning conflicts of interest should not be applied to the accounting profession because the roles of the attorney and the accountant in litigation are entirely different.

If a conflict of interest does not exist in fact, the accountant must decide if a conflict in appearance exists of if business issues would prevent acceptance of the engagement. For example, the accountant may decline to perform services because the position required by the prospective client conflicts with the business interests of an existing client. These determinations are based on the accountant's judgment.

Before accepting a litigation services engagement, the accountant should perform procedures that will enable him to determine if a conflict exists with any parties to the litigation. All conflicts and potential conflicts must be disclosed to the retaining attorney for his evaluation. Interpretation 102.2 of the AICPA Code of Professional Conduct provides that if a conflict exists and is disclosed to the client and other appropriate parties, the accountant can accept the engagement with the consent of all parties. The accountant should be aware that new federal regulations prohibit the performance of litigation consulting services for any audit client that is an SEC Registrant. For more information regarding conflicts of interest refer to AICPA Consulting Services Special Report No. 93–2, "Conflicts of Interest in Litigation Services Engagements."

The four general standards, professional competence, due professional care, planning and supervision, and sufficient relevant data, under Rule 201 of the Code of Professional Conduct apply to litigation consulting services. In fact, these four standards are included in SSCS No. 1 and are discussed in more detail below.

Pursuant to Rule 202 of the Code of Professional Conduct, the accountant must comply with the standards promulgated by the Consulting Services Executive Committee.

Rule 203 requires the accountant to demonstrate an understanding of GAAP. To the extent that GAAP is applicable, the accountant shall apply the appropriate accounting principles.

Pursuant to Rule 301, the CPA in public practice may not disclose Confidential client information without the client's consent. In litigation consulting services engagements, Confidential client information obtained in prior engagements must be protected. Thus, the accountant has the dual responsibility to be both truthful and honest while preserving past and present client confidences. Before the accountant relies on specific information obtained in an unrelated prior engagement and uses that information as the basis for his opinion, he must either obtain the consent of the prior client to reveal its confidences or abandon any effort to use such information as the basis of his opinion.

The general standards defined in Rule 201 of the AICPA Code of Professional Conduct are applicable to litigation consulting engagements.

In addition to the general standards, SSCS No. 1 also establishes specific consulting standards for consulting services.

When acting as an expert, the accountant should be aware that all of his communications with the client, written or oral, are subject to discovery and must be provided upon request by the opposing party. All of the accountant's work product, including draft reports and schedules, notes, supporting schedules, and correspondence, can be requested as part of the discovery process.