By effectively understanding a financial expert’s role in litigation, clients and counsel can best leverage their expert’s objective contributions to litigation matters. Above all, experts need to be objective, offering their unvarnished view of the issues. Financial analysis, data analytics and other financial and accounting tools offer powerful means to assess the historic and projected outlooks that underpin an assessment of causation, calculation of value or determination of damages. However, it is essential that the expert maintain objectivity—both for their own credibility and for the clients they serve. Performing a biased analysis geared toward supporting a position, rather than performing an independent, objective analysis geared toward evaluating strengths and weaknesses, poses significant risk that the expert’s views may be considered tainted or that the expert may even be prohibited from testifying. An honest view serves everyone’s best interests by indicating the strength of the evidence and analysis that supports the findings, while still recognizing the evidence and analysis that contradicts those findings.
Questions addressed by financial experts
Financial experts provide invaluable services to the court and to parties in interest in litigation. As business experts with specialized training, they can provide evidence and opinions that assist the trier of fact in reaching an understanding of key issues in the case. The trier of fact can be a jury, a judge in the case of a bench trial or an agreed-upon individual or panel appointed in an alternative dispute resolution arena such as arbitration.
Beyond standard accounting and tax issues, financial experts acting in a consulting capacity can help attorneys understand a wide range of issues as they prepare trial strategy and can then serve as expert witnesses to communicate those issues in court. The range of topics addressed by qualified financial and business testimony is significant. A representative list includes:
- Corporate finance and transaction analysis
- Cash flow results, analysis and management
- Forensic accounting and fraud investigation
- Business valuations
- Loan compliance, i.e. financial reporting and covenant testing
- Contract compliance, i.e. royalties and revenue recognition
- Business viability assessment and business plan feasibility analysis
- Management and operations evaluation
- Director and officer liability issues
- Lost profits computations
- Anti-trust matters, i.e. price fixing and competitive issues
- Damage computations
Financial experts play a key role by helping the litigants and the court to understand the complex financial issues frequently involved in litigation matters. The types of professionals available to analyze these and other topics are also quite varied, encompassing accountants, business consultants, turnaround experts, fraud examiners, tax professionals and others with specialized training. Determining the relevance and the role of the financial professional required for each case will depend on the fundamental questions affecting that specific litigation and the counsel’s overall litigation strategy.
It is also critical to determine whether the expert has the backing and support of a knowledgeable team who can provide the staffing resources to perform the work and who can tackle issues that may arise. A well-supported expert should also have the ability to tap other resources or areas of expertise within the firm for additional research or other needs. In some matters, the expert may be supported by separate, outside litigation consultants. This three-way relationship between counsel, the expert and the litigation consultant can offer its own strategic benefits. Triangulating these roles can help preserve attorney-client privilege by separating the work-consulting role from the expert role.
Understanding the financial expert’s role
A financial expert’s main role is to educate, by helping the attorney and the court to understand the financial aspects of a case during evidence gathering, trial preparations, possible mediation and in court at trial. Therefore, the expert’s ability not only to understand the issues, but their ability to communicate them clearly and in understandable language, is paramount.
Expert credentials are vital to establishing credibility with clients and especially with the court. Selection of the right expert or experts should be compelled by the facts and circumstances of your case. Financial and accounting experts are governed by a wide range of rules defining their professional conduct. For example, certified public accountants are governed by the American Institute of Certified Public Accountants. Financial experts may possess a variety of other designations or certifications from other organizations that demonstrate their qualifications. Those other certifications and participation in professional organizations may impose additional governing concepts upon the expert. Examples include:
- Certified fraud examiner (CFE)
- Certified insolvency reorganization advisor (CIRA)
- Certificate in distressed business valuation (CDBV)
- Certified anti-money laundering specialist (CAMS)
- Certified in financial forensics (CFF)
- Accredited senior appraiser (ASA)
- Chartered financial analyst (CFA)
- Certified financial planner (CFP)
- Certified financial consultant (CFC)
- Certified turnaround professional (CTP)
- Certified management accountant (CMA)
- Accredited in business valuation (ABV)
- Certified information technology professional (CITP)
Key questions to consider
The following questions can help clients and counsel think about key issues when deciding how to get the most from a financial expert. These types of questions may help clients evaluate and select the best expert for their situation.
- Does the expert have the appropriate background, qualifications and experience necessary to render an opinion?
- Will the expert be assisted by a knowledgeable team with sufficient resources to handle the case?
- Has the expert ever failed to be qualified as an expert in another case under Daubert or another standard? Does the expert have any prior opinions that were excluded by another court? Does the expert have any prior opinions that may adversely impact the current case?
- Who is the expert’s client—the attorney or the attorney’s client? What interest is being represented—a party in interest, the plaintiff or defendant, a committee representing a defined class or interest, or perhaps the committee’s attorney? Who will retain the professional expert—the attorney or the attorney's individual clients?
- What privileges will be available to protect the expert’s work product and communications between the expert and counsel? What protocols will be put in place to avoid unnecessary written communications between the expert and counsel? Does the expert have experience working within this environment?
- Does the expert have any material conflicts of interest? Are they disclosed?
- Will the expert have fair and complete access to all of the pertinent facts necessary to perform an independent and objective analysis? Will the opinion itself be independent and objective? Will there be any limitations on access to documents or people?
- How could the expert’s findings affect overall trial strategy, timing, document requests or other aspects of the case? Will any findings from the expert’s investigation be revealed, even if they jeopardize the case? How could these findings impact other related litigation?
- Will the expert testify as an expert witness or only serve as a litigation consultant? Can the relationship change from litigation consultant to testifying expert, or will a separate expert handle specific issues? When may this shift occur? Can the expert execute the shift? What are the implications for discovery?
- What is the venue (i.e., federal court, state court or alternative dispute resolution arenas such as arbitration or mediation)? What are the court's expectations regarding rules of evidence and the use of expert testimony? Can the expert meet these expectations?
Managing the engagement
A financial expert or litigation consultant should focus on investigating facts and circumstances and performing analyses regarding key financial and accounting questions involved in the litigation. They do not offer legal opinions. Their job includes educating their client and their attorney about their business, financial and accounting facts; related analysis; and findings.
As an expert witness, the financial expert’s role shifts from being client-focused to educating the trier of fact, be it a judge, jury or other arbiter, about the issue at hand. It is common for a business or financial litigation consultant to shift roles and later testify as an expert on matters involving business viability, solvency, cash flow forecasts, business performance, tracing of prior transactions, financing alternatives, business valuation and other topics. Here, the attorney and expert must remain cognizant of the shifting definition of these roles and the implications for the expert and the overall case.
Effective management of the engagement requires careful, personal oversight and thoughtful communication between the expert, the client and counsel.
- Communication is critical, but the expert and counsel need to be careful of discovery implications for all written materials, including billing and budgeting documents.
- Regular meetings, both in person and telephonically, between the attorney and the consultant or expert will be necessary to maintain a clear understanding about the issues, the documents being requested and the analysis being performed.
- Written reports can document the work performed and provide a defined basis for evaluating the findings.
- While strict budgets are often difficult to implement due to the evolving nature of the work, fee estimates and phased work can help prevent surprises.
- Most important, make sure the professional responsible for overseeing the work or providing the expert opinion is involved in the oversight of their staff and the development of the analysis. The expert’s findings, analysis and opinions should be their own.
Beware the expert who cannot educate the attorney and who requires much guidance. Financial experts should be capable of explaining their methods, underlying data, procedures, ethical issues, proper formats, interpretations and terminology. They should also be able to explain potential weaknesses, questions they may face, questions for the opposing expert and expected answers, as well as liability and damage theories. The basis for the expert’s conclusion must be clearly understood by both the attorney and expert before trial to prevent misinterpretations or surprises.
Above all, the expert must be honest and objective with his client and to the court. When experts are perceived as a hired gun or mouthpiece, they will not be seen as useful to the court, and the case itself can be jeopardized. A good expert will not simply advocate. A good expert should identify key topics and break down component issues to determine a set of basic assumptions or conclusions that can be drawn from the facts. Careful analytical work persuasively presented in an articulate, forthright manner should lead to firmly supported opinions that can make the difference between winning and losing the case. The successful financial expert will understand and manage these items as a key member of the litigation team. By working together, the attorney and financial expert can better focus the many financial issues present in complex commercial litigation matters. Understanding and managing these issues should help attorneys and clients choose the right expert for their litigation matters.