How can you, as an attorney, know whether the forensic accounting or valuation expert you’re hiring has what it takes to win a favorable verdict? On the other hand, how can you tell if an opposing expert has the required expertise?
Unfortunately, not all forensic accounting or valuation experts are created equal. To determine whether a finance or accounting professional is qualified to provide any type of dispute consulting service, an attorney should verify that the individual has valid credentials, clear areas of expertise, a knowledge of valuation basics and/or technical accounting issues, and the ability to provide thorough and accurate reports.
A few key questions can help you assess a valuation or forensic accounting expert’s qualifications. Doing so will enable you to get the most from your expert, and hold the opposing expert to account, thus avoiding costly mistakes.
Credentials of qualified experts
Valid credentials should be a top consideration when hiring an accounting or valuation expert. Individuals with part-time experience, or even individuals with prior, but not recent full-time experience, may not be current with the latest trends, research, and case law relating to valuation theory and accounting rules.
Find out whether the individual or team you may collaborate with is affiliated with any business valuation or accounting organizations. A qualified valuation expert is likely to belong to organizations such as the American Society of Appraisers (ASA), the CFA Institute (CFA), the Institute of Business Appraisers (IBA), or the National Association of Certified Valuators and Analysts (NACVA).
A qualified accounting expert will likely belong to the American Institute of Certified Public Accountants (AICPA), while those familiar with fraud detection and other forensic accounting issues may be members of the Association of Certified Fraud Examiners (ACFE).
Ask key questions before hiring an expert
- Take time to ask the expert a few questions, such as:
- What percentage of your time is spent in the subject area of expertise?
- Do you have the experience with companies in the same industry, or a related industry, as the subject?
- How many valuation or forensic accounting reports have you prepared in your career? Over the last year?
- Have you ever testified in court? If so, what is your track record?
In addition, ask whether your potential appraiser or accounting expert specializes in a particular niche. For example, a firm may have extensive experience working with clients in the manufacturing sector.
Improve how you question opposing experts
Astute questioning can be invaluable when dealing with opposing experts in deposition and at trial. When you are guided by someone with technical valuation and accounting expertise, you can frame deposition and trial questions around certain common denominators. Qualified experts will be able to critique the analysis and findings of opposing experts. In addition to asking about the opposing expert’s qualifications, be sure your expert possesses the analytical abilities to help prepare questions to be used in deposition and at trial that cover issues such as:
Basic business valuation knowledge
Consider giving the opposing expert a pop quiz on valuation basics. The expert should be able to define fair market value and know the three approaches to valuing a business. The opposing expert also should know the factors to consider when valuing a business under Revenue Ruling 59-60, including the nature and history of the business, the economic and industry outlook, the earning capacity, and the comparable transactions.
If the opposing expert hesitates or makes mistakes while answering these questions, he or she may be unprepared or unqualified. If the mistakes are significant enough, a Daubert challenge may be a viable option.
Assumptions and limiting conditions
Most appraisal reports contain an appendix that lists all of the valuator’s major assumptions and limitations. Scour this statement for any red flags such as a scope limitation, overreliance on management-prepared spreadsheets, or the expert’s (or opposing valuation firm’s) ongoing financial interest in the client’s business.
Internal controls
In some cases involving fraud and other forensic accounting issues, the opposing expert should understand the Internal Control-Integrated Framework formed by the Treadway Commission’s Committee of Sponsoring Organizations (COSO). The opposing expert should be able to explain the five components of the framework-control environment, risk assessment, control activities, information and communication, and monitoring-and how they apply in the context of issues relevant to the dispute.
What is a Daubert Challenge?
The 1993 Daubert v. Merrell Dow Pharmaceuticals decision instructs judges to consider four nonexclusive factors when determining whether expert evidence meets minimum standards of reliability:
- Has the expert’s theory been tested? Can it be tested?
- Has the theory or technique been subject to peer review or publication?
- What is the known or potential error rate for the theory or technique?
- Is the theory or technique generally accepted in the relevant scientific community?
The Supreme Court’s 1999 decision in Kumho Tire Co. v. Carmichael confirmed that Daubert applies to both scientific and nonscientific evidence, including testimony by financial and business experts. Since Daubert, courts have raised the bar concerning admissibility of expert witness testimony. To ensure your valuation experts are allowed to testify, discuss these standards with them.
This document is for informational use only and may be outdated and/or no longer applicable. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Capital Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.
