Expert Testimony: The CPA’s Responsibilities

By Michael G. Ueltzen, CPA, CFE and Robert H. Johnson, Esq.

In recent years, CPAs have been called upon in greater numbers with greater frequency to assist judges and juries in their deliberations. The skills that CPAs bring to dispute resolution are our core purpose, values, services, and competencies identified in the CPA Vision Project: “CPAs deliver value by . . . translating complex information into critical knowledge.” Also, the core values outlined by the CPA Vision Project include competence, integrity, and objectivity. These foundations of the CPA profession are among the primary reasons that CPAs are called upon to assist the court system.

To help CPAs who offer litigation services uphold the goals outlined by the CPA Vision Project, the Litigation Services and Dispute Resolution Subcommittee is in the process of developing a Statement on Responsibilities for Litigation Services. The purpose of this proposed Statement is to combine the existing professional standards with the concepts embraced by the federal courts and prior publications of the AICPA.

A catalyst for developing a Statement on Responsibilities for the litigation services practitioner is that in recent years, trial courts have become increasingly frustrated with reliance on testimony from individuals who hold themselves out as experts and yet can claim no specific framework of professional guidance for their services. Since 1993, the Supreme Court has found it necessary to set forth guidelines. These two cases are Daubert v. Merrill Dow Pharmaceuticals, Inc. (509 US 579 (1993)) and Kumho Tire Company, Ltd v. Patrick Carmichael (526 US 137 (1999)).¹ Further, a federal judge in Pennsylvania applied the standard set forth in Daubert in JMJ Enterprises v. Via Venento Italian Ice, Inc. (97-CV-0652, 1998 WL,175888) to a CPA seeking to testify as an expert witness.

The purpose of this article is to explore the Daubert and Kumho Supreme Court decisions and the trial court ruling and consider how these rulings could be used in developing the new Statement of Responsibilities. (Note: The article addresses the issue of federal standards as opposed to the various state standards, some of which approach the issue of expert witness testimony in a different manner. Some states, such as Texas, have adopted the federal standards, while others, such as California, have different standards.)

Daubert v. Merrill Dow Pharmaceuticals, Inc.

In 1993, the Supreme Court issued a decision known as Daubert v. Merrill Dow Pharmaceuticals, Inc., which suggested that a federal trial judge should look to several factors to ensure the reliability and relevancy of expert testimony. The trial judge was charged to conduct “a preliminary assessment of whether the reasoning or methodology underlining the testimony is scientifically valid, and of whether that reasoning or methodology properly can be applied to the facts in the issue.” The Court went on to establish essentially four factors that the trial judge should consider before testimony would be allowed from an expert. These four factors are:

1. Determine whether the scientific testimony can be and has been tested.

2. Determine whether the theory or technique has been subjected to peer review and publication.

3. Consider the known or potential rate of error and the existence and maintenance of standards controlling the techniques and operations.

4. Consider whether the testimony has achieved general acceptance within a profession.

Kumho Tire Company, Ltd. v. Patrick Carmichael

In Kumho Tire Company, Ltd. v. Patrick Carmichael, the Supreme Court made it evident that it intended for the Daubert decision to apply not only to scientific testimony, but also to all experts providing testimony in federal courts. The Supreme Court held that it was the gatekeeping function of the trial court to determine whether the testimony would assist the trier of facts pursuant to Federal Rules of Evidence Section 702. (Rule 701, “Opinion Testimony by Lay Witnesses”; Rule 702, “Testimony by Experts”; and Rule 703, “Bases of Opinion Testimony by Experts” are presented in Exhibit 1.) As a result of the Supreme Court decision in Kumho Tire, a trial judge may perform the gatekeeping function (that is, determine whether an expert will testify) based on guidelines, including these:

1. The testimony should assist the trier of fact.

2. The expert should have some minimum qualifications that would include:

1. Special knowledge

2. Special skill

3. Special experience

4. Special training

5. Special education

The expert would also have to show, before providing testimony, that the testimony (1) is based on sufficient facts or data, (2) is the product of reliable principles and methods, and (3) can demonstrate that the expert had applied the principles and methods reliably to the facts of the case. Kumho Tire clearly established reliability standards for expert testimony, which was based on three pillars: (1) reliable data, (2) a reliable methodology, and (3) a reliable application of the methodology.

JMJ Enterprises v. Via Veneto Italian Ice, Inc.

Even before the Supreme Court decided the Kumho Tire case, federal judges began to apply the Daubert standards to nonscientific testimony. In the matter of JMJ Enterprises v. Via Veneto Italian Ice, Inc. a district court judge in Pennsylvania reviewed the proposed testimony of a CPA expert to determine whether the testimony would be allowed. Much insight can be gained from his analysis of the proposed testifying expert.

The CPA was retained to present a damage calculation on behalf of the plaintiffs. The methodology was based on the CPA’s model, which was to (1) project sales, (2) determine the net margin, (3) multiply net profit margin by projected sales, (4) subtract operating expenses, (5) discount to present value, and (6) add unrecovered investment. The methodology was reliable; however, the analysis had significant shortcomings. The owners had limited background in the industry. The projection assumed sales would increase from 6,000 containers in year 1 to 20,000 containers in year 2, 57,600 containers in year 3, and 115,200 containers in year 4.

At a pretrial hearing, the trial court judge used the following questions to screen the opinion of the CPA:

1. Did the CPA possess the requisite qualifications?

2. Did the expert’s testimony have some connection to the existing facts?

3. Was the expert’s testimony based on reliable processes or techniques?

4. Will the expert’s testimony assist the trier of fact to understand the evidence or determine the fact and issues?

5. Will testimony create either confusion or unfair prejudice in the matter to be heard by the court?

Based on the screening questions at the pretrial hearing, the judge determined the CPA:

• Knew little about the industry

• Knew little about the company or other distributors

• Had a limited understanding about the operating expense structure

• Acted as an advocate

The judge reviewed the entire proposed testimony and precluded the CPA from testifying in the trial. The CPA, in the opinion of the federal judge, did not (1) have sufficient relevant data that was (2) reliable that would (3) assist the trier of fact.

Professional guidelines currently available

Unlike some experts that provide testimony in a courtroom, the standards that apply to a CPA, if followed, should provide a powerful tool to address the concerns of the court. While a number of professions can lay claim to minimum (or even onerous) educational requirements, a rigorous exam, internship requirements, a code of professional conduct and a regulatory process administered by the states, few, if any, have an extensive peer review process that occurs even when there has been no problem with “morbidity or mortality” or more guidelines spelling out exactly what the professional should do under a wide variety of circumstances. To be sure, other professionals publish many articles and books on (for example) surgical or trial techniques. Few, if any, however adopt such detailed rules mandating how relatively specific tasks must be done. By contrast, other professions have “schools of thought” on how things should be done.

The guidelines available to CPAs who offer litigation services include our Code of Professional Conduct; Statement on Standards for Consulting Services, Consulting Services: Definition and Standards (AICPA, Professional Standards, vol. 2, CS sec. 100); Litigation and Dispute Resolution Services Subcommittee publications, and generally accepted accounting principles.

Code of Professional Conduct

Whenever CPAs provide any professional service in their capacity as a CPA, the AICPA Code of Professional Conduct applies to the services being provided. The code is part of the examination process to become a CPA. The code is monitored by a regulatory body and subject to extensive peer review, and the AICPA Code of Professional Conduct has been published. The standards that the CPA adheres to emanate from the code but apply to a wide variety of services for which the CPA is well recognized as being competent, including:

• Auditing

• Tax

• Consulting matters

All of the above areas are subject to examination, peer review, and publication.

The AICPA Code of Professional Conduct embraces the concepts of integrity and objectivity that are applied to all services provided by a CPA. The general standards of the profession require that the CPA demonstrate professional competence, exercise due professional care, demonstrate adequate planning and supervision, and obtain sufficient relevant data.

Statement on Standards for Consulting Services

The profession has also concluded that testimony provided by a CPA in a litigated matter is a consulting service and, therefore, the Statement on Standards for Consulting Services would also apply.

Litigation and Dispute Resolution Services Subcommittee publications

The AICPA created a special consulting services subcommittee in 1990 known as the Litigation and Dispute Resolution Services Subcommittee. As a result of the initial effort, two special reports were issued in 1993 (Special Report 93-1, Application of AICPA Professional Standards in the Performance of Litigation Services, and Special Report 93-2, Conflicts of Interest in Litigation Services Engagements). Since that time, a significant number of practice aids and two additional special reports have been developed and issued.

Generally accepted accounting principles

When questioned about the underlying principles, CPAs should look to the Financial Accounting Standards Board (FASB), a private body that is well recognized. All FASB publications and standards are subject to extensive peer review and have been published. In addition, CPAs are examined on their understanding of the body of knowledge established by the FASB.

The new Statement on Responsibilities

CPAs should strive not only to meet the federal standards, but also to exceed the expectations of the trial courts. Although existing CPA standards line up well with the Federal Rules of Evidence 702 (see Exhibit 2), there are gaps between existing CPA standards and the more detailed standards formulated by Daubert and Kumho and their new progeny. The new Statement on Responsibilities would seek to fill these gaps.

The development of the new Statement on Responsibilities would help complete a pyramid of standards and responsibilities that would apply to practice as an expert witness. This pyramid is summarized below.

Level 1 General standards and Code of Professional Conduct

Level 2 Statement on Standards for Consulting Services

Level 3 Statement on Responsibilities for Litigation Services (under consideration)

Level 4 Subject matter expertise

What has become evident is that a Statement on Responsibilities interpreting both the applicable professional standards and the rules of court would provide CPAs better guidance and would be a benefit in the court system. It would educate the CPA about applicable standards both of the court and the profession, acknowledge the messages of the various courts concerning the need to meet their standards, and raise the quality of work being provided by CPAs.

—By Michael G. Ueltzen, CPA, CFE, Ueltzen & Company, LLP, Sacramento, California. Ueltzen is a member of the AICPA’s Litigation and Dispute Resolution Services Subcommittee; his firm is one of the leading litigation support firms in California; phone (916) 563–7790; e-mail mueltzen@ueltzen.com. Robert H. Johnson, Esq., Johnson, Schacter & Collins, P.C., Sacramento, California, is the managing shareholder of the firm, which emphasizes the defense of professional liability cases throughout California; phone (916) 921–5800; e-mail bob@jsc-attorneys.com.

¹Two other U.S. Supreme Court decisions have had an impact on expert testimony: (1) General Electric Co. v. Joiner, 522 U.S. 136 (1997), in which GE clarified Daubert by explaining that while the focus under Daubert is the reliability of the expert’s methodology, if the expert’s conclusions do not reliably follow from the data on which the expert relies, the conclusions may not be admitted in evidence, and (2) Weisgram v. Marley Co., 528 U.S. 440 (2000), in which Weisgram permitted an appellate court to order entry of judgment for a defendant when, after ruling that expert testimony should not have been admitted, there was insufficient evidence to support a causation theory. It was after Weisgram that the Supreme Court adopted an amendment to Federal Rules of Evidence section 702 that affirms the gatekeeper role of the federal trial judge.