Academic journal article Journal of Accountancy

Court Rules on Accountant's Expert Testimony

Academic journal article Journal of Accountancy

Court Rules on Accountant's Expert Testimony

Article excerpt

Court Rules on Accountant's Expert Testimony

As one partner in a Big 5 accounting firm now knows, CPAs should think twice before providing expert testimony on damages in a law suit.

Using new standards to judge the acceptability of such testimony, the Seventh Circuit Court of Appeals in Chicago affirmed a district court decision that excluded the CPA's expert testimony. As a result, in Target Market Publishing, Inc. v. ADVO, Inc., the plaintiff's suit for damages was dismissed on jurisdictional grounds.

Disputed Profits Led to Suit

In 1993, Target Market Publishing, Inc. (Target), entered into a one-year contract with ADVO, Inc. (ADVO), to prepare and distribute a direct-mail advertising publication called Select Auto. The project involved selling automobile dealers exclusive advertising rights at a flat rate in the monthly publication. The two companies were to share equally any profits from the enterprise.

Whether any profits were actually earned became the primary subject of dispute. In early 1994, ADVO notified Target that it was no longer going to participate in the preparation or distribution of Select Auto.

In April 1994, Target brought suit against ADVO claiming breach of contract and breach of fiduciary duty. After the close of discovery, ADVO filed a motion for summary judgment maintaining Target could not prove its claim that it had sustained damages of at least $75,000 as a result of the failed project.

In opposing ADVO's motion for summary judgment, Target relied primarily on the report from its damages expert. The CPA's report concluded that had ADVO met its obligations under the contract Target would have earned $1.4 million in profit from the venture. ADVO maintained that the CPA's expert report was pure speculation. ADVO argued that the report was based upon implausible assumptions and unreliable methodology. The trial court concurred and granted ADVO's motion for summary judgment dismissing the case.

Daubert Set Rules for Experts

On appeal, the Seventh Circuit held that, under both Daubert v. …

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