Expert Witnesses - in Jeopardy? Experts Aren't Always Protected from Lawsuits, So It Pays to Be Informed

By Crain, Michael A.; Goldwasser, Dan L. et al. | Journal of Accountancy, December 1994 | Go to article overview

Expert Witnesses - in Jeopardy? Experts Aren't Always Protected from Lawsuits, So It Pays to Be Informed


Crain, Michael A., Goldwasser, Dan L., Harry, Everett P., Journal of Accountancy


Experts aren't always protected from lawsuits, so it pays to be informed.

Litigation services have become one of the faster growing practice areas for CPAs. Many practitioners previously dedicated to accounting and auditing have entered this area part-time or full-time. More CPAs are preparing damage analyses, performing business valuations, assisting counsel in document productions, participating in negotiations and providing expert witness testimony. Unfortunately, litigation against expert witnesses is increasing as well.

Professional liability has become a key concern for all CPAs, but most of the problems have been in traditional services. Because there have been relatively few cases against expert witnesses, some practitioners erroneously believe this practice area carries little or no liability exposure. A California lower court case demonstrates why this is a dangerous assumption: A jury awarded $14.2 million in compensatory damages and approximately $28 million in punitive damages in the first major plaintiff victory against a CPA firm performing litigation services (see MATTCO FORGE.) Practitioners who serve as expert witnesses clearly need to take the threat of litigation seriously.

EMERGING THREATS

Two factors have led to an increase in claims against all types of expert witnesses, both by the expert's client and opposing parties:

* In litigation at least one party is likely to be unhappy with the outcome and will search for someone to blame.

* The courts are beginning to erode the barriers that have protected expert witnesses from liability claims.

Potential allegations against CPA-experts include

* Breach of contract: The CPA failed to perform some aspect of the engagement.

* Professional malpractice: The expert's testimony about a business valuation was wrong; an exhibit used for trial was flawed; during pretrial negotiations, the expert did not properly disclose his or her opinion and misled the opposing party, resulting in a poor settlement for that party; the expert released improper documents to the opposing side during the discovery process.

* Libel or slander: The CPA made damaging remarks about another person or entity.

* Disparagement: The accountant damaged the reputation of the opposing party's business.

* Fraudulent or negligent misrepresentation: The opposing party incurred damages because the CPA misstated facts during the trial.

* Disclosing a client's confidential information: The CPA-expert used another client's information (without permission) for industry data comparisons.

KNOW THE STANDARDS

To minimize exposure to professional liability, the CPA first should determine which professional standards apply to the engagement. The standards always applicable to litigation services are composed of the American Institute of CPAs Code of Professional Conduct and Statement on Standards for Consulting Standards (SSCS) no. 1, Consulting Services: Definitions and Standards. Nonauthoritative educational guidance is available in AICPA Consulting Services Special Report 93-1, Application of AICPA Professional Standards in the Performance of Litigation Services, and Consulting Services Special Report 93-2, Conflicts of Interest in Litigation Services Engagements. Other professional standards also could apply if certain types of services, such as an audit, are performed as part of the litigation engagement.

The courts won't necessarily perceive the CPA's responsibilities as limited to the code and SSCS no. 1. In determining compliance with professional responsibilities, the courts frequently consider practice aids and other nonauthoritative guidance. Accordingly, CPAs serving as expert witnesses should stay abreast of the applicable professional literature. As a practical matter, they also should be aware of publications that are considered "authoritative," even though CPAs' professional standards don't recognize them as such, and be prepared to explain any departure from them. …

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