Accountants Considerations of Daubert-Related Decisions on Valuation Expert Testimony
Reilly, Robert F., The National Public Accountant
Accountants are often called upon to perform litigation support services, including expert testimony on valuation and economic damages. This includes valuation analyses related to shareholder disputes and shareholder appraisal rights; breach of contract and other types of commercial litigation; insurance claims and cases of federal income taxation; federal gift and estate tax; state and local property taxation; infringement and deprivation; eminent domain and condemnation; marital dissolution and family law; and other types of valuation-related disputes.
Accountant/valuation expert witnesses should be aware of several recent court cases that have applied and interpreted the Daubert guidelines with regard to expert testimony. For purposes of this discussion, the Daubert guidelines refer to the factors articulated by the U.S. Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, Inc. (113 S.Ct. 2786, 125 C. Ed., 2d 469 ). These factors are applied by federal trial courts in their "gatekeeping" function of including--or excluding--expert testimony under the Federal Rules of Evidence Rule 702.
While the Daubert guidelines specifically apply in federal courts to expert testimony offered under Rule 702, accountants should realize that these federal guidelines might influence state and local trial courts as well.
It is the objective of the Daubert "gatekeeping" requirement to ensure the reliability and relevancy of expert testimony. The Daubert factors are used by the trial court to consider whether an expert witness, when basing testimony on professional studies or on personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field. As will be discussed below, the Daubert case originally applied to scientific expert testimony, and the Daubert factors were used to help clarify what is science and what is "junk science."
Several recent published decisions (at both the Court of Appeals and the Supreme Court levels) have concluded that the trial court's "gatekeeping" inquiry into both relevance and reliability applies not only to scientific testimony, but also to all expert testimony. Accordingly, all valuation practitioners should be aware of--and should attempt to comply with--these expert testimony guidelines. This would include all accountants who offer expert testimony on the value of assets, properties, and business interests within the context of Federal Rules of Evidence Rule 702.
The Daubert Factors
Under Rule 702, trial judges have historically been the "gatekeepers" regarding the admission of expert evidence in federal cases. Traditionally, trial judges would rarely disqualify expert witnesses or exclude expert testimony. Rather, they would limit the areas in which the expert was allowed to offer testimony. And, they would allow witnesses to testify and then afford that testimony its "due weight" in their final deliberations. However, in Daubert, the Supreme Court articulated specific factors that trial judges should consider with regard to the admission or exclusion of expert testimony.
In the Daubert case, a doctor testified before the trial court and presented a radical medical opinion. That opinion was unsupported by either the relevant professional literature, the medical research scientific standards, the recognized professional organizations, or any concurring medical research colleagues. With regard to the admission of this testimony, the questions that trial court faced were: (1) Was the doctor truly a scientific expert or merely a "hired gun?" and (2) Was the expert testimony based on medical expertise or on "junk science?" With regard to the admissibility of expert testimony, the Daubert court wrestled with the following issues:
1. Whether the expert will be testifying as to scientific knowledge.
2. Whether the testimony based on scientific knowledge will assist the trier of fact in determining the ultimate issue. …