The Role of the Expert Witness in Accounting Fraud Cases

By Sanchez, Maria H.; Zhang, Shirley Wei | Global Journal of Business Research, January 1, 2012 | Go to article overview

The Role of the Expert Witness in Accounting Fraud Cases


Sanchez, Maria H., Zhang, Shirley Wei, Global Journal of Business Research


ABSTRACT

We provide information regarding expert testimony in financial fraud cases. Financial fraud, including tax fraud, is on the rise, and so is the demand for expert witness testimony for both the prosecutors and the defense team when these frauds are prosecuted. We detail the role and qualifications of the accounting expert witness and we provide examples of two high profile fraud cases in which expert testimony of accountants was used. This article should be of interest to attorneys, accountants, academics and students.

JEL: M40

KEYWORDS: financial frauds, expert witness

INTRODUCTION

Financials frauds have been making headlines for years. From Enron and WorldCom to Fannie Mae and Freddie Mac, it seems like there is a new high-profile scandal every week. Less publicized financial frauds are also on the rise (Emshwiller, 2010). This paper examines the role of the expert witness in accounting fraud cases. This is an important topic to examine because of the sheer magnitude of cases involving accounting fraud. In 2009, approximately 10% of all federal criminal cases were related to fraud (United States Sentencing Commission, 2010). In a recent poll by Deloitte, more than half of the 2,100 business professionals thought more financial fraud would be uncovered in 2010 and 201 1 than in the prior three years (Deloitte, 2010). Due to the recent financial crisis in the United States, businesses, individuals, and large corporations have been facing huge financial pressures.

They have suffered or may still be suffering from financial losses, which could, to some extent, increase number of incidents of financial fraud. Pressures, opportunities, and rationalization form the fraud triangle for financial fraud perpetrators. Accountants play an increasingly important role in providing litigation services for financial fraud cases. Many attorneys need assistance from accountants during the preparation of their cases and then later need accountants to testify as expert witnesses. Currently, there is a lack of academic literature that addresses the role of the accountant as expert witness.

This article adds to the current literature by providing an overview of the role of the accountant as an expert witness in financial fraud cases, with a specific focus on two high profile cases: Enron and HealthSouth. In this paper, we examine those two high profile cases in detail, with actual quotes from the expert witnesses at trial. This paper should give both students and practitioners good insight into the role of the expert witness, from preparation to actual testimony.The remainder of the case is organized as follows. First, we review the prior research. Next, we look at tax fraud in general. Then we examine the role and the qualifications of an expert witness. Then the role of the expert witness in the Enron case is examined in detail, followed by an examination of the role of the expert witness in the HealthSouth case. Finally, a conclusion section summarizes the paper and provides suggestions for accountants in an exper witness role.

Prior Research

There is little academic research that examines in detail the role of the expert witness in specific accounting fraud cases. Many case studies examine accounting frauds in detail (e.g., Moriceau, 2005). The frauds at Enron and HealthSouth have been studied extensively. The frauds were widely covered by the popular press, especially the Wall Street Journal. There are cases on them in numerous textbooks (e.g., Knapp, 2011; Beasley et al., 2009). Most business students study at least one of these cases during their time at the University.

Enron is such an important part of accounting history that some faculty use the Enron case during the first day of all of their accounting classes to capture student interest and let them see that accounting is anything but boring (Stice and Stice, 2006). Enron is one of the most widely cited accounting fraud cases in recent history and is used to teach a variety of business topics, such as special purpose entities (e. …

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