Damage Claims and the Lawyer/Accountant Relationship

by Chris Campos

In any lawsuit, the trial attorney must address not only the legal issues but also the financial impact on the client in the event damages become a factor. One expert an attorney should utilize is an accountant with experience in investigating and evaluating claims for damages. It can be a great advantage to have an expert with that background, because he or she will be aware of what an attorney requires in such cases.

To obtain the greatest value from an expert accountant, an attorney should be aware of what characteristics to look for in the expert, common problems encountered in the attorney-accountant relationship, and the substantive ways in which the expert can be helpful. Not only will time and money be saved, but the entire relationship between the two can proceed in a more efficient and effective manner.

Characteristics of an expert

The expert accountant used in the defense of a damage claim encounters a completely different set of working conditions from those in conventional accounting practice. The expert evaluates records of an adversary who often offers a minimum of assistance and information, and the work is generally performed in an unstructured environment with disorganized information. These situations are more familiar to accountants experienced in evaluating damage claims.

Characteristics that are required of an expert accountant called upon to review and evaluate a damage claim include creativity and flexibility in approaching a problem; the ability to use "unorthodox" approaches if they are logical and equitable; tact in dealing with persons in an adversary position; sensitivity to other persons' methodologies and ideas; the ability to view damage claims from a broad perspective and to be alert to possible parallel causes that may have contributed to the claimed loss; energy and motivation to test and probe the damage claim in spite of obstacles such as missing, disorganized, or incomplete records; an ability to subordinate his or her role to that of the attorney and to be able to work in a partnership relationship with experts in other disciplines; and objectivity. To ensure objectivity, it is preferable that the expert accountant not be the regular auditor retained by the defendant. In addition, it helps if the expert has had prior experience in evaluating damage claims, as this can reduce the time required for start-up and should eliminate the need for orientation on matters involved in law suits such as interrogatories, document requests, depositions, and trial.

Finally, the expert must be able to communicate his or her findings to the attorney client and then to a judge and/or jury in simple, non-technical terms.

The accountant may utilize manual or computer-generated data, based on the circumstances. The data may include such methodology as auditing tests, statistical sampling, and regression analysis. In completing the assignment, the accountant will call upon many resources of business information, not only of an internal nature but also from external sources, using his or her experience to tap the vast resources available in printed form and through electronic data retrieval services and the Internet. Many internal documents reviewed by the expert accountant in a damage claim are not those normally used by a certified public accountant in conducting an audit. They are of an operational nature and are used to test and probe the validity of the claim.

In addition, after performing the review, the experienced accountant should know whether other experts are needed to support assumptions he or she is making about the claimant's business, and can suggest that the attorney retain an engineer, for example, to verify these assumptions.

From the accountant's point of view, a number of problems in this attorney-accountant relationship sometimes arise. An understanding of the nature of these problems will serve to prevent or at least minimize them.

Common problems

One common problem is that the engagement of the accountant is delayed so long that the accountant's effectiveness in doing the job is compromised. This problem is caused principally by two factors: (1) a desire to try all legal means at the disposal of the attorney to resolve the case before trial (such as a motion for summary judgment or a settlement); and (2) a desire on behalf of the client to avoid unnecessary experts' fees in the event any of these pretrial techniques brings the desired result.

However, an attorney, while filing summary judgment motions or engaging in settlement negotiations, should utilize an accountant in preliminary stages to point out weaknesses of the claim. Until liability is favorably resolved, the attorney should have an expert review that claim to separate fact from fiction. Settlement can often be reached if the plaintiff knows that the defendant is aware of the true value of the claim. Regardless of liability in the case, the attorney has thereby improved his or her posture for negotiations. The attorney should be pragmatic, recognize the risks involved, and determine the extent of the client's vulnerability.

This situation can best be illustrated by the following example. The plaintiff submitted a claim for over $1,800,000 for lost profits due to the alleged wrongdoing of the defendant. In addition to the questions of whether the defendant was liable and whether the plaintiff was partially negligent, a question arose as to the reasonableness of the damages claimed. The claim had been professionally prepared by a Big Five accounting firm, but there were no logical or reasonable bases for the assumptions the firm used. Through regression analysis prepared on a computer by the expert accountant, unit sales were projected based on historical data. In this manner a claim for lost profits of only $340,000 was developed. The contributory negligence percentages were applied to that amount to arrive at a settlement between the parties.

A second problem frequently facing the accountant is inadequate communication with the attorney. The accountant should be made aware of the basis for the claimant's position and the theories to be propounded by the claimant's attorney, and any changes in this position should be communicated to preclude any surprises. At the very least, the attorney should set forth the scope of the expert's assignment, and clarify the accountant's role by setting appropriate parameters. These guidelines will prevent duplication of effort, unnecessary work, and omission of required procedures. Also, the attorney should inform the accountant of the cut-off dates for discovery.

The overall strategy which an attorney plans for developing and presenting the case need not be discussed with each expert. However, to the extent that the strategy applies to an expert's area, the attorney should advise that expert not only of what he or she wants the expert to do but also the reasons for that action. Often an accountant, looking at a case from a background of experience in other suits, can offer suggestions that the attorney may not have considered.

These comments are in no way intended to compromise the role which the attorney must play in a lawsuit. Instead, they suggest that the attorney's orchestration of the case will result in a harmonious production if the players know what tune to play, how, when, where, how often, and how long. Metaphorically speaking, the attorney is the conductor and the experts and witnesses are the musicians whom he or she must direct.

Often attorneys are unaware of the most important services that experienced accountants can render on their behalf. These include assistance in the preparation of: (1) a list of documents for claim verification; (2) interrogatories; (3) questions for depositions and assistance to the attorney during the depositions; (4) an actual audit of the claim; and (5) questions for cross-examination. Ultimately, the accountant may be used as an expert witness.

Production of records

An accountant, more than any other professional, is in the best position to know what records are normally prepared by a company and what reports, tax returns, and other documents it will have filed with governmental agencies. He or she has assisted companies in the preparation of these forms and is therefore best qualified to know which records will be helpful in challenging a claim and in developing an alternative approach, if necessary, to arrive at damages.

If the accountant has an inquisitive mind, he or she will request records and documents normally maintained in the business from an operating and management point of view as well as of an accounting nature. An expert accountant will also recommend that records and documents be requested which the claimant insists are nonexistent, not maintained, or have been discarded. This will force the claimant to take a position, in writing, as to their existence.

A poorly drawn document request is an indication to the opposing party that it was prepared by someone unfamiliar with the type of records maintained by various businesses or by the specific industry involved. On the other hand, when a well drawn request for specific documents is presented, the opposing attorney and client are aware that the defendant recognizes their significance. This often can set the stage for negotiation of a reasonable settlement.

Suggested interrogatories

The expert accountant can serve as an investigator and interpreter for the attorney to help prepare interrogatories, such as follow-up interrogatories when the documents themselves are not self-explanatory, and additional information concerning their method of preparation and purpose is necessary to understand them fully. Also, explanations are sometimes needed to understand completely the business or other activities of the claimant. To the extent that these questions arise in the work that the accountant is performing for the attorney, he or she can submit them for the attorney's consideration.

A utility company, for example, claimed $7 million in damages from a manufacturer as a result of a mechanical failure. The manufacturer's attorney retained an expert accountant who noted, during his review of the utility company's records, that it had recently instituted a rate increase. Aware that such increases had to be approved by a state public utilities commission, the accountant suggested that the attorney have an associate go to the commission and research the records concerning the rate increase. When the attorney did so, he found that the utility company's treasurer claimed in sworn testimony to the commission that the company suffered a loss of $2 million which it sought to have amortized for rate increase purposes. In consequence, the damages were dramatically reduced.

Assistance in depositions

An accountant can be helpful while the attorney is deposing the claimant's accountant, other persons who prepared, helped prepared, or have knowledge of facts affecting the claim, or those involved in the record-keeping for the claimant. An attorney frequently has a legal assistant to make notes and discuss strategy and questions during recesses in the depositions. Similarly, the attorney should use the services of an accountant to offer suggestions from an accounting point of view. The accountant can advise the attorney of types of questions or records which substantiate or refute statements of the deponent. This advice can either be used during the deposition or saved for the subsequent trial, depending on the attorney's strategy.

An accountant, like other experts, cannot convey to an attorney all the information garnered in the course of an assignment or in the course of his or her professional experience. Therefore, as a deponent is answering questions, the expert may be aware of details he or she has not transmitted to the attorney.

The deponent can tell by the questions posed whether the attorney is fully conversant with accounting or financial matters in general and the specific damage claim in particular. If an inkling of unfamiliarity with these matters is conveyed to the opposing counsel, the defense attorney is at a disadvantage. An accountant's knowledge of nomenclature in records can prevent such a situation.

The accountant's attendance at a deposition can also provide a basis for attacking the validity of documents, or for a request for additional documents. An accountant can give similar assistance by reading a transcript of a deposition, although not as effectively. The attorney can use the comments of the accountant either in a continuation of that deposition or ultimately at trial.

In a recent multimillion dollar case, the presence of an expert accountant at the deposition of the person who prepared the well-documented and detailed damage claim proved successful. The plaintiff had hired a prestigious accounting firm to calculate the claim. The calculations, however, were based on the plaintiff's assumptions, and the accounting firm had printed a statement to the effect in its report. The accountants for the plaintiff had thus performed merely a mechanical function. Advice on accounting practices and projections given to the defense attorney by the expert accountant resulted in questions that put the plaintiff in a position of eliminating its accountants as experts. The plaintiff was forced either to re-do the claim or to rely on experts who would endorse all the detailed assumptions and calculations made by its in-house personnel.

Audit of the claim

An accountant can conduct an audit of the claim to evaluate damages either at his or her office or, preferably, at the office of the claimant. During the audit, he or she can determine how the claimant's accounting records are maintained. Working with personnel in the claimant's office often gives a better insight into the business and the means by which the claim was prepared. By reviewing the claim, the expert accountant will be able to inform the attorney about the quality of the claimant's management.

In the evaluation, the accountant will determine the strong points and weaknesses of the claim so that he or she is in a position either to support the claim in its entirety or to enumerate its weaknesses and their magnitude. If obvious duplication or errors are in the claim, they will be brought to the attention of the attorney who will determine how they should be handled.

If sufficient weaknesses in the claim exist, the accountant will ascertain whether the attorney wishes to proceed with an alternate approach to arriving at damages. The attorney may prefer merely to attack the claim and not incur the expenses of an alternate claim calculation. This strategy will obviously be the decision of the attorney and be part of his or her overall plan.

In light of other factors in the case, an attorney may prefer that the accountant not appear as an expert witness armed with an alternate approach to the claim. He or she may fear (not unreasonably) that the opposing attorney will exploit the accountant to establish the value of damages that were poorly prepared and presented.

Questions for cross-examination

The accountant can be of service to the attorney by providing a list of deficiencies, errors, duplication, incorrect theories or assumptions in the claim preparation. Since an accountant is oriented to detail and records, he or she will document each deficiency, error and duplication in a manner which an astute and imaginative attorney can use to maximum effect during cross-examination. Inasmuch as it is the claimant's burden to prove the extent of the damages, an effective cross-examination can often obviate the need for an expert accountant as a defense attorney's witness.

Use as an expert witness

If it is deemed prudent by the attorney to use the accountant to testify as an expert witness, the accountant can testify to the court of weaknesses, errors, or deficiencies in the damage claim or present an alternate approach.

Properly displayed findings of the accountant, presented in a graphic manner, can be a persuasive tool in the trial. Graphs, charts, slides, and other visual aids are an effective means of making a desired point.

Finally, an accountant who is experienced at testifying in damage claims should know how to conduct himself or herself during direct examination and particularly during cross-examination in a deposition or a trial. He or she should know, among other things, to refrain from answering a question that is not understood and to ask that the question be clarified; to wait until the question has been completed and to give the attorney time to object, if necessary; to clarify any yes or no answer unless the attorney plans to clarify on direct examination; to avoid debate, argument, humor, evasiveness, pettiness, personal exchanges, or hostility while testifying; to be calm, collected, careful, and confident; to answer only the question asked and thus avoid opening new areas of inquiry; to be fully prepared for testimony; and to answer questions objectively and truthfully.

In contemplating all of the services which an accountant can perform in damage suits, consideration must be given to the fees involved. The attorney and client can limit the cost by asking for assistance in only one or more phases. Proper communication between the attorney and the accountant at all stages of the engagement will eliminate unnecessary costs and build a strong case for the client.

In choosing an expert accountant to review a damage claim, look for prior experience with such work, creativity, flexibility, unconventionality, tact, sensitivity, broad vision, drive, the ability to cooperate with other professionals, and objectivity. Do not, if possible, use the client's regular auditor.

Do not delay hiring an expert accountant in hopes of reaching a settlement. The client may lose more from a settlement negotiated based on an incomplete understanding of a claim than he would spend on fees to have an expert determine the claim's true value.

Be sure to make clear to the expert accountant what role he or she is to play. This will avoid duplication of work (and fees), unnecessary work (and fees), and omission of necessary procedures.

Advise the expert accountant of the cut-off dates of discovery.

An expert accountant can be invaluable in the preparation of a document request. He or she will be thoroughly familiar with the record keeping practices of business, and can assure that all relevant documents are requested. If you have hired the proper expert, he or she will be able to help you request operational and managerial documents which would ordinarily be outside the purview of most accountants.

Use an expert accountant to help in the preparation of interrogatories. He or she can act as an interpreter of documents, and will be able to alert you in the event that answers and documents you have received reflect incomplete or inadequate information.

When deposing or cross-examining a claimant's accountant or other persons who prepared or helped prepare the claim, or anyone involved in record keeping for the claimant, it is a good idea to have the expert accountant sit in with you. The expert may have omitted a piece of information in briefing you, believing it to be unimportant, which is found during the deposition or testimony to be important. In addition, the accountant's understanding of the documents and knowledge of what should be in them can be an invaluable aid.

The expert's most obvious value will be in an audit of the claim. If possible, arrange for the audit to take place at the claimant's office.

The expert can merely audit the claim, or can go a step further and prepare an alternative measure o damages. This is a judgment call which must be left to the attorney.

If you decide to use the accountant as an expert witness, be certain he or she knows how to be an effective witness. Choosing your expert carefully can shorten your pretrial briefing.

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