Don't Wait Until Trial To
Call an Accountant
by Chris Campos
Many attorneys are still unaware of the important
services an experienced
investigative accountant can offer long before there is any
need for expert testimony.
Such accountants can be valuable in helping
to separate fact from fiction in a damage claim at the most
preliminary stages of litigation and settlement negotiation.
At a time of rising client concern over legal expenses, a
properly utilized investigative accountant can significantly
affect both litigation and settlement costs.
Production Of Records
Investigative accountants will know not only
what records are normally prepared by a company but what reports,
tax returns and other documents are filed with government
agencies and trade organizations. They will recommend the
request of documents and records maintained for management
information and other operating use as well as those created
purely for accounting uses.
Besides satisfying the obvious objective
of obtaining records, a well drawn request for specific documents
communicates to the other side an understanding of the documents'
significance to the damage claim and can help set the stage
for negotiation of a reasonable settlement.
FOR EXAMPLE: In a suit by a petro-chemical
producer against an equipment manufacturer, the amount of
damages turns on the length of time the plaintiff's boilers
were unavailable. Accountants working with the manufacturer's
attorney obtain publications from a trade association on industry-wide
boiler downtime. The plaintiff is listed among those contributing
statistics to the trade association. The records they .submitted
are therefore known to exist and can now be specifically requested.
Suggested Interrogatories
The investigative accountant can serve as
an investigator and interpreter for the attorney. The accountant
can help prepare follow-up interrogatories when the documents
are not self-explanatory and when additional information concerning
their method of preparation and purpose is needed to fully
understand them. Explanation of the business or other activities
of the claimant may also be needed.
FOR EXAMPLE: A utility company sues a manufacturer
for $15 million in damages resulting from a mechanical failure.
The utility recently instituted a rate increase. The accountant
retained by the defendant's attorney suggests that an associate
be sent to the state public utilities commission to research
records concerning the rate increase. The attorney found that
the utility company's treasurer claimed in sworn testimony
to the commission that the company suffered a loss of $5 million,
which it sought to have amortized for rate increase purposes.
A settlement was quickly negotiated after this fact came to
light.
Assistance In Depositions
Attorneys often use legal assist ants to
make notes and discuss strategy during recesses in depositions.
Similarly, an accountant can be helpful to an attorney who
is deposing the other side's accountant or others involved
in the company's record keeping or having knowledge of the
facts affecting the dam age claim. A good investigative accountant
can suggest types of questions or records which substantiate
or refute statements of the person being deposed The attorney
will make the strategic judgment on whether to use such advice
during the deposition or to save it for subsequent trial.
An investigative accountant can also provide a basis for attacking the validity of documents or for a request for additional documents. Although the accountant can render some assistance by reading a transcript, the attorney can often make use of these ideas at the deposition itself.
FOR EXAMPLE: A damage suit alleging loss
of profits turns on the earnings of the previous quarter.
An initial examination of records suggests that pension and
vacation accruals may have been manipulated to reduce expenses
and increase profits for that quarter. The attorney is completely
unfamiliar with the technical accounting practices related
to pension and vacation accruals and reversals, nor does he
wish to spend the time to become expert in these matters.
Prior to deposing the other side's accountant, the attorney
is briefed by the accountant on the technical issues involved,
how they apply to the case, and how they are evidenced in
the documents. The attorney then formulates questions in his
own style and consistent with his overall litigation strategy.
Review Of Damages Claimed
An investigative accountant can conduct an
audit-preferably at the claimant's office-to evaluate the
damages claim. During the audit, the accountant can determine
how the claimant's accounting records are maintained.
Working with personnel in the claimant's
office often allows extra insight into the business and the
means by which the claim was pre pared. The accountant should
become thoroughly aware of the claim's strong and weak points
so he can either support it unequivocally or enumerate its
weaknesses and their magnitude.
FOR EXAMPLE: A coat retailer claims the value of inventory lost in a fire on Feb. 10 at $450,001). The accountant points out these were winter coats which would have to be sharply discounted to sell at this date and suggests an alternative approach that values the inventory at $200,000.
Cross-Examination Support
Accountants should be able to document any
deficiencies errors or duplications discovered in the damage
claim This information can be used by the attorney during
cross-examination Inasmuch as it is the claimant's burden
to prove the extent of the damages, effective cross-examination
can often obviate the need for an expert accountant as a defense
attorney's witness.
Expert testimony
While expert testimony is probably the most
widely understood role of the accountant in litigation, it
is worth noting what an attorney should expect from an accountant
who is experienced in testifying in damage claims.
The accountant should know how to conduct
himself during direct examination and particularly during
cross-examination in a deposition or a trial. Among other
things, he should know:
- 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;
- 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 fur testimony,
and
- to answer questions
objectively and truthfully.
In some cases the attorney may decide not to use as an expert witness an accountant who has been consulted in other aspects of the case, since all of his work file would then become open to discovery.
Words Of Caution
A final caution: not all accountants are
investigative accountants.
The skills and experience of true investigative accountants
differ significantly from those who primarily do conventional
audit and tax work.
Remember that conventional accountants are
paid by the party whose books they audit or whose tax return
they prepare. They typically have little or no experience
in the adversarial world of litigation and may find it very
difficult to work effectively under these unfamiliar conditions.
Your accountants will also need to be creative in dealing with incomplete or disorganized records and energetic in searching for alternative approaches. They should also be accustomed to subordinating their role to the attorney's in the litigation process.
Most important of all, they must be intimately familiar with the broad range of business records and record keeping practices beyond those used to satisfy standard financial reporting requirements. In a word, they must be investigators.
Article initially appeared in New Jersey Lawyer, October 26, 1992.
Chris Campos is founder and senior partner of Campos & Stratis, a Teaneck-based international accounting firm dedicated to litigation support.
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