Navigating Litigation Reporting Standards
Thereâ€™s a Maze of Standards Out There. Hereâ€™s a Guide to Key Provisions in The Most Important Ones
*AUTHORS NOTE*Â This article was written in May 2010.Â In December 2010, the Federal Rules of Civil Procedure, section 26(a)2(b) were updated such that drafts and attorney communications are now specifically recognized as work product and not discoverable.Â The exception to this is correspondence as it relates to compensation for the expertâ€™s study or testimony or if the correspondence identifies facts or data that the expert considered in forming his or her opinion.Â For the actual updated rule clickÂ here.
Navigating various reporting standards is tricky. Rebekah Smith provides a guide to various standards from NACVA, AICPA, and ASA, and discusses Federal Rules of Civil Procedure (FRCP), State Reporting Requirements, and guidelines from other organizations.
Many valuation experts are accustomed to preparing detailed â€śfullâ€ť valuation reports for estate and gift, financial reporting, or other traditional purposes. When engaged to provide a valuation opinion in a litigation setting, however, there sometimes exists confusion about the report requirements. I have found that many practitioners believe a full report is required in a litigation setting, which is not necessarily true.Â But no wonder the confusion. When considering the various business valuation governing bodies, federal and state requirements, it becomes apparent that navigating reporting standards when issuing a valuation opinion in an adversarial proceeding can be tricky.
American Institute of Certified Public Accountantsâ€™ (â€śAICPAâ€ť)
The AICPA Statement on Standards for Valuation Services (SSVS) No. 1 paragraph 50 states:
Reporting Exemption for Certain Controversy Proceedings
50. A valuation performed for a matter before a court, an arbitrator, a mediator or other facilitator, or a matter in a governmental or administrative proceeding, is exempt from the reporting provisions of this Statement.Â The reporting exemption applies whether the matter proceeds to trial or settles. The exemption applies only to the reporting provisions of this Statement (paragraphs 47â€“49 and 51â€“78). The developmental provisions of the Statement (paragraphs 21â€“46) still apply whenever the valuation analyst expresses a conclusion of value or a calculated value (Valuation Services Interpretation No. 1).
Thus the AICPA SSVS allows that experts who are expressing a conclusion of value or a calculation of value as a measure of damages or in an adversarial proceeding would be exempt fromÂ the written reporting requirement. The appraiser could provide opinions orally only; however, he or she is not exempt from the developmental provisions. Thus, the appraiser still must complete all of the analysis required to provide an opinion. There is just no requirement to document it in a formal report. Â
National Association of Certified Valuators and Analysts (â€śNACVAâ€ť)
NACVAâ€™s standard states:Â
4.4 Litigation Engagements Reporting Standards. A valuation performed for a matter before a court, an arbitrator, a mediator or other facilitator, or a matter in a governmental or administrative proceeding, is exempt from the reporting provisions of these standards. The reporting exemption applies whether the matter proceeds to trial or settles. This litigation waiver does not, however, relieve the member from complying with the Development Standards and all other standards promulgated by NACVA.
Similar to the AICPA standards, NACVAâ€™s standards allow for oral reports. However, the appraiser is not exempt from NACVAâ€™s Development Standards and all other standards such as the General and Ethical standards. Meaning, in order to issue anÂ opinion of value, the appraiser must do all the work necessarily required by a full valuation but does not have a requirement to document that work in a formal report. Â
The American Society of Appraisers (â€śASAâ€ť)Â
The ASA has a procedural guideline in its standards entitled â€śPG- 1 Litigation Support: Role of the Independent Financial Expert.â€ťÂ Â The procedural guideline is set forth in the following sections:Â (I) Preamble, (II) Performance of litigation support services, (III) Conducting the assignment, (IV) Preparation of an expert report, and (V) Retention of work papers and report.
Specifically, Section IV â€śPreparation of an expert reportâ€ť sets forth recommendations for the report as follows:Â
To the extent that it is both possible and appropriate, an expert report should contain, as a minimum, the following information:
Section IV then goes on to identify 15 areas of informationÂ that should be included if possible and appropriate suchÂ as: Identity of client, Description of assignment, EffectiveÂ date(s) or effective time period(s), Intended use, Definitions,Â Documents and information relied upon and, if applicable,Â those reviewed but not relied upon, Limitations, RelevantÂ chronology, Relevant context and financial analysis,Â Methodology, Analysis,Â Assumptions, Conclusion, ReportÂ date, and Exhibits, appendices, graphs, charts, schedules,Â and tables.
Perhaps the key language, however, is that these areas should only be included when â€śpossible and appropriateâ€ť which allows for the subjectivity of the appraiser in determining what is appropriate, if anything, to be included in a report.Â
Institute of Business Appraisers (â€śIBAâ€ť)
The IBA sets forth standards for â€śExpert Testimonyâ€ť in Standard Three.Â The standard defines expert testimony as â€śan oral report given in the form of testimony in a deposition and/or on the witness stand before a court of proper jurisdiction or other Trier of fact.â€ťÂ Standard Three then goes on to discuss mandatory content and the appraisers requirement to comply in a manner that is â€śclear and not misleadingâ€ť with respect to the following:Â
- Introduction wherein the appraiser is to identify theÂ client, set forth the property being appraised, theÂ purpose and function of the appraisal, the standardÂ of value and the effective date of the appraisal.Â Â
- Assumptions and limiting conditions.
- A statement of disinterestedness.
- Valuation conclusion, which can be in the form of (i)Â a statement of a specific opinion of value or (ii) aÂ range of values or (iii) a preliminary estimate, whichÂ must include a statement that an opinion of andÂ valueÂ resulting from a form report might be different that difference might be material.
Standard Three is not clear if those required elements mustÂ be presented in writing or not, and does state that â€śexpertÂ testimony reports should comply with all applicable sectionsÂ of Standard One, Professional Conduct and Ethics.â€ťÂ
Federal Rules of Civil Procedure, Section 26(a)(2)(B)
Section 26(a)(2)(B) of the Federal Rules of Civil Procedure,Â specificallyÂ relates to a written report from an expert, andÂ governs the information required when disclosing expert witness testimony.Â Section B reads as follows:
Written Report. Unless otherwise stipulated or ordered by the court, this disclosure must be accompanied by a written reportâ€”prepared and signed by the witnessâ€”if the witness is one retained or specially employed to provideÂ expert testimony in the case or one whose duties as theÂ partyâ€™s employee regularly involve giving expert testimony.Â The report must contain:Â
Â (i) Â Â Â a complete statement of all opinions theÂ witness will express and the basis and reasonsÂ for them;Â
(ii) Â Â Â the data or other information consideredÂ by the witness in forming them;
(iii) Â Â Â any exhibits that will be used to summarize or support them;
(iv) Â Â Â the witnessâ€™s qualifications, including a list of all publications authored in the previous 10Â years;Â
(v) Â Â Â a list of all other cases in which, during the previous 4 years, the witness testified as an expert at trial or
Â Â Â Â Â Â by deposition; and
(vi) Â Â Â a statement of the compensation to beÂ paid for the study and testimony in the case.Â
The requirements under 26(a)(2)(B)(i) require a more detailedÂ valuation opinion.Â In particular, the language requires an expert to discuss â€śall opinions and the basis and reasons for them.â€ťÂ Section (iii) requires the expert provide exhibits that will be used to summarize or support the opinions.Â
Thus, any data, analysis, methods, or opinions the expert wishes to testify about must be included in the report.Â The valuation expert must think carefully about what must be included in a report in federal litigation in order to fully disclose and support his or her opinions.
Note: A change may occur in the near future related to expert witness reports. A proposal to change Rule 26 of the Federal Rules of Civil Procedure was approved by the Supreme Court in May and is on track to take effect by December 1, 2010 unless overridden by Congress. The proposal states that expertsâ€™ draft reports will no longer be discoverable.Â
State Reporting Requirements
Guidelines for reporting vary from state to state. Some states have requirements similar to those set forth in Federal Rule 26(a)(2)(B) while others have no requirements. In fact, some local customs may be that no report is submitted while other localities require a formal report regardless of what is required by state code. It is important for the appraiser to consult with retaining counsel to gain an understanding of what the state court expects.
An expert may also belong to other organizations, which have standards or exemptions for reporting requirements in a litigation matter.Â He or she should become familiar with the particular organizationâ€™s standards. Understanding the reporting requirements or exemptions when providing a valuation opinion in a litigation matter is imperative.Â A â€śfullâ€ť detailed report may not be required in all circumstances. Â Â
Rebekah Smith, CPA, CVA, CFFA, is Director of Financial Advisory Services at GBQ, Consulting, LLC, Columbus, OH 43215.Â She has 12 years of experience in the areas of business valuation, forensic accounting, economic damages, and litigation consulting. She is a Director and a member of GBQ Consulting LLC. She has rendered services in litigation matters and is qualified to testify in court as an expert witness on business valuations and economic damages as well as other matters. She has also served as a court-appointed expert. Rebekah may be contacted at email@example.com.
This article first appeared in the May 2010 issue of National Litigation Consultantsâ€™ Review (NLCR).Â