Do Not Become a ‘Damaged’ Expert

Credibility is the Critical Driver of Value for an Expert. Stay on Top With These Best Practices.

John Marcus provides guidelines successful expert witnesses abide by: Trust no one, read everything, spend more time thinking and less time computing, and be true to yourself. Here’s why these best practices matter.

In more than 30 years of practice and more than 10 years of teaching for the National Association of Certified Valuators and Analysts (NACVA), I have had the opportunity to review, rebut, and sometimes launch Daubert challenges against hundreds of expert reports. Some of the reports were pure works of art and testaments to the knowledge, skill, and abilities of their authors. Other reports had potential, but for some reason or another, never quite hit the mark of telling a compelling story that could persuade the triers of fact. Others, however, were wonderful stories with a high entertainment value, but more appropriately relegated to children’s literature than to a forensic environment.

As I reminisce and ponder the situations that caused my opposing experts to crash and burn, I realize that the death spirals were not always caused by my extraordinary skill, but too often by my opponents’ lack of attention to wisdom of the sage Harry Callahan: “A man’s got to know his limitations.”¹ 

We all know accountants and other professionals who spend their entire careers working within their area of competence—their comfort zone. Many of them have built large practices in auditing, accounting, tax, and other specialty areas where they are respected advisors to their clients and pillars of their communities. As long as they remain in their safe cocoons, they are usually protected from the harsh environment of litigation. Once they pass through the threshold into the forensic environments, they are entering the Twilight Zone² where the rules are different. Ignorance of these differences can result in a tarnished career or in premature retirement.

The following sets forth four rules that a forensic expert should embrace:

Rule #1: Trust No One

Sometimes attorneys troll the waters looking for an expert to say what they want said—even if it is not true! They may engage in subtleties such as withholding data or misplacing documents or they may be even more blatant and lie to their experts. This is an especially difficult situation for CPAs who traditionally want to believe their clients.

I was once engaged by an attorney who intentionally misled me in a damages case. I was told in writing that certain documents did not exist and based my opinions on the documents that I was able to obtain. At my deposition, the non-existent documents were thrown across the table at me; they had been provided to the opposition by my client. I immediately invoked my right to amend my report based on new information. It took me 12 hours to prepare and distribute the amended report, but it only took opposing counsel four hours to file a Daubert challenge against me.

I was not told about the Daubert challenge until after the judge had rejected it. My retaining counsel laughed at my reaction to the entire episode. I told him that my reputation was not for sale and he said something that I will remember for the rest of my life, “John, I don’t want to buy your reputation; I just want to rent it for awhile.”

Always remember who the players are and what they are expected to do: The attorney is a client advocate, hired to win the case; the expert is an objective and impartial individual whose primary purpose is to analyze and clearly explain issues within his field of expertise so that the triers of fact may render and appropriate verdict.

Clarity of thought and precision in expression are essential tools of the trade.

Rule #2: Read Everything

A healthcare accountant with a stellar reputation for more than 30 years was asked by an attorney friend and fellow church member to assist him in a small case involving a physician who was wrongfully terminated from a specialty medical group. The terminated physician wanted to be paid for her portion of the practice and for her share of the ancillary investment that the practice made in a hospital. It sounds like a simple project, doesn’t it?

Based on the income distributions from the investment and some comments made by one of the members during a deposition, the accountant proceeded to compute the fair market value of the ownership interest in the hospital. He then assumed that the stock would have been sold upon her termination, generating a significant amount of money. After adding judicial interest to this amount, his total damages claim was approximately one million dollars.

Although a great deal of data was supplied to the experts on both sides, this accountant concentrated his efforts on analyzing the financial data in order to keep his fees “reasonable.” He was confident that his friend and fellow church member would tell him if anything else needed his particular attention.

At trial, the accountant’s direct testimony focused on his vast experience in the health care industry. The cross-examination focused on the documents that he examined, and more importantly, those documents that he had not seen. The accountant freely admitted that if his assumptions were faulty, his conclusion of damages would be incorrect.

In less than 20 minutes, after being presented with signed operating agreements and other documents governing the behavior of members of the medical group, the accountant crashed and burned. He was forced to admit that his client had been properly terminated, that she had no ownership interest in the ancillary investments of the group and, accordingly, there were no damages!

Good attorneys are not just “wordsmiths”; they are also “spin doctors.” Many of the litigation projects requiring financial experts contain large volumes of data, including hundreds or thousands of pages of depositions. Sometimes retaining counsel offers to assist the expert by providing summaries of the more important or lengthy depositions in order to save valuable time (and fees). You should graciously accept the summaries, but in addition to—not instead of—the actual deposition transcripts.

Recently, an accountant with many years of experience was asked by plaintiff’s counsel to determine the damages in an attorney malpractice lawsuit. A surgeon with a debilitating disorder could no longer perform surgery. He was trying to decide whether to sell his surgery practice or donate it to a local medical school. After finding no demand in the marketplace for his practice, he sought advice from his attorney regarding an act of donation for the practice. The attorney structured the donation in a manner that would maximize the charitable deduction to the donor. The donee found the act of donation too complicated and requested a donation of equipment instead of the practice as a whole. Without benefit of counsel, the physician complied and the deal was done. The medical school received the equipment, but the donor received nothing because all equipment had been fully depreciated. 

The accountant relied on summaries of the deposition that contained excerpts of conversations between the surgeon and the medical school chancellor in which five million dollars was mentioned as the value of the medical practice. The accountant used this amount and computed the value of the tax savings for a charitable contribution of this magnitude as the measure of damages. His report stated that a competent attorney would have known that the donation of fully depreciated equipment would generate no charitable deduction or tax savings.

If the accountant had taken the time to read the actual depositions of the surgeon and the medical school chancellor, he would have known that business brokers had determined there was no market for the practice. He would also have known that no value for the practice had ever been determined, it could not be sold at any price, and that the surgeon’s counsel had not been consulted about the changes to the act of donation.

Rule #3: Spend More Time Thinking and Less Time Computing

Accountants enjoy solving problems and finding the right answers. Sometimes asking the right question will lead you in an entirely different direction. Time spent in considering all facets of a situation often results in identifying the core issue instead of the superficial ones.

An accountant who was a nationally recognized expert in the operation of gas stations and convenience stores was asked to compute the damages suffered by a U.S. Army reservist activated during the war in Iraq. The reservist owned a convenience store and retaining counsel believed that this accountant’s expertise was critical to determining the damages suffered by the business as a result of the bank’s failure to reduce the loan interest rates to the maximum allowed under the SSCRA.³

The accountant had a great deal of knowledge about the operations of convenience stores and the volume/pricing relationship that guaranteed profitability. Because the business failed while the service member was on active duty, he assumed that the failure was caused by the bank keeping the loan interest at 10% instead of the prescribed 6% rate. In a giant leap of faith, he assumed that if the business had not failed, the savvy reservist would have several convenience stores covering a large radius from the sole existing store.

The accountant’s logic told him that the interest rate was too high, the business failed, so the failure was due to the bank’s violation of the SSCRA. Using this as the core of his argument, he constructed a scenario encompassing past, present, and future damages, wrapped it in the Flag, and presented a package designed to show how the bad bank had crushed the dreams of a patriot while he was serving his Country during war. 

The accountant was so convinced that the bank caused the business failure that he did not look for any other possible explanations. He missed the fact that a new highway changed traffic patterns away from the store. He missed the fact that during the absence of the reservist, the business was entrusted to a relative incapable of running it. He did not analyze the viability of the business before the activation of the reservist, so he did not know that the Altman Z-Score⁴ predicted that the business was headed towards bankruptcy. 

Rule #4: Be True to Yourself 

Always tell the truth: to your client, to the court, and to yourself. Experts have no financial interest in the outcome of the case, so it should be easy to always tell the truth. That being said, why is it that experts seldom agree on what the truth really is?

Sometimes the variant opinions are due to differences in data and the quality of information in the possession of the respective experts. Other times it may be due to the different levels of skill, knowledge, education, experience, and training possessed by the experts. But sometimes the different opinions are simply caused by external pressures exerted by retaining counsel.

It may be difficult to resist the persuasiveness of an accomplished litigator when he tries to plant the seeds of doubt or uncertainty in your analysis or opinion. It is especially difficult if you know that much future work hangs in the balance of how your opinion is presented. Nevertheless, you must:

• Present your opinion
• Do not exaggerate or embellish
• Do not equivocate
• Do not compromise
• Be true to yourself

If following these rules makes you feel lonely since you are not a “team player” remember: 

Loneliness is transitory, but dishonesty is forever!

This article was originally published in the February 2010 issue of the National Litigation Consultants’ Review.

John Marcus, MBA, CPA/ABV, CVA, CFFA is the managing partner of Marcus, Hastings & Associates, a New Orleans-based litigation and valuation consulting firm. Mr. Marcus’ practice concentrates in the area of financial damages of all kinds. He is a member of the NACVA Executive Advisory Board and is a co-instructor in the NACVA Expert Witness Bootcamp. With more than 30 years of experience, Mr. Marcus often serves as a mentor or consultant to other practitioners in the financial forensic discipline. He can be reached at john@mha-value.com or (504) 835-5794.

[1] Clint Eastwood as Dirty Harry Callahan, Magnum Force, 1973.