“When businesses enter into litigation,” says Gelman, “their attorneys often have to retain an expert in the field of accounting or finance to help support the calculation of any damages that result as a byproduct of the litigation and to present financial evidence in accordance with court procedures.”
Smart Business spoke with Gelman about how companies can go about engaging reliable witnesses, and the challenges they face in doing so.
How are expert witnesses used in the financial and accounting fields?
Lawsuits commonly occur between shareholders in a corporation where one wants to leave the corporation by being bought out. The absence of a predetermined buy-sell agreement valuation creates an automatic conflict. There can be accusations of a breach of fiduciary duty between the shareholders. For example, the minority shareholder may claim that a majority shareholder has breached his or her fiduciary duty to the minority to protect the value of his or her investment and/or mismanaged the corporation.
Many business lawsuits are brought by creditors who will accuse the controlling shareholder of using the corporation as a personal pocketbook. In other cases, creditors will sue corporations and try to pierce the corporate veil by stating that the corporation is nothing more than an alter ego of a shareholder. These claims are often proven using expert witnesses accountants, CPAs and financial professionals who find proof that the corporation didn’t follow corporate protocol, and that it was indistinguishable from its shareholder in terms of its actions.
The best way to avoid this type of lawsuit is to keep annual minutes, document all board meetings, and treat the closely held corporation at arm’s length.
How should a company go about engaging an expert witness?
First, it needs to hire a proper attorney to handle its case. If it’s a business lawsuit, for example, the company must hire a litigator who has experience in that specific type of litigation. The chosen attorney will generally use certain experts repeatedly, knowing that they have expertise in a specific field.
You want someone who has testified in court many times, and who is considered independent. You don’t want someone who is a hired gun that would say or do anything depending upon who is paying the fee.
What challenges do companies face when using expert witnesses?
When companies enter into litigation, they can quickly find themselves in unfamiliar territory and relying on an attorney to manage the process for them.
Legal fees begin at about $10,000 for the most basic cases. On top of that, the client is usually surprised that the attorney has to hire an expert to calculate the impact of any financial result of the lawsuit. If a minority shareholder sues a majority shareholder, for example, then the attorneys would need a CPA to testify as to how they arrived at the damage amount. Lost profits calculations must be performed when a company goes under, due to unfair competition or acts of God such as floods and hurricanes.
There’s generally an expert for the person who files the complaint, and one for the person who responds to the complaint, and both charge their own fees for the work.
What advice would you give a company that needs an expert witness right now?
I recommend strongly that it avoid the use of ‘joint experts’ where both parties hire one expert to express an opinion. The joint expert has quasi-judicial immunity and cannot be sued. Generally, you want an expert who works as an ally to your attorney and is indirectly an advocate for your financial case.
However, you must keep in mind that those experts must stay independent. Clients shouldn’t try to influence them unduly or withhold payment from them to try to influence them, because in the court of law the expert is going to testify under the penalty of perjury and will be absolutely unwilling to ever impeach himself.
Experts also cannot rely upon hearsay, which means that they need independent facts that support the case and help them reach the most accurate financial conclusions possible.
GLENN M. GELMAN, CPA, MST, is managing director at Glenn M. Gelman & Associates CPAs in Santa Ana. Reach Gelman at (714) 667-2600 or email@example.com.