On the money

Most civil and many criminal cases are all about money. Their success depends on persuading either the other side's clients, or a judge, that your case is better than your opponents' on the two main issues of liability and quantum. A combination of both legal and financial skills is therefore vital to any winning team, and an experienced forensic accountant can make the difference between winning and losing.

The most obvious role for an accountant to play in a dispute is as an expert witness to give evidence on the practice of accounting and auditing, usually in the context of professional negligence. Alternatively, many post-acquisition disputes depend on whether company accounts were prepared in accordance with Generally Accepted Accounting Principles. Here, the role is focused on liability.

More commonly, though, accountants are brought in to assist with quantum. Strangely, quantum is often left as an afterthought, with lawyers concentrating on the intricacies of the legal issues while simply taking their client's word for the amount of the losses suffered.

What forensic accountants do

The discipline of forensic accounting has really come of age in the last ten years, as accounting input has been critical in many of the major disputes and corporate failures of recent years.

Before then, 'litigation support' departments were the repository for expert accountants '“ what one solicitor referred to rather unkindly as the 'uber-geeks among the geeks'. The term 'forensic accountant' is now universally used: the word 'forensic' of course meaning suitable for use in court.

We are not yet at the stage where the profession has its own superstars, but I remember my son '“ on coming across an article I was writing entitled 'The Money Detectives' '“ being immeasurably more impressed that daddy was no longer a mere accountant, and asked me whether I carried a gun when going to the office!

Forensic accountants are most commonly instructed to provide input in three main areas:

• To give evidence on the value of an asset, typically a business or intangible asset such as a brand, often as part of a shareholder or matrimonial dispute.
• To look at solvency and liquidity, and the ability of one party to pay. Examples feature in insolvency or directors disqualification cases, security for costs applications, and in matrimonial or partnership disputes '“ where a key factor is the ability of a business' cash flow to sustain future payments to the other party.
• To give evidence on gains and losses.

In the regulatory and criminal arena, accountants with experience in white collar crime play a valuable role in assisting the defence team to understand how a defendant's assets were derived, and which may have been obtained from criminal conduct (and therefore available for confiscation). But it is in the civil arena where most accounting instructions take place. Here, they provide advice, assistance, and expert evidence if necessary, as to the amount of losses suffered by a claimant.

Choosing a forensic accountant

Having established that there is a significant financial angle to a case, the first key task of the solicitor is to choose and instruct a forensic accountant. As with any profession, the 'perfect' forensic accountant doesn't exist '“ though most experienced forensic accountants look good on paper. So, what questions should one be asking to find the right fit?

1) Who is doing the work?

Large firms can produce experts with exemplary experience, but many of them fall to pieces on the detail because they delegate too much of the work. A cross examination that starts: 'First question, Mr Smith'¦ turn to page 37, the figure in footnote 17, can you please explain to the court how this number was derived?' is usually damaging against this type of expert.

2) Is their experience of the right type?

Make sure your forensic accountant's experience is current and at the right level, and that they are not past their sell-by date. If evidence is required over the accounts of a small family-owned engineering company, then the input of the global chairman of one of the Big Four accounting firms is unlikely to be right for the assignment, even if cost is not an issue.

No two forensic accountants are the same. Some specialise in divorce; others in personal injury. These are typically seen as specialist areas, where practitioners with more corporate experience seldom venture. And, while most forensic accountants are able to give reasonably coherent evidence on tortuous or contractual losses, by no means are all forensic accountants experienced valuers.

Some solicitors seem unduly focused on industry specialisation. They approach an expert search with questions along the following lines: 'We have a case which is a contractual dispute relating to the turkey breeding industry and we need a forensic accountant to look at quantum. Do you have any experience in this sector?'

In fact, most forensic accountants are generalists and can turn their hand to any sector very quickly. So, specific expertise is not necessarily important, but it is better to know a professional, not a 'student', is working on the case for you.

3) Are they sufficiently robust, without being intransigent or arrogant?

I suggest that early on in the case the legal team gently tries to push the expert to a place they are uncomfortable going. If they are willing to drastically change their opinion to suit the case, then their evidence will unravel and they should be taken off the case. It's unfortunate, but better to find this out sooner rather than later.

4) Would they fit into the team?

Would you be happy making conversation with them in a mediation breakout room well into the small hours, and would they take their turn to get the coffee?

Avoiding the pitfalls

It is well accepted that any expert instruction has a uniquely dual nature and an expert is required to navigate conflict-strewn waters. This is complex because he or she is typically engaged and paid by one party, and instructed not only as a key independent witness under part 35 of the CPR but also to give out-of-court advice to the party engaging them.

The issues are even more pronounced with forensic accountants looking at quantum, as they play such a central role in most disputes '“ so there are several ways that the use of a forensic accountant can go wrong and solicitors should be alive to the more common pitfalls.

The forensic accountant acts as advocate

There is a difference between an expert persuasively putting forward the arguments in favour of an opinion supporting the client's cause, and acting as an advocate for the client's case. Some forensic accountants will stray from their proper role, which is that of setting out arguments based on the assumption that the 'facts' put forward by his or her side are the correct ones. Usurping the role of the judge or jury and telling the court which facts they should accept as true seldom goes down well.

Opposing experts opine on different issues

The instructing solicitors should provide clear and precise instructions to the questions to be answered by experts. Except in the most trivial of cases, it can save time if the expert helps to formulate or refine the questions once appointed, so that all parties agree them.

I was recently instructed in a case where both solicitors had spent an inordinate amount of time agreeing issues for expert accounting evidence. The experts on both sides were duly instructed to opine on the level of 'profit' made by a company during the period in question. Unfortunately, terms such as 'profit', 'cash flow' or 'value' are open to liberal interpretation by accountants, and without elaboration this meant that both accountants came up with numbers prepared on different bases. This clearly can undermine both parties' evidence.

Fear of suggesting improvements to the report

It is the responsibility of the instructing solicitor to ensure that the expert's report is relevant and in an appropriate form to be submitted in evidence. Both solicitor and counsel should review a draft report in detail, and come up with suggestions. Many lawyers feel nervous about this, thinking that this somehow compromises the independence of the expert, but their role is invaluable in tightening up evidence that strays into irrelevant areas or threatens to move outside of the expert's domain. Lawyers should not change the substance of the expert's opinion, but should eliminate any loose wording and unstated assumptions '“ both of which are fertile areas for cross-examination.

Payment: sufficiently aligning interests

Clearly experts cannot work on conditional fee arrangements: this is explicitly prohibited by part 35 of the CPR. Increasingly though, litigation funding is an important tool in the UK litigation market, and many claims of substance today have lawyers, insurers, funders and counsel with financial interests all sharing in the success of the claim with the client. If you draw on practices established in other jurisdictions, and in the right circumstances, forensic accountants can be engaged with claims on bases other than simple hourly rates. In many cases, the financial consulting role comprising information gathering, financial analysis, data manipulation, modelling, and preparing scenarios can be done by forensic accountants as consultants, behind the scenes. This gives far more flexibility on remuneration structures, cost efficiency and alignment of interests. I believe we will see more of this in the future.

There is some precedence for this in the Court of Appeal decision in R v Factortame (No 2) [1990] UKHL 13, where it was held that there was no prohibition on forensic accountants (acting as consulting experts) working on a contingency fee basis, and expert opinion evidence could be given by a separately instructed and independent testifying expert retained on a far more modest fixed fee.

Pyrrhic victories are all too common in litigation. It's no use winning on liability if the numbers don't stack up, and the costs exceed the amounts recoverable. For this reason, forensic accountants rightly play a front-line role in many disputes and, if used correctly, can provide an invaluable level of support in any case involving financial settlement.

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