frank wisehart, m.b.a., cpa, abv, cfe, cva · frank wisehart, m.b.a., cpa, abv, cfe, cva. director...

Frank Wisehart, M.B.A., CPA, ABV, CFE, CVADirector of Business Advisory Services

Schneider Downs & Co., Inc.41 S. High Street, Suite 2100

Columbus, Ohio 43215(614) 586-7118

Frank A. Wisehart M.B.A., CPA, ABV, CFE, CVAM.B.A. – Cornell University, Ithaca, New York – 2009B.S. – Miami University, Oxford, Ohio – 1988

Certified as aPublic Accountant – CPABusiness Appraiser – ABV, CVAFraud Examiner – CFE

Instructor:Ohio State Bar Association, Columbus Bar Association, Toledo Bar Association, Dayton Bar Association, National Association of Certified Valuation Analysts, Consultants Training Institute, National Business Institute, Association of Certified Fraud Examiners

Work Concentration:• Litigation, Forensic Accounting, Fraud, Business Valuations, Personal and

Commercial Damages, Expert Testimony, Management Consulting

• Participation Strongly Encouraged

• Organization of Materials– Attacks on Procedure/Gatekeepers

• Federal Rules of Evidence• Daubert Challenges• Other Standards

– Attacks on the Case’s Merits• Evidence• Methodology• Assumptions• Expert

– Other Issues

Housekeeping/Goals

Attacks on Procedure/Gatekeepers

Frye v. United States

Frye v. United States, 54 App. D.C. 46, 293 F. 1013 (1923)

James Alfonzo Frye v. United States– Murder trial– New scientific test – systolic blood pressure test suggested

James was innocent

Frye Established:

1. The “general acceptance” test for scientific methods upon which expert testimony is based.

2. A common law test to determine the admissibility of expert testimony.

3. Expert testimony as admissible if it is based on principles generally accepted in the scientific or professional community related to the subject.

Post Frye

• Problems with Frye:– Relevance and general acceptance test was too broad– Tended to keep out the evolution of new scientific

methodology– Poor gatekeeper

Federal Rules of Evidence

• Rule 401 - Evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.

• Rule 702 - If scientific, technical or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training OR education may testify thereto in the form of an opinion or otherwise if (1) the testimony is sufficiently based upon reliable facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case

• Rule 703 - The facts or data in the particular case upon which an expert bases an opinion or inference may be those perceived by or made known to him at or before the hearing.

In 1975 Federal Rules of Evidence Introduced

• Put to the test opposite Frye Standards in:– Daubert v. Merrill Dow

Daubert v. Merrell Dow Pharmaceutical Inc.

• 509 U.S. 579, 113, S. Ct. 2786, 125 L.Ed.2d 469 (1993)– Birth defect case involving drug Benedictine

• District Court granted summary judgment:– Using the Frye Standard:

• Evidence did not meet the general acceptance standard for the admission of expert testimony.

• 9th Circuit Court of Appeals – Upheld the decision citing the Frye Standard.

• Daubert appealed.

• Supreme Court:– Threw out the Frye Standard– “…a rigid standard would be at odds with the (Federal)

Rules' liberal thrust and their general approach of relaxing the traditional barriers to ‘opinion’ testimony.”

• Ensures reliability and relevancy of expert testimony.

• Ruled that the Federal Rules of Evidence displaced Frye’s “generally accepted” standard and determined a new “standard for admitting expert scientific testimony.”

• Established the two-pronged test:– Courts must decide whether reasoning or methodology

described in testimony is scientifically valid, and;– Whether that reasoning or methodology can be properly

applied to facts at issue.

• Introduced four criteria for scientific methodology and theory:

1. Testing – Whether the methods upon which the testimony is based are centered upon a testable hypothesis.

2. Peer review – Whether the theory has been subjected to peer review or publication, which aids in determining flaws in the method.

3. Error rates – The known or potential rate of error associated with the method

4. Acceptability – Whether the method is generally accepted in the relevant scientific community.

Court Switches Positions

• Move from a Results-based Court to a Methodology Court– Is the method relevant AND reliable?

Kumho Tire v. Carmichael

• Tire blowout caused car to overturn, killing one passenger and injuring others.– Plaintiffs claimed defective tire.

Kumho Tire v. Carmichael

• The trial court agreed with the plaintiffs that the four Daubert factors were simply illustrative and that Daubert should be applied flexibly.

• Most notably, the Kumho court held that the Daubert standard applies to all expert testimony.

The Daubert Challenge

• Whether a method consists of a testable hypothesis• Whether the method has been subjected to peer review• The known or potential rate of error• The existence and maintenance of standards controlling

the technique’s operation• Whether the method is generally accepted• The relationship of the technique to methods that have

been established to be reliable• The qualifications of the expert to employ the

methodology• The nonjudicial uses to which the method has been put

Professional Standards

ACFE Standards

Professional Conduct

• Integrity and Objectivity– Members shall conduct themselves with integrity, knowing

that public trust is founded on integrity• Due Professional Care

– Requires diligence, critical analysis and professional skepticism

– Conclusions shall be supported with evidence that is relevant, competent and sufficient

– Work of others must be adequately supervised• Confidentiality

– Keep confidential information confidential• General

– Reports may be oral or written– There is no prescribed format

ACFE Standards of Reporting

• Report Content– Reports shall contain information based on data that are

sufficient and relevant to support the facts, conclusions, opinions and/or recommendations related to the fraud examination.

– The report shall be confined to subject matter, principles and methodologies within the member’s area of knowledge, skill, experience, training or education.

– No opinion shall be expressed about the legal guilt or innocence of any person or party.

Accounting Standards

• “Litigation Services and Applicable Standards Guide” 03-1 – Issued by the AICPA affecting all members of the AICPA

performing litigation services• Describes steps and procedures to follow

Certified Public Accountant Standards

Attacks on the Case’s Merits

• Evidence– Used the proper/wrong evidence

• Assumptions– Made valid or invalid assumptions

• Methodology– Used convenient or appropriate methods

• Expert– Qualified or not

Four Pillars of Expert Testimony

• Evidence– What evidence helps and/or harms the case?– Experts need to be armed

with the facts in order tomaintain impartiality

Four Pillars of Expert Testimony

The Chain of Custody of Records

• Reliability of records – where evidence comes from is a big deal

• Admissibility of Records – Are they in the court’s record?– Catalog important records – when received, by whom, etc.– Be sure counsel knows to have records admitted

Less Reliable More Reliable

UncorroboratedStatements

Client Prepared Financials

Audited FinancialsBank Statements

• Cases that excluded testimony based on inaccurate facts:– In re Scrap Metal Antitrust Litig., 527 F.3d 517 (6th Cir. 2008) – Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039 (8th Cir.

2000)– In re Brand Name Prescription Drugs Anti-Trust Litig., 1999 U.S.

Dist. LEXIS 550

• Other cases of interest discussing the necessity of accurate facts:– Avery Dennison Corp. v. Four Pillars Enterprise Co., 45 Fed.

Appx. 479 (6th Cir. 2002)– Pirolozzi v. Stanbro, 2009 U.S. Dist. LEXIS 42575 (N.D. Ohio

2009)– Honeysett v. Williams, 2003 U.S. Dist. LEXIS 27595 (N.D. Ohio

Evidence

U.S. v. White – Fact Summary Witness Approach (note 1)

• The expert witness:– Qualified by

• Knowledge• Skill• Experience• Training• Education

• Note 1 - Used with permission from Doug Squires, U.S. Attorney, Columbus, Ohio, presentation on white-collar criminal issues, Ohio Auditors Society conference, “Expert vs. Summary Witness Testimony,” 5-17-11

U.S. v. White – Fact Summary Witness Approach

• The Fact Witness:– Based on first-hand knowledge or observation– Not based on scientific, technical or specialized knowledge

• The “Sophisticated” Witness– With specialized knowledge– Qualities of expert/fact witness

• Requires– Written summaries of opinion testimony– Reasons underlying opinions– Qualifications

• Experts make assumptions about key facts, data and interpretations of events

• Types of Assumptions– Core – relates to the underlying case issues

• Who is responsible for this assumption?

– Expert/Model – helps generate the expert’s ultimate conclusion

• Your assumptions – are they reasonable?

Assumptions

• Cases that excluded testimony based on improper assumptions:– Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039

(8th Cir. 2000)– Blue Dane Simmental Corp. v. American Simmental Ass’n,

178 F.3d 1035 (8th Cir. 1999)– In re Brand Name Prescription Drugs Anti-Trust Litig.,

1999 U.S. Dist. LEXIS 550 (N.D. Ill. 1999)

• Other cases of interest on the issue of assumptions:– Pirolozzi v. Stanbro, 2009 U.S. Dist. LEXIS 42575 (N.D.

Ohio 2009)– Bouchard v. Am. Home Prods. Corp., 2002 U.S. Dist. LEXIS

27517 (N.D. Ohio 2002)

Assumptions

Blue Dane Simmental Corp. v. American Simmental Association (ASA)

Fullbloods are the genetic base of the Simmental breed. Imported to North America in 1960s, Fullbloods are known for their production of lean muscle and milk. Purebred animals were defined by the ASA having less than 100% Simmental blood.

Battle ensued about what “purebred” meant when Risinger cattle were classified as “fullblooded purebreds” by the ASA.

• Typically, there is more than one method to reach a conclusion.

• Expert should articulate what method was chosen and why it is preferable over other methods.

• Daubert Challenge:– Has the method been tested?– Subjected to peer review?– Error rate?– General acceptance?

Methodology

• Cases that excluded testimony based on methodology:– Blue Dane Simmental Corp. v. American Simmental Ass’n, 178 F.3d

1035 (8th Cir. 1999)– Virginia Vermiculite Ltd. v. W.R. Grace & Co. – Conn., 98 F. Supp. 2d

729 (W.D. Va. 2000)

• Other cases of interest on the issue of methodology:– Bouchard v. Am. Home Prods. Corp., 2002 U.S. Dist. LEXIS 27517

(N.D. Ohio 2002) – McGarry v. Horlacher, 149 Ohio App.3d 33, (2nd Dist. 2002)– Lewis v. Alfa Laval Separation, Inc., 128 Ohio App.3d 200 (4th Dist.

• An interesting study that may be used to attack methodology:– Predicting Interest Rates: A Comparison of Professional and Market-

Based Forecasts, Michael Belongia, Federal Reserve Bank of St. Louis, 1987 (In this study, economists were able to correctly predict the direction of interest rate change 42% of time.)

Methodology

• Expert ignored US Geological calculations of vermiculite in favor of his own calculations.

• Testimony was ultimately disallowed.

Virginia Vermiculite Ltd. v. W.R. Grace & Co.

• Is the expert qualified?– Are his/her accomplishments embellished?

• What credentials does the expert hold?– What credentials are available to the expert?– Using your qualifications against you

• Is the expert consistent in his/her opinions?– Does the expert flip sides on issues depending on whom

he/she is representing?

Expert

• Cases that excluded testimony based on qualifications:– In re Independent Serv. Orgs. Antitrust Litig., 114 F. Supp.

2d 1070 (D. Kan. 2000)– Virginia Vermiculite Ltd. v. W.R. Grace & Co. – Conn., 98 F.

Supp. 2d 729 (W.D. Va. 2000)– Seatrax, Inc. v. Sonbeck Int’l, Inc., 200 F.3d 358 (5th Cir.

Expert

• The conclusion is the product of evidence, assumptions, methodology and expert– May be more effective to explore these areas rather than

the result thereof

Conclusion

Other Issues

frank wisehart, m.b.a., cpa, abv, cfe, cva · frank wisehart, m.b.a., cpa, abv, cfe, cva. director...

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