When a forensic accountant provides expert witness testimony in litigation, the data forming the foundation of the accountant’s pretrial analysis is often a focus of dispute. This can especially be the case for client-supplied information, which may include projections, market forecasts, industry trends, and other data that often include fuzzy, forward-looking data. To be admissible in court, an expert witness’s testimony must be based on “sufficient facts or data” in accordance with subpart (b) of Rule 702 of the Federal Rules of Evidence and the cases following the Supreme Court’s landmark decision in Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993).
A challenge for forensic accountants and the attorneys they support is the absence of a single clear standard of what constitutes “sufficient relevant data” under Rule 702. Absent a set formula, courts have applied a range of factors to evaluate whether client-supplied information meets the standard. HSNO has observed courts weigh the following factors:
- The extent to which management-supplied projections rest on assumptions that are testable and can be linked to the operational reality of the company’s business.
- Whether management representations are made by client personnel who are qualified to make the representations based upon their day-to-day responsibilities and backgrounds.
- The relative merit of the underlying data and assumptions contained in the management-supplied information, and the availability of corroborating evidence.
- Whether the management-supplied projections were prepared in the normal course of business or solely in preparation for litigation.
None of these factors on its own necessarily disqualifies a piece of client-supplied information from being relied upon by a forensic accountant in preparing testimony. But adverse parties know that the more doubt they can cast upon the basis of the accountant’s testimony, the more likely the court will be to exclude it. That is why a forensic accounting firm needs to be thorough and accurate in its process, giving close scrutiny to every source of data to verify its accuracy and test it for potentially fatal flaws.
An incomplete process at any point in a forensic accountant’s analysis could render the entire testimony inadmissible on grounds that it is unreliable. As the courts have said, “an expert’s analysis must be reliable at every step. Although a minor flaw in an expert’s reasoning will not render an expert’s opinion per se inadmissible, exclusion is nevertheless warranted whenever the flaw is large enough that the expert lacks ‘good grounds’ for his or her conclusions.” Compania Embotelladora Del Pacifico, S.A. v. Pepsi Cola Co., 650 F. Supp.2d 314, 319 (S.D.N.Y. 2009) (internal citations and punctuation omitted). In other words, an essential component of providing expert witness testimony is ensuring that every piece of foundational data can pass muster in court. Fatal flaws must be addressed well before they go before opposing counsel or a judge.