Forget the hype of CSI. Providing expert evidence is no walk in the park but it can bring an end to serious wrongdoing.
By Beverley Head
It is 20 years since Australia learned about Brian Quinn’s gilded lavatory. Quinn, the former chief executive and chairman of retail giant Coles Myer, was found guilty in 1997 of defrauding his employer of more than A$4 million. The company funds, which should have been used to maintain properties owned by Coles Myer, were instead siphoned off to pay for extensive renovations at Quinn’s Melbourne home, including the lavish loo.
The press naturally had a field day with details of the extent of the fraud and photographs of the ornate imported fixtures. Quinn ultimately served nine months in prison, where the ablution blocks are less ornate.
What eventually brought him undone was the discovery by an accountant that invoices purportedly for maintenance of company property were in fact payments to contractors renovating Quinn’s home.
Not all such cases are as well publicised, and not all of them make it to court, either.
In April, INTHEBLACK featured Colin Cameron FCPA, who pursued Lehman Brothers and Standard & Poor’s over the sale of risky collateralised debt obligation (CDO) products to the City of Swan in Western Australia.
The 2007 subprime mortgage crisis in the US slashed the value of the CDOs, but Cameron, then the City of Swan’s corporate services executive manager, wasn’t about to let ratepayers carry an A$11 million loss on products that Standard & Poor’s had rated as AAA investments.
He extracted from Lehman Brothers Australia the full documentation behind one of the CDOs. Hunting through the document’s confusing double negatives and eight pages of disclaimers, he found a flip clause in the small print which promised return of all the CDO’s collateral. It took 10 years, an accountant’s eye, a class action and four court cases, but Cameron eventually managed to get back more than 90 cents in the dollar for the council.
INTHEBLACK also featured the similarly dogged fight by Allan Lorraine FCPA. Lorraine was a retired accountant who had lived with his wife at Mentone Gardens aged-care facility in Melbourne. He and other elderly residents saw their deposits and bonds disappear when parent company, Parklane Assets, went into liquidation in 2013. That money, which residents had been told by Mentone Gardens’ staff was held in a trust, was nowhere to be found.
Then aged 90, Lorraine used his skills in forensic analysis to prove that the Victorian Government had failed in its oversight of the registered supported residential service, and should cover the cost of the lost bonds. When the government wouldn’t listen, Lorraine urged the ombudsman, Deborah Glass, to look into the Health Department records on Mentone Gardens, where she found a litany of failings, financial and otherwise.
The ombudsman’s report recommended the Victorian Government hand over A$4.33 million in ex gratia payments to the former residents (or their estates) to compensate for the lost bonds, deposits and the unspent fees paid in advance.
Both these practitioners were closely involved in their cases, but in many instances, when accountants are called on for their forensic expertise and analysis, the first they know about a matter is when the lawyer calls.
The expert in court
John McGuiness joined McGrathNicol as a partner recently, after 30 years with KPMG. A specialist in dispute advisory services, he is regularly sought for his expertise in analysing accounting and financial issues.
McGuiness stresses the distinction between the independent expert and the consulting expert in a court case. The independent expert has obligations to the court, even though they may be retained by one or both parties to a case.
“You need to be open and transparent about what information you have been given, what questions you have been asked to consider, and how you have come to your conclusion,” he explains.
A consulting expert role would require similar analysis, however the work “is not expected to be visible to the hearing”, but to instead help the lawyer determine questions for analysis or to test a hypothesis.
McGuiness’s CV is peppered with comments from judges about how he has injected accounting clarity to cases they have heard. They also acknowledge his contribution in trials that hear concurrent evidence – so called “hot tubs” – where expert witnesses from each side share their insights and sometimes even the witness box at the same time.
“The skill of an expert accountant is to ... distil simple themes from complex or large volumes of data.” John McGuiness, McGrathNicol
McGuiness says that since the global financial crisis (GFC), companies are generally keen to resolve disputes ahead of litigation.
“Companies have sought to manage their cost structure more effectively. General counsels and CEOs are asking tougher questions about how to resolve issues and how to preserve relationships with suppliers and contracting partners. They don’t necessarily want to engage in litigation for the sake of it – there is a lot more common sense about the resolution process generally.”
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If the matter does proceed to a courtroom and McGuiness is called on to appear as an expert witness, he stresses the need for transparency and clarity.
“When both parties – and instructing solicitors and solicitors opposite – and the judges or arbitrators are reading reports, they need to be walked through the methodology and the calculations, so they can see the connection of information and logic and the application of methodology through to conclusions.”
It’s what teachers and lecturers always advise – show your workings.
“The skill of an expert accountant is to reduce complex concepts to simple propositions. It is to distil simple themes from complex or large volumes of data,” says McGuiness.
Judging the work of others
Ram Subramanian, CPA Australia’s policy adviser, reporting, notes that the Australian Accounting Standards are based on International Financial Reporting Standards, so are largely principles based. They require, he says, “a degree of professional judgement from the preparer applying them.”
When other accountants review accounting information, either as an auditor or forensic expert, they bring their own professional judgement regarding the application of various assumptions.
For example, in the three-tiered hierarchy of valuation techniques under Australian Accounting Standard AASB 13 Fair Value Measurement, which is often tested in disputes, Subramanian notes that “… because there are assumptions in play, they can be open to challenge.”
He adds that despite regulations and audits, in cases of fraud, “Ultimately, if people want to do things the incorrect way and they can hide what they are doing, then that can happen – it’s not a totally watertight system.”
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The in-demand expert witness
With his combined commerce and law degrees from The University of Queensland, KordaMentha partner Andrew Ross understood commercial and courtroom realities right from the beginning of his career. He was one of Australia’s first forensic accountants, working in Arthur Andersen’s pioneering forensic practice from the early 1990s. He was attracted by the opportunity to maintain a deep technical engagement with accounting, even as his career advanced.
Ross typically makes just one or two courtroom appearances a year, but it’s not because he isn’t in demand.
“Well over 90 per cent of the engagements I am involved in settle before expert evidence is required,” he explains.
“Over time, an awareness has developed that accountants can provide assistance to lawyers where there is no intention that the accountant will end up in court. Rather, the accountant will act in a consulting role for the legal team, providing expertise to the legal team and its client.”
Although Ross has been involved as an accounting expert in a case heard before a jury in the US, in Australia all the matters in which he has given evidence have been heard before a judge.
“Being able to explain complex concepts simply is at the heart of being an expert witness.” Andrew Ross, KordaMentha
While a judge is clearly educated, he or she cannot be expected to be expert in all areas of accounting.
“Being able to explain complex concepts simply is at the heart of being an expert witness,” says Ross. “The court only requires an expert witness if the court doesn’t have the necessary understanding of the principles involved.
“In areas of true expertise, it might be difficult for a non-expert to understand the concepts and therefore make decisions between the views of competing experts. But the role of a good expert is to explain the issues and their opinions in terms that can be understood by an educated layman. This makes excellent written and oral communication very important to the role of an expert witness.”
Being able to withstand cross-examination also comes with the territory although, Ross says, increasingly, Australia’s superior courts are borrowing from other jurisdictions – including the Land and Environment Court and the Family Court – in allowing “concurrent” evidence rather than traditional cross-examination.
“Rather than being cross-examined separately, both experts sit in the witness box at the same time. The judge will ask his or her own questions, and the experts might be invited to ask questions of each other and to engage in a dialogue around the issues in dispute,” explains Ross.
Part of the challenge for courts, of course, is that accounting has become very complicated – and that is precisely why accounting experts will continue to be called in.
When accountants can help as expert witnesses
Advice for the witness box
- Answer the question
- Don’t try to anticipate where the lawyer is going
- Don’t get flustered – you’re the expert
- Don’t get angry
Ethical standards for CPA Australia members
Dr Eva Tsahuridu, CPA Australia’s policy adviser, professional standards and governance, says when a CPA Australia member is called on as an expert witness in a case they must: “Act in the public interest and comply with the code of ethics and its principles: integrity, objectivity, professional competence and due care, confidentiality and professional behaviour, as well as independence, where relevant.”
There are also times when a member should refuse to be an expert witness, she says. “If a member is asked to provide an expert witness service and, due to other relationships or services provided to the client or employer, there is a conflict with the objectives of the expert witness service, then the member must decline.”
As an expert witness, a member must comply with the Accounting Professional and Ethical Standards (APES) 110 Code of Ethics for Professional Accountants, as well as APES 215 Forensic Accounting Services.
Members must also comply with specific APES standards such as APES 225 Valuation Services when engaged to consider a valuation. Public practitioners must also comply with APES 305 Terms of Engagement and APES 320 Quality Control for Firms.
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