1. ASWA, SF Chapter, 01/13/2010
Litigation Consulting
and
Forensic Accounting
American Society of Women Accountants
San Francisco Bay Area Chapter #11
By George Fruehan of Numbers Talk
GeoFru@usa.net 510-558-1999
510- 558-
January 13, 2010
What is Litigation Support,
-- Litigation Consulting?
• Litigation Support: Transcription, copying,
indexing, database for retrieval, prepare poster
board exhibits, prepare videos, Powerpoints, etc.
• Litigation Consulting:
• expert – to teach the court
• in most technical topics
• failure analysis, accident reconstruction,
the professional “standard of care”,
computer performance, document
examination
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2. ASWA, SF Chapter, 01/13/2010
San Francisco Bar,
directory of experts in, …
• accidents (investigation, analysis, reconstruction, reenactment)
• Chemical
• Commercial Trucking
• Construction
• Elevator/Escalator
• General
• Industrial/Manufacturing
• Other (slips, trips and falls, household and power tool accidents)
• Psychological Trauma
• Transportation — Aviation
• Transportation — Bicycle
• Transportation — Boating
• Transportation — Highway/Traffic/Vehicular
• Transportation — Pedestrian
• Transportation — Railroad
• accounting
• actuarial
• ada compliance
• agricultural sciences
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Forensic Accounting, examples
• Accounting issues:
– Monetary Damages: Loss of profit from
lost sales, lost customers, product costs
– Wage, Pension loss from: ‘wrongful
termination’, discrimination, injury
– Loss of profits from IP: Patent,
trademark, copyright, trade secrets
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3. ASWA, SF Chapter, 01/13/2010
What is Forensic Accounting?
• Accounting done to a standard suitable for
legal review
• Anticipates that the accounting will be used in an
adversarial proceeding
• Thoughts:
> How is this different from popular CSI-type
programs on television?
> How is this different from the practice of an
accountant in the commercial, legal environment
of today?
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Landscape of Forensic Cases
• Civil Cases
parties: natural persons, corporations
Contract disputes – lost profits
Wrongful termination, discrimination, death or
disability
Intellectual Property – owner’s lost profits, infringer’s
profits
Criminal Cases
a crime “against the state”
IP – copyright, Federal sentencing guidelines
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4. ASWA, SF Chapter, 01/13/2010
Forensic Standards, 1923
• The Frye standard, Frye test, or general acceptance
test provides that expert opinion based on a scientific
technique is admissible in United States Federal courts
only where the technique is generally accepted as
reliable in the relevant scientific community.
• This standard comes from Frye v. United States , 293 F. 1013 (D.C.
Cir. 1923), a case discussing the admissibility of polygraph test as
evidence. … requiring the trial judge to ensure that an expert's
testimony rests on a reliable foundation.
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Forensic Standards, 1993
• A Daubert challenge (rare) is a hearing
conducted before the judge where the expert is
required to demonstrate that his/her
methodology and reasoning are scientifically
valid and can be applied to the facts of the
case.
• The term comes from the 1993 U.S. Supreme Court case, Daubert
v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), in which
the Court articulated a new set of criteria for the admissibility of
scientific expert testimony.
• In its 1999 Kumho Tire v. Carmichael opinion, the Court extended
Daubert' general holding to include non-scientific expert testimony
s
as well.
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5. ASWA, SF Chapter, 01/13/2010
Forensic Standards, 2000
In 2000, Rule 702 was amended in an attempt to codify
and structure the "Daubert trilogy." Rule 702 now
includes the additional provisions which state that a
witness may only testify if:
1) the testimony is based upon sufficient 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.
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Cases From Headlines, 1 of 100’s
May 28, 2004, (AP) Former Rite Aid Corp. chief
executive Martin L. Grass was sentenced to eight
years in prison Thursday for conspiring to falsely
inflate the value of the company his father founded
and cover up the scheme.
Grass, 50, who headed up the nation' third-largest
s
pharmacy chain in the late 1990s before being
forced out in October 1999, also was fined
$500,000 and given three years' probation for his
role in a billion dollar accounting fraud that sent
the company's stock tumbling.
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6. ASWA, SF Chapter, 01/13/2010
Enron' Financial Fraud, 1
s
• Most Wall Street firms had Enron as a strong buy up until the
company filed for bankruptcy. Apparently, the analysts weren'doing
t
much analyzing during this period. Instead, they were mostly
cheerleading—on the company' behalf, their firm' and, ultimately,
s s,
their own.
• Enron' balance sheet smelled a bit overcooked as far back as
s
1997. Looking at the comparison of Enron's EPS to the cash flow
that the company generated, earnings were positive 15 out of 16
quarters, but cash flow was in the black only three times during
the same period.
• Remember that net income from the income statement appears at
the top of the statement of cash flows. So, where did the earnings
go?
• Spot Hanky Panky with Cash Flow Analysis, such as at:
http://oreilly.com/pub/h/1868
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Enron' Financial Fraud, 2
s
Let' take a closer look at the September 1997 quarter, in which earnings per
s
share were a positive 17 cents a share, whereas free cash flow was a
whopping negative $7.82.
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7. ASWA, SF Chapter, 01/13/2010
Enron' Financial Fraud, 3
s
• Dec. 21, 2001: UNIVERSITY OF CALIFORNIA JOINS
FEDERAL CLASS ACTION SUIT. The suit is pending in the
U.S. District Court for the Southern District of Texas in
Houston. It alleges that investors who purchased
Enron securities between Oct. 19, 1998, and Nov. 27,
2001, were the victims of a fraudulent scheme whereby
the defendants disseminated false financial statements
that artificially inflated the price of Enron securities and
allowed the defendants to engage in $1.1 billion of illegal
insider trading.
• Dec. 18, 2008: UC begins distributing Enron settlement
to victimized investors
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Personal Cases:
“Simple” Wage Loss
• Young man, ~ minimum wage, married, 3
children, “spotty background – getting straight”,
enlists in CA National Guard.
• Before assignment to training, auto accident,
serious injury to back with surgery, misses his
deployment.
• What loss does he experience from the military
discharge?
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8. ASWA, SF Chapter, 01/13/2010
Personal Cases:
Construction Loss
• Construction contractor, 20 year history of
growth; public sector, school buildings, low
profit margin (1.6%)
• Roof blows off Science Building in winter,
additional water damage to building shell.
• School withholds “Retainage” ~ $1mm
• Insurance Co denies coverage ~ $1mm
• Contractor repairs building; declares bankruptcy
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In Summary
Forensic Accounting:
• Demands good accounting that will stand up to
criticism by a “peer”, in an adversarial setting
• Combines elements of teaching in a restricted
forum of protocol, objections, deadlines, etc.
• “The Forum” has opportunities for drama and
persuasion, but you must not even appear to be
an advocate for your party.
• Q&A
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