Litigation Consulting - An Overview

Wednesday, December 1, 2004 - 01:00

Litigation consulting services, once an ancillary area of professional services consulting, has emerged to become one of the fastest growth areas in legal consulting. As defined by the American Institute of Certified Public Accountants ("AICPA"), litigation consulting services involve a range of services in connection with formal and potential legal proceedings before a trier of fact which, the AICPA defines as a court, a regulator, government body; their agents; grand jury; or an arbitrator or mediator of a dispute.1 Litigation consulting professionals are in a position to explain technical matters in a simple and understandable manner. Therefore, Counsel will utilize these services in order to strengthen their cases and to facilitate settlement negotiations.

A litigation consulting professional can serve as an expert witness, a trial consultant or provide other services as an adjunct to Counsel. As an expert witness, a litigation consulting professional would render an opinion before a trier of fact. For example, in a case involving financial fraud, an expert would testify as to amounts misappropriated. A consultant, in contrast to an expert, advises the litigant on a variety of issues which may include case strategies and/or preparing analyses used in negotiations, but does not necessarily testify before a trier of fact. Litigation consulting professionals also can serve as triers of fact, mediators or court appointed experts. Some of the litigation services rendered include, but are not limited to:

  • Calculation of economic damages and lost profits arising out of class action lawsuits, intellectual property disputes and other claims;

  • Fraud prevention and investigation into alleged improprieties;

  • Expert services and/or consulting services with respect to professional standards and accountant's liability issues;

  • Asset tracing and recovery;

  • Monitoring construction projects and government contracts;

  • Business and intangible asset valuations;

  • Analyses for matrimonial settlements;

  • Consulting related to Chapter 7 and Chapter 11 bankruptcy proceedings; and

  • Claims analysis relating to business interruption and other insurance claims.

According to a 2002 report issued by the Association of Certified Fraud Examiners, businesses in the U.S. were projected to lose more than $600 billion annually on account of fraud and embezzlement in the form of kickbacks, misappropriation, and financial statement fraud. A litigation consulting professional is often called upon to assist Counsel in constructing a case by gathering evidence and determining the amount of monetary damages suffered on account of the fraudulent acts committed. Litigation consulting professionals also help businesses prevent fraud by performing fraud risk assessments and helping business owners strengthen and implement internal control systems aimed at preventing frauds. As a service to clients, forensic accounting has gained significant attention in light of Statement of Auditing Standard ("SAS") 99: Consideration of Fraud in a Financial Statement Audit which requires auditors to perform their work with the presumption that fraud exists in the entity being audited. Litigation consulting professionals who are also forensic accountants utilize their expertise in helping detect and prevent frauds. These activities can provide external auditors and company management with additional assurances as to the effectiveness of the internal control systems.

Business and intangible asset valuations are performed for a number of reasons including bankruptcy plan issues, buy/sell agreements, dissenting and oppression suits, employee stock ownership plans, goodwill impairment and testing, intangible asset valuations, matrimonial actions, estate tax planning and damage and other claim calculations. Litigation consulting experts trained in business valuations need to have the technical expertise and analytical skills to be able to explain and defend their rationale and value conclusions, often before a trier of fact. More specifically, business valuation professionals need to possess strong verbal and written skills, along with the ability to comprehend financial statements, understand the economic and industry forces that impact the value of an entity, as well as a thorough understanding of the valuation approaches and methodologies. One of the most critical aspects in the business valuation arena is the credibility of the valuator. This credibility is predicated upon quality work and superior ethics. Credentials are extremely helpful when the professional's reputation is not known to Counsel or when Counsel has not forged a working relationship with the professional. Professional accreditations relating to business valuation are offered by the AICPA, American Society of Appraisers, Institute of Business Appraisers, National Association of Certified Valuation Analysts and the CFA Institute.

Bankruptcy consulting is a prominent area under litigation consulting. Experts can provide invaluable services in Chapter 7 and Chapter 11 cases. In Chapter 11 cases, it is critical to evaluate the debtor's current financial condition and future viability. In addition, such cases also involve the preparation and analysis of business plans and financial projections. In bankruptcy cases, creditor committees and trustees engage consulting professionals to analyze business operations, search for potential preferential payments and fraudulent transfers, review the debtor's books for suspicious and unusual transactions, critically evaluate financial projections prepared by the debtor as part of the Plan of Reorganization and/or Disclosure Statement and advise the committee on the feasibility of a Plan of Reorganization. Consulting experts provide services to the debtors which include preparation of monthly operating reports, tax preparation, preparation of a feasible Plan of Reorganization and Disclosure Statement, claim administration and assisting the debtor in implementing cost reduction measures, among others. Consulting experts also help court appointed examiners in investigating and reporting on various issues including fraudulent transfers and transactions, corporate integrity, insider and/or related party transactions and valuation issues.

Another critical area where litigation consulting experts assist Counsel is in the calculation of economic damages. These damages can arise from matters of breach of contract, securities fraud, product liability, patent infringement, antitrust and construction claims. An economic damage calculation may involve estimating lost profits and economic losses, calculation of lost earnings, economic analysis of punitive damages, evaluation of a firm's financial condition resulting from a breach of contract, contract costs and claims analyses, and construction and environmental claims analyses. The calculation of economic damages will often require the litigation consulting professional to use complex financial models to identify and analyze the financial information used in the calculation of damages. Similar to business valuations, the valuator of economic damages must possess the technical skills to defend the methodology employed and the resulting damage calculation.

Due to attorney-client privilege issues, usually the decision to hire an expert witness rests with Counsel. Independence can be an extremely critical issue especially when the litigation support professional provides expert witness services. The AICPA, for one, defines independence as "to be free from relationships that might affect one's ability to perform objectively and with integrity, or that might prevent the practitioner from being impartial and fair in reaching conclusions and judgments, or from maintaining an independent mental attitude in all matters relating to the engagement."2 Impairment of independence can call into question the professional's credibility and ability in being objective and impartial and can even lead to disqualification by the trier of fact of the professional as an expert. Therefore, it is absolutely imperative for a professional organization rendering litigation consulting services to perform a thorough conflict search to ensure this independence.

Litigation consulting professionals are often involved in pretrial consultation and analysis. An evaluation of the strengths and weaknesses of a case early in the litigation process can significantly influence the strategies employed by Counsel to secure the most beneficial course of action for the client. Typically at the beginning of a case, the litigation consulting professional meets with Counsel and the litigant to establish the scope of work to be performed. This promotes clarity and goes a long way towards avoiding duplication of work and unnecessary professional expenses. It is in the best interest of Counsel that the litigant and the litigation consulting professional formalize the process through an engagement letter which clearly establishes the scope, duties, the anticipated degree of cooperation with respect to documentation and information need to perform the work, retainer if any, billing rates, billing frequency and other issues.

In the discovery phase, litigation consulting professionals typically formulate comprehensive and specific requests for document production, assess market or industry characteristics, perform trend analyses and investigatory (forensic) accounting procedures, reconstruct financial records, and develop pro forma financial statements. In settlement negotiations, litigation consulting professionals provide services such as analyzing proposals presented by the opposition and prepare counter-proposals, evaluate short- and long-term business implications as well as tax ramifications, and evaluate the option of structured settlements. During trial, litigation consulting professionals evaluate and analyze financial evidence presented by the opposition, suggest effective lines of cross-examination, prepare and analyze trial exhibits and render expert witness services.

To testify as an expert witness, the knowledge, skills, education, professional designations and experience of the litigation consulting professional must not only meet the professional standards which apply to the area of their practice but also the standards established by the trier of fact. In many cases, the federal and state professional standards adequately cover the trier of fact's rules. According to the U.S. Supreme Court decision in the case of Daubert v. Merrill Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), the federal judge trying the case may become the authority with respect to admissibility of expert scientific testimony, and examine several factors to establish the adequacy of the testimony's reliability. In the case of Kumho Tire Company, Ltd. v. Patrick Carmichael, 526 U.S. 137 (1999), the Court held that the principles of Daubert applied not only to experts providing scientific testimony, but to all experts. As a result of this decision, the Daubert principles are now applicable to all matters covered by Rule 702 of the Federal Rules of Evidence. Therefore, the Federal Rules of Evidence have been modified to establish the basis on which a federal trial judge can determine whether experts meet the minimum standards to testify and the bases of opinion testimony by experts.3

The litigation consulting field offers a wide variety of expertise that can be extremely rewarding for professionals and beneficial to clients. However, the success of a professional depends on acquiring the appropriate skills, experience and designations. As remunerative and rewarding a field of study, the litigation consulting field demands the highest standards of professionalism where the faint of heart need not apply.

1 AICPA "Proposed Statement on Responsibilities for Litigation Services No. 1" December 1, 2001.
2 Ibid.
3 Ibid.

Howard Fielstein, a Partner of Margolin, Winer & Evens LLP, heads up the Litigation and Valuation Services Practice Group and holds the CPA/ABV, CFE, CIRA and CTP designations. He can be reached at John F. Lemanski, a Manager in the practice group, holds an MBA degree and the CFE designation. He can be reached at Vijay Krishnamurthy, a Consultant who holds an MBA and ACA, contributed to this article.