Frank Wisehart, M.B.A., CPA, ABV, CFE, CVA
Director 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, CVA
M.B.A. – Cornell University, Ithaca, New York – 2009
B.S. – Miami University, Oxford, Ohio – 1988
Certified as a
y Public Accountant – CPA
y Business Appraiser – ABV, CVA
y Fraud 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
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Housekeeping/Goals
• Participation Strongly Encouraged
• Organization of Materials
– Attacks on Procedure/Gatekeepers
• Federal Rules of Evidence
• Daubert Challenges
• Other Standards
– Attacks on the Case’s Merits
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•
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Evidence
Methodology
Assumptions
Expert
– Other Issues
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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
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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.
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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
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Federal Rules of Evidence
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.
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Federal Rules of 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
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Federal Rules of Evidence
• 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.
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In 1975 Federal Rules of Evidence Introduced
• Put to the test opposite Frye Standards in:
– Daubert v. Merrill Dow
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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
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Daubert v. Merrell Dow Pharmaceutical Inc.
• 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.
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Daubert v. Merrell Dow Pharmaceutical Inc.
• 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.”
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Daubert v. Merrell Dow Pharmaceutical Inc.
•
•
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.”
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Daubert v. Merrell Dow Pharmaceutical Inc.
•
–
–
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.
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Daubert v. Merrell Dow Pharmaceutical Inc.
•
Introduced four criteria for scientific methodology
and theory:
1.
2.
3.
4.
Testing – Whether the methods upon which the
testimony is based are centered upon a testable
hypothesis.
Peer review – Whether the theory has been subjected to
peer review or publication, which aids in determining
flaws in the method.
Error rates – The known or potential rate of error
associated with the method
Acceptability – Whether the method is generally accepted
in the relevant scientific community.
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Court Switches Positions
• Move from a Results-based Court to a Methodology
Court
– Is the method relevant AND reliable?
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Kumho Tire v. Carmichael
• Tire blowout caused car to overturn, killing one
passenger and injuring others.
– Plaintiffs claimed defective tire.
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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.
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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
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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
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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.
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Accounting Standards
Certified Public Accountant 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
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Attacks on the Case’s Merits
Four Pillars of Expert Testimony
• Evidence
– Used the proper/wrong evidence
• Assumptions
– Made valid or invalid assumptions
• Methodology
– Used convenient or appropriate methods
• Expert
– Qualified or not
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Four Pillars of Expert Testimony
• Evidence
– What evidence helps and/or harms the case?
– Experts need to be armed
with the facts in order to
maintain impartiality
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The Chain of Custody of Records
• Reliability of records – where evidence comes from
is a big deal
Less Reliable
More Reliable
Uncorroborated Client Prepared Audited Financials
Statements
Financials
Bank Statements
• 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
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Evidence
• 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
2003)
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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
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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
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Assumptions
• 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?
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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)
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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.
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Methodology
• 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:
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–
–
–
Has the method been tested?
Subjected to peer review?
Error rate?
General acceptance?
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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.
1998)
• An interesting study that may be used to attack
methodology:
– Predicting Interest Rates: A Comparison of Professional and MarketBased 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.)
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Virginia Vermiculite Ltd. v. W.R. Grace & Co.
• Expert ignored US Geological calculations of
vermiculite in favor of his own calculations.
• Testimony was ultimately disallowed.
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Expert
• 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?
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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.
2000)
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Conclusion
• The conclusion is the product of evidence,
assumptions, methodology and expert
– May be more effective to explore these areas rather than
the result thereof
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Other Issues
Other Lines of Questioning
• Double negative
– “You cannot prove that this did not happen?”
• Policies and Procedures
– Don’t violate your own
• Opinion on ultimate issue
– “Evidence is consistent with fraud”
• Trying the case through hypothetical facts
– Making you their best expert
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Other Lines of Questioning
• Other issues
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Frank Wisehart, M.B.A., CPA, ABV, CVA, CFE
Director of Business Advisory Services
Schneider Downs & Co., Inc.
41 S. High Street, Suite 2100
Columbus, Ohio 43215
Direct: (614) 586-7118
Email: fwisehart@schneiderdowns.com
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