Accountants and examiners are often engaged in cases involving alleged fraudulent financial statements that lead to financial losses.

When disputes ultimately lead to civil litigation, cases generally hinge on a plaintiff’s ability to prove liability and financial damages.

While accountants and examiners have an obvious role in proving damages, they don’t directly provide an opinion on liability. That determination rests with the trier of fact based on the evidence.

In fact, the ACFE Code of Professional Ethics prohibits certified fraud examiners from making statements of opinion as to guilt or innocence of any person or party involved in an examination.

However, financial experts can be critical in identifying and providing information that the judge or jury may consider in reaching their decisions. 

Elements of a fraud claim

A recent Wall Street Journal article put companies on notice. Regulators are scrutinizing whether companies are manipulating their financial statements to meet Wall Street targets, as a profit-squeeze increases pressure on executives to “make the numbers, as tough economic times have historically been fertile ground for earnings management.”

Certified fraud examiners and CPAs are often hired as expert witnesses in matters pertaining to white-collar fraud and misconduct. While they are not attorneys—as experts, they have a working knowledge of the applicable laws and generally accepted standards that govern their work.   

For a plaintiff to prevail in their fraud claim, certain elements must be proven. The elements necessary to prove liability for fraud based on the generic text-book definition of fraud typically include a representation about a material point, which is false, intentionally or recklessly so, and which is believed and acted upon by the victim to the victim’s damage. 

Attorneys representing the parties are tasked with gathering and presenting evidence that will assist counsel in advocating their client’s position.

A financial expert is required to be objective and should only be an advocate for their own opinion, as opposed to the client’s or counsel’s positions. While the expert cannot directly offer an opinion on liability, the expert can be instrumental in presenting evidence pertaining to liability that a trier of fact may consider in reaching a verdict.

For example, let’s take the element of intent. It would be inappropriate for a CPA or CFE to offer a view on a defendant’s intent or state of mind during the acts giving rise to the dispute.  However, a skilled expert could identify evidence that suggests the defendant was less than forthcoming, such as facts that are indicia of concealment, conversion or obstruction.

Proving intent

Often, the determination of liability boils down to the defendant’s intent. An expert might assist in identifying examples that the judge and jury could find relevant in reaching their verdict.

Those examples could include illustrations of concealment, where the defendant destroyed evidence, deleted electronic records, attached removable devices to computers, or obstructed the investigation through deception.

Examples could also include conversion, where an expert traces the flow of funds through accounting records from a corporate account to a personal account controlled by the defendant.

Some financial experts are skilled in auditing. That includes identifying supporting documentation, assessing, and testing internal controls that prevent fraud and misconduct. 

Those skills become relevant in instances in which payments were made or transactions recorded despite lack of supporting documentation or in cases where controls are absent or overridden.

Fraud through omission

Fraud may also be shown through an omission or a failure to disclose material facts. For example, in Texas, fraud by non-disclosure, a subcategory of fraud, occurs when a party has a duty to disclose certain information and fails to disclose it.

To establish fraud by non-disclosure, the plaintiff must show –

• The defendant deliberately failed to disclose material facts. 
• The defendant had a duty to disclose such facts to the plaintiff. 
• The plaintiff was ignorant of the facts and did not have an equal opportunity to discover them. 
• The defendant intended the plaintiff to act or refrain from acting based on the nondisclosure.  
• The plaintiff relied on the non-disclosure, which resulted in injury.

There may be a duty to disclose when the defendant: 1) discovered new information that made its earlier representation untrue or misleading, 2) made a partial disclosure that created a false impression, or 3) voluntarily disclosed some information, creating a duty to disclose the whole truth. 

These provisions address situations where the initial representation may have been materially accurate at the time but new information rendered it untrue or misleading. The plaintiff must now prove the defendant had a duty to disclose and knew or should have known about the conflicting facts. A financial expert can help identify information to illustrate the point at which the recent information became known (or should have been known), or how the previously disclosed information was impacted by the recent developments. 

The information related to these issues could be in the form of data analytics, email communications, board minutes or earnings call transcripts. However, where such information does not exist (or is unavailable), many experts have gone through years of interview training, and can assist attorneys in drafting deposition and cross-examination questions pertaining to financial, accounting, and internal control topics.

Overcoming challenges

A financial expert may find their opinions being criticized and challenged.  A common challenge is that the expert is rendering a legal opinion.  Therefore, it is imperative that experts adhere to the professional standards that help govern their profession and focus on the types of evidence that is ordinarily and customarily relied upon by experts in their field.  

For example, expert evidentiary standards require experts to obtain “sufficient relevant data” to support their opinion to a “reasonable degree of certainty.” 

Prudent financial experts consider all available evidence, including evidence that may be contrary to their opinions. 

For example, experts should consider evidence suggesting:

• The act was as a mistake or accident.
• The defendant had no knowledge the act occurred, or the omission was inappropriate.
• It wasn’t me (who hasn’t heard this one?!?!).

Mistakes are not generally made repeatedly. Knowledge of money going into a defendant’s account or the defendant’s role within an organization could address lack of knowledge. 

The use of passwords, card keys or surveillance cameras could be generally helpful in identifying (or exonerating) the accused culprit. Nonetheless, the expert should be prepared to address all facts that could impact their opinions.  

Summary

Using a financial expert to prove damages in financial statement fraud matters is straightforward. However, attorneys can also be well-served by retaining similar experts in proving or disproving certain elements of their liability case.