Having for over 20 years provided accountancy support to parties in dispute, I find it interesting to reflect on the changing perceptions of the accountant’s role. What used to be considered an optional “add-on” is now an essential ingredient in an established procedural framework that governs form, legitimate content and timing.

The development that most obviously defined this transition was of course the reform in 1999 of the Civil Procedure Rules that laid down the structure which now governs public recourse to the Courts, and it is within this structure that independent experts’ services must be accommodated.

The CPR framework

Contrary to initial aspirations litigated civil cases are not resolved more quickly: the revised CPR can sometimes have the opposite effect, particularly when, for example, there are protracted inter-party arguments about nominating a single joint expert, or about meeting criteria for completeness of disclosure, or privilege.

But the CPR has certainly concentrated minds by raising the stakes via such punitive devices as wasted costs orders. Largely informal old-style directions hearings have given way to case management conferences at which the progress of the litigation is both monitored and ordered through to trial.

In virtually all cases in which monetary valuation or measurement of loss and damage is a feature the potential for constructive input from accountancy experts has been immeasurably enhanced by the current regime.

The term “forensic” means “pertaining to courts of law” and this is a useful reminder to all who seek to take on a litigation support role by calling themselves forensic accountants. The application of accountancy concepts, principles and practice to matters in the realm of law requires a proper understanding on the accountant’s part of the limitations of one’s expertise as well as a strictly applied disciplinary code, the essence of which is that one’s overriding purpose is to assist the court with matters falling within the scope of one’s technical expertise and direct experience as an accountant.

Hallmark is independence

Written reports which constitute one’s evidence must carry a stamp of impartiality that can withstand vigorous cross-examination. Although one may at first be a party-appointed expert, instructed to advise on the strengths and weaknesses of respective sides’ arguments, once the case moves to trial one’s evidence must be seen to be wholly independent: one is there to answer questions to assist the judge – never to act as advocate for the arguments pleaded. The distinction is a subtle one: it would be surprising (to all the parties, not least the judge!) if one’s objective evidence did not support the client’s pleaded case, but that is not the same as advocacy. Nothing is more likely to antagonise the judge than an expert whose evidence voices opinions or conclusions that are within the court’s domain. Being there to assist the judge is all very well, but making his findings for him is assistance he does not require!

Alternative routes to settlement

Increasingly, disputes are resolved by one of the alternative processes to litigation, notably mediation. This is partly due to the courts’ frequent insistence that the parties should make every reasonable effort to reach a settlement before taking up the courts’ time. It is, of course, also due to the high cost of funding the litigation process and the inescapable risk of a “freak” result – i.e. that, contrary to all expectation and advice, one might actually lose!

Far from diminishing the need for accountancy expertise, mediation has accentuated the accountant’s role in facilitating a meaningful negotiating process and in achieving a mutually acceptable outcome in the form of a settlement.

This is particularly relevant in cases involving allegations of professional negligence of accountants themselves, since the experts appointed by claimants and defendants will be required to consider both liability and quantum and occasionally even issues relating to causation and reliance. Although by no means all such cases will settle pre-trial, the majority are susceptible to mediation as a means of potential settlement.

The arguments will by then have been well-rehearsed in experts’ reports; the experts will have met as often as they consider their discussions, always held without prejudice, are likely to be fruitful; and they will also have produced a joint statement for the court on all matters agreed and not agreed (with a précis of supporting arguments) which, once signed by both (or all) experts, loses its “without prejudice” status and is a potent indicator of the areas in which cross-examination will be of most value to the judge should mediation fail.

Admitting weaknesses

The expert accountant’s objectivity and independence is often reflected in those sections of his report which highlight weaknesses in his own side’s case. If, for example, he is instructed by the defendants’ solicitors or insurers, he may express criticism of the defendants’ failure to issue an engagement letter; or their failure to qualify an audit opinion in appropriate terms; or their failure to maintain an adequate record of discussions at meetings that are critical to the matters pleaded; or their mechanical and thoughtless completion of their own audit working papers, betraying a lack of attention to detail.

In practice admissions of this nature, taken individually or collectively, may not be fatal to the defendants’ case as their impact may be ameliorated by factors pertaining to causation or reliance. In one reported “loss of chance” action earlier this year in which I was retained by the claimant it was, for example, argued on behalf of the defendants that the accountants’ alleged recommendation to the claimant to proceed with the acquisition of a business on the basis of fundamentally flawed profit and cash flow projections was not the cause of her losses since she, according to their evidence, was determined to go ahead with the purchase whatever their advice.

Although this argument proved to be unsuccessful at trial (and on appeal) it highlights the distinction between matters on which expert accountancy evidence may assist and matters of factual evidence for the court’s determination.

For whatever reason, the parties involved chose not to try mediation first: had they done so, the input of the accountancy experts may well have served to narrow the arguments to the point at which settlement could have been achieved.

Mediation’s advantages

Mediation takes place in a “micro-climate” which is quite unique. Factors enter the arena that would have no place in a court of law. Most litigants find court proceedings not only insensitive to their most basic instincts and feelings, but usually incomprehensible and, ultimately, unjust. Mediation can find that intersection between feelings of burning resentment, however perceived to have been caused; vague notions of adequate compensation; and an abiding awareness of the financial uncertainty of potentially ruinous litigation.

Accountancy expertise can have a sobering effect, particularly when respective side’s experts, acting in the spirit of professional colleagues, are able realistically to advise the litigants at each turn of the negotiating wheel on the strengths and weaknesses of the remaining arguments. I have many times spent a private hour with my opposite number and a laptop computer feeding data into a damages template updated to reflect the latest potential concession of one party or grudging compromise agreed by the other.

This enhanced possibility of settlement applies to virtually any dispute in which financial measurement plays a part – whether it involves one joint venturer’s alleged failure to account properly to the other; loss of investment potential and goodwill following breach of a trading agreement; or the dire consequences of transferring, for tax reasons, privately held property companies into a trading company, all under common control, when the latter becomes insolvent.

The forensic accountant does not pretend to tell the parties what to do – that is for the advisers. But he can alert them to the probable financial effect of any potential settlement matrix.

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