Expert witnessing in forensic accounting: a handbook for lawyers and accountants

362 Pages·2003·3.5 MB·English

by  Zeph Telpner

EXPERT
WITNESSING
I N
FORENSIC
ACCOUNTING
A Handbook for
Lawyers and Accountants

EXPERT
WITNESSING
I N
FORENSIC
ACCOUNTING
A Handbook for
Lawyers and Accountants
ZEPH TELPNER
MICHAEL MOSTEK
CRC PR ESS
Boca Raton London New York Washington, D.C.
0898_frame_ FM Page ii Wednesday, May 15, 2002 10:28 AM
Library of Congress Cataloging-in-Publication Data
Telpner, Zeph
Expert witnessing in forensic accounting : a handbook for lawyers and accountants /
Zeph Telpner and Michael S. Mostek
p. cm.--(Expert witnessing)
Includes bibliographical references and index.
ISBN 0-8493-0898-4 (alk. paper)
1. Forensic accounting--United States. 2. Evidence, Expert--United States. I. Mostek,
Michael S. II. Title. III. Series
KF8968.15 .T45 2002
657—dc21 2002017497
CIP
This book contains information obtained from authentic and highly regarded sources. Reprinted material
is quoted with permission, and sources are indicated. A wide variety of references are listed. Reasonable
efforts have been made to publish reliable data and information, but the authors and the publisher cannot
assume responsibility for the validity of all materials or for the consequences of their use.
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Visit the CRC Press Web site at www.crcpress.com
© 2003 by CRC Press LLC
No claim to original U.S. Government works
International Standard Book Number 0-8493-0898-4
Library of Congress Card Number 2002017497
Printed in the United States of America 1 2 3 4 5 6 7 8 9 0
Printed on acid-free paper
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Preface
Part One
Forensic accounting–expert witnessing is not a new discipline, but few
accounting textbooks exist to present a broad view of the profession of
forensic accounting–expert witnessing. Books do exist on special subparts of
it, including the determination of damages, business valuations, general dis-
cussions of fraud investigations, or other limited areas of forensic accounting.
Books devoted to the expert witness in court are designed to assist all experts
to become more valuable to the court, and to the attorneys who must work
with them.
Much of this book is written in the first person, with the authors’ expe-
riences used as examples. All cases used as illustrations are from actual
disputes worked on by the authors. We believed that actual cases with the
insight of those who worked on them would be more helpful than if we had
analyzed disputes that were resolved by others.
We also wanted this book to differ from other textbooks. We did not
want to tell a reader what to do; we wanted to show the reader how to do it.
The authors have devoted many professional years to litigated matters
or tax disputes short of litigation. I have practiced public accounting either
as an employee, partner or proprietor since 1956. My co-author, Michael
(“Mike”) Mostek, J.D., has been a trial attorney since 1985 and is a partner
in a 17-attorney law firm.
My first forensic engagement occurred in 1961 when I was assigned to
the Sister Elizabeth Kenney embezzlement in Minneapolis. Later, I discovered
falsified records and inventory theft by the manager of a gas distribution
subsidiary of a natural gas company. In 1964 and 1965, I was engaged to
reconstruct the accounting records for a multistate bankruptcy estate. I did
not testify as an expert until 1966, when I was appointed to serve as Master
in Chancery by the Iowa District Court. The appointment authorized me to
take testimony under oath, and to have the U.S. Marshall enforce summons
for me.
For many years, CPAs and other accountants have been called upon to
testify in court. CPAs were rarely sued for malpractice until the 1960s, when
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iv Expert Witnessing in Forensic Accounting
malpractice charges against CPAs began to mount. With an explosion in
litigation and malpractice charges, accounting expert witnesses more fre-
quently have been hired to assist with tax, accounting, financial litigation
and fraud when money is involved.
In 1979, I wrote a continuing professional education (CPE) seminar for
CPAs entitled “The Practical Aspects of Forensic Accounting and Litigation
Support.” The seminar was presented five times by state CPA societies. The
average attendance was eight students, so the course died.
For many years, each accountant who was interested in forensics and expert
witnessing was self-taught. Often, he was a bad teacher. Now, large accounting
firms have departments that are dedicated to forensics. The American Institute
of Certified Public Accountants (AICPA) and related state associations now
present a few forensic courses each year. Usually these focus on fraud. Two
organizations feature many forensic accounting seminars. One is the American
Board of Forensic Accountants (a division of the American College of Forensic
Examiners). Only recently has it begun to present many relevant courses annu-
ally. Most of its seminars are prepared by college professors who also have
practical forensic experience, and experienced forensic CPAs from local,
national, and Big Five accounting firms. The other is the Association of Cer-
tified Fraud Examiners, which offers many fine courses on fraud.
In 1999, I was presenting a program on forensic accounting at the Wal-
dorf Astoria and later wandered into the room of one the exhibitors, where
I met Becky McEldowney, senior acquisitions editor for CRC Press. I pro-
posed to write a handbook on forensic accounting and accounting expert
witnessing for attorneys so they would know when and how to work with
accountants. Becky asked me to address it to accountants also. Later, Becky
accepted my proposal to co-write it with Mike, directing our comments to
both accountants and lawyers. Mike and I are compatible and work well
together on trials. I have learned much from Mike, as I have from other
lawyers with whom I have worked.
We have tried to show some successes and failures of experts — including
our own imbecilities when they occurred. Some of our examples expose a
local accountant, some expose a Big Five or national firm. Some expose my
mistakes. The purpose of such examples is to remind an attorney to always
match the accounting expert with the job to be done. An example from my
own career demonstrates how the arena in which one learns a trade or
profession can make all the difference. After working for very large firms —
Arthur Andersen then Peat Marwick — I opened my own practice in Iowa,
where I suddenly was called upon to prepare farm returns. When the first
return I prepared for a cattle rancher was reviewed, the Internal Revenue
agent removed six steers from the depreciation schedule. Being a city boy, I
didn’t know steers were castrated bulls and couldn’t reproduce. Therefore,
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Preface v
they were not subject to depreciation. Both the rancher and the agent laughed
at me. The rancher said he knew I was making a mistake when I depreciated
them, but, he thought, “more power to me,” if the depreciation deduction
passed an IRS examination. Later, when I tried to convince the agent that
the steers were for display purposes, he refused to accept my argument, but
he said that I deserved an “A” for trying.
To speed the reading of this book, we have not used the phrases, “he or
she,” or “him or her.” We have used the masculine pronouns: “he, his or him.”
My niece is a successful trial lawyer and I would never slight her. So please,
women lawyers and accountants, substitute “she,” or “her,” at any time or place.
Zeph Telpner
Part Two
Whenever Zeph and I worked together, we realized that the laws of civil
procedure, evidence, expert opinions, trial procedure and the presentation
of expert testimony were a mystery to many accountants and even some
lawyers. And, we both knew that not all lawyers take the time to provide the
information or explain the adversary process in a way that would truly help
the forensic accounting expert do the best job in preparing and presenting
his opinions. Our goal here is to write a handbook that pulls together all the
essential information on this topic, useful to both the lawyer and the expert.
This is not a scholarly book written from the ivory towers of the law
schools or business schools. You can pick any topic in this handbook and
probably find published volumes of detailed material that you could spend
many hours studying. And, there may be times when an important issue in
your case demands that an exhaustive study be undertaken. But, in our
estimation, this is more often the exception than the rule. This is a book
conceived and written in the trenches, for professionals pitched in the adver-
sarial process. We hope it will serve as a fitting reference guide for lawyers
who are helping their experts prepare testimony, and for forensic accountants
who are preparing to testify. We hope that you will be able to pick up this
book and find, if not all the answers, then the succinct explanation you need
in short order. It is intended to provide a framework within which the lawyer
and the forensic accountant can build their working relationship by providing
some common ground and a common rudimentary base of knowledge.
This handbook is a valuable addition to any legal or accounting library.
We hope the lawyers who purchase this book will share it with their account-
ing experts, and use it as an aid in preparing them to assist with the case. We
hope the accountants who acquire this book will share it with their lawyers
and use it to learn more about or refresh their understanding of the legal
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vi Expert Witnessing in Forensic Accounting
process whenever they may be called upon to develop an opinion and provide
testimony in legal proceedings.
We offer this handbook to serve as a useful tool for both the lawyer and
accountant in meeting these objectives. If you are a lawyer, we hope you will
receive our methods and advice as tools you can use to help you fulfill all of
these responsibilities. With so many demands on your time and attention in
preparing your case, we urge you to turn to this handbook and even share
it with your forensic accounting expert as a means of building that all-
important relationship. And we urge you to do it early in your case. We intend
this handbook to make at least this aspect of your work more effective and
efficient, relieving some of the burden and allowing you to focus more energy
on other details of the case.
This handbook is designed to offer accountants a better understanding
of the process in which they have become involved. Accountants will be
armed with a working knowledge of the adversary process. They will be
confident in asking the lawyer for the information needed to develop and
present their opinions. In summary, our essential argument — that lawyers
and expert accountants must work together closely and early in preparing a
case — forms the premise for this handbook. We believe it will help provide
the tools you need to work closely and effectively in preparing your current
case and those that follow. It is up to you to decide when you will start
working together, but we believe the earlier the better.
Of necessity, this book discusses the procedural and evidentiary rules
that most often affect the forensic accounting specialist in his work. When
doing so, we will refer to the federal civil rules in effect and customs pre-
vailing in our locality at the time of this writing. Readers, of course, should
be aware that the requirements and customs of the federal courts in their
locality might differ. Also, the rules of criminal procedure will apply in a
criminal case. And certainly, the rules and customs, whether civil or criminal,
vary from state to state, sometimes significantly. A detailed review of all
potentially applicable criminal and civil rules in both federal and state courts
is unworkable and would probably make this handbook difficult to use.
Referring to the uniform federal civil rules is both useful and efficient in
pursuing the goal of creating a common working knowledge of these matters,
upon which the lawyer and accounting expert can expand and simplify as
needed for purposes of their work.
Good luck with your case, and work early and often with your experts.
Mike Mostek
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The Authors
Zeph Telpner, CPA, limits his practice to forensic accounting and tax con-
sulting provided nationally from his offices in Council Bluffs, Iowa. Formerly
with the firms now known as Arthur Andersen LLP, and KPMG Peat Marwick
LLP, he is self-employed. He received his BSBA degree from Creighton Uni-
versity in 1958, and earned his CPA designation from Nebraska and Iowa in
1962. His public accounting career began in 1956, and he completed his 41st
year in forensic accounting in 2001.
His federal and state court forensic engagements as an expert accounting
witness and consultant include disputes in accounting malpractice, criminal tax
fraud, corporation breach of contract, business valuations, trademark infringe-
ment, murder liability, injury damages, divorce, and bankruptcy. He also has
served as Special Master, Master in Chancery, and bankruptcy examiner.
Zeph has written and presented 18 continuing education seminars for
CPA and trade associations, the Internal Revenue Service and businesses in
26 states. In 1985, he wrote an industry training and reference guide, Account-
ing and Tax for the Trucking Industry, for Arthur Andersen LLP. About 250
of his human interest essays and business profiles have been featured in
newspapers and magazines.
Zeph is recognized nationally as an expert in truck transportation and
providing continuing professional education to CPAs. In 1981, he sold his
ongoing trucking industry practice to Arthur Andersen LLP. He has served
on the boards of directors and committees of national and local accounting
associations.
Michael S. Mostek, J.D., is a shareholder with the law firm of Koley, Jessen,
P.C., in Omaha, Nebraska. He has practiced environmental law, real estate,
business law and civil litigation for the past 16 years. He advises clients nation-
ally on due diligence, liability and compliance issues under both state and
federal environmental laws and regulations.
Mike received his J.D. degree from Creighton University School of Law
(1985), and his B.A. degree from Kearney State College (1982). He was
admitted to the Nebraska Supreme Court in 1985, the U.S. Court of Appeals,
Eighth Circuit, in 1989 and to the U.S. Supreme Court in 1990.
vii