Mike Costello: The Question Of Independence

Monday, October 23, 2006 - by Mike Costello
Mike Costello
Mike Costello

When an expert witness renders a professional opinion about the value of a business, a loss as a result of a disability or the amount of financial damages, an important consideration for the credibility and acceptance of that opinion is the independence of that expert from all parties involved in the matter. The appearance of independence is critical in these types of cases, and perception is very important.

What Is Independence?

Independence is a broad concept that includes conflicts of interest. The concept of independence is not discussed as a required standard, but rather in an effort to consider a pitfall that may be used against the expert’s objectivity.

To increase the probability that an expert’s opinion doesn’t appear to be tainted, a basic understanding of independence is helpful. Experts may never seem totally independent because they are being paid for their services. But, the apparent lack of independence may be nothing more than the appearance of a relationship between parties, even though no relationship exists.

The attempt to impeach an expert because of relationships with counsel or the client, the amount of fees charged, or contingent fee arrangements is common in today’s legal environment.

Establishing Expert Independence Can Defuse These Arguments

To defuse these arguments, your expert should use standard procedures to check that no member of his or her firm has any relationship that could impair independence. Naturally, the larger the firm, the more difficult this task may be. But the firm should have procedures in place to identify potential problems.

Even if the expert has determined he or she has no conflict of interest, all of the expert’s relationships, past and present, with all parties should be disclosed. It is ultimately the client and his or her counsel who must decide whether a conflict of interest exists that may affect the credibility of the expert in court.

There are many potential conflicts of interest that you should look for. These include:

• Financial relationships, such as partners in other businesses;
• Family relationships, either directly or by law; and
• Any close personal relationships.

Also avoid billing relationships that are not the expert’s standard practice at the standard rates.

The more critical an expert’s opinion is to the ultimate outcome of a case, the more critical the credibility of the expert and the importance of the independence issue are.

Representing Only One Side Can Lead To Questions

Implications of lack of independence are also a concern when an expert represents only one side in issues. For example, an expert who only works for plaintiffs or only for spouses employed outside the home could raise the appearance of a lack of independence.

In certain fields, such as personal injury, it is generally accepted that an expert who one day represents a plaintiff probably will not be hired to represent a defendant. But, to always see fault one way or always quantify damages with one set of attributes can raise the issue of bias and whether the expert has accurately and independently assessed the facts.

Establish Independence Up Front

The question of independence should be considered before retaining an expert witness. Any gray area should be discussed by the expert, counsel and client. A little protection up front can avoid serious repercussions down the road.

Local Case Study

In a recent marital dissolution case, the opposing expert prepared a written report that did not disclose the relationship his firm had with his client. His partner in his CPA firm had performed accounting, tax and consulting services for the company that was the subject of his business valuation. His firm had received several thousand dollars in revenues over many years, yet in his written report, he indicated that he had no relationship with the individual for whom he had prepared the business valuation.

After intense questioning by the attorney representing the opposing party, he admitted that he should have disclosed the relationship to avoid any question of independence.

At Decosimo Litigation Support, we routinely perform conflict of interest checks before starting any engagement as a part of our procedures. We are available to assist you in the event your CPA has a real or perceived conflict or independence issue.

(D. Michael Costello is a Certified Public Accountant, business appraiser and consultant with more than 15 years of training and experience in business valuations and appraisals, business acquisitions and divestitures, and related fields.

He has written several articles for the Tennessee CPA and the AICPA’s Management Consultant newsletter.

He was the Managing Director and President of Costello, Strain & Company, PC, a CPA firm he established in May 1984. The firm was merged with Joseph Decosimo and Company, LLP, CPA’s in September 2003. Joseph Decosimo and Company, LLP was founded in 1972 and today is one of the top 100 CPA firms in the nation.)

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