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In cases involving claims for lost profits damages, the Plaintiff will generally be able to recover damages only if it can be demonstrated that the breach or other wrongful act committed by the Defendant was the proximate cause of the loss. According to Black's Law Dictionary, proximate cause is defined as "That which, in a natural and continuous sequence, unbroken by any efficient intervening cause, produces injury and without which the result would not have occurred." Thus, if alleged acts never occurred the injury would not have occurred.

In establishing the linkage between the wrongful act and damages, it is important to note that the CPA expert witness is not called on to serve in the role of advocate of fact in that capacity. The Plaintiff and Plaintiff's counsel are responsible for establishing liability and for advocating their own position. Liability is the "condition of being responsible for a possible or actual loss, penalty, evil, expense or burden." The CPA expert witness's role is to assume that liability is established and to determine how much in damages can be attributable to the wrongful act. To do so, the expert needs to consider how much of the damages can be attributed to the Defendant's actions and how much can be attributed to other factors.

Causation

During the planning stage of the engagement, CPA expert witnesses need to make decisions about their role with respect to causation from a conceptual point of view. The CPA expert witness can choose to address causation, ignore causation or assume causation. Often the CPA expert witness is asked to assume causation by the attorney; however, as described below, the expert should assess causation for reasonableness. As a result, the CPA expert witness may be asked to opine on causation. Accordingly it is important for the CPA expert witness to understand the two elements involved in establishing causation:

1. Factual causation includes determining if the Defendant's acts did in fact cause the Plaintiff's loss.
2. Legal causation relies on the law to determine whether or not the defendant can be held liable for the Plaintiff's damages.

Typically, the CPA expert witness will often make the assumption that legal causation exists and will be proven at trial. As shown below in the case study (PDF), the CPA expert witness should consider the importance of performing his or her economic damages and other analyses based on the factual issues that took place.

Professional Standards

While the forgoing case study demonstrates that the Plaintiff's expert failed to establish the causal link between the alleged bad acts and the damages that were allegedly sustained, it also raises the question of whether the failure on the part of the Plaintiff's expert to undertake an adequate analysis to establish the linkage between the damages and the causal issues resulted in a situation where the CPA expert witness also failed to adhere to the appropriate professional standards in preparing the economic damage analysis.

According to the AICPA Consulting Services Special Report 03-01 "Litigation Services and Applicable Professional Standards," litigation services are consulting services that are subject to the Statement on Standards for Consulting Services (Litigation Services and Applicable Standards, paragraph 7). Further, the CPA damages expert must also comply with the General Standards contained in the AICPA's Code of Professional Conduct. Among the Standards that may be relevant in a situation such as this include:

• Rule 102, Integrity and Objectivity. Rule 102 provides that, "The expert does not serve as an advocate for the client's position and, therefore, should not subordinate his or her judgment to the client. The expert is engaged as someone who has specialized knowledge, skills, training and experience in a particular area and presents conclusions and judgments with integrity and objectivity. The expert's function is to assist the trier of fact in understanding complex or unfamiliar concepts after having applied reliable principles and methods to sufficient relevant data." (Litigation Services and Applicable Standards, paragraph 13)
  
  The importance of adherence to these standards is further reinforced by the recently issued AICPA Special Report 08-1 "Independence and Integrity and Objectivity in Performing Forensic and Valuation Services." Special Report 08-01 provides that, "Expert services may create the appearance that a CPA is advocating or promoting a client's position." (Independence and Integrity and Objectivity Forensic and Valuation Services, paragraph 27. Also note that if a member conditionally or unconditionally agrees to provide expert witness testimony for an attest client, the CPA's independence would be considered impaired with respect to the attest services.) While the CPA that undertakes expert services for certain clients may be deemed to have his/her independence impaired, the CPA expert should continue to maintain objectivity and integrity in performing the economic damage analyses. The CPA expert witness should be an advocate for his or her professional opinions and not an advocate for the client.
• Rule 201, General Standards, Professional Competence. In discussing Professional Competence, Consulting Services Special Report 03-01 states, "As a result of Daubert v. Merrill Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and Kumho Tire Company, Ltd. v. Patrick Charmichael, 526 U.S. 137 (1999), the practitioner should consider that the reliability and relevance of the expected testimony is likely to be subjected to careful judicial scrutiny before it will be allowed to be presented at trial. When deciding whether to accept a litigation services engagement, the practitioner should consider whether it is likely that he or she has the knowledge and the skills necessary to provide a reasonable basis to present relevant and reliable testimony on the issues to be presented in the particular case." (Litigation Services and Applicable Standards, paragraph 17)
• Rule 201, General Standards, Due Professional Care. Recognizing the special role that a damages expert plays in a case, Consulting Services Special Report 03-01 states, "In a litigation engagement, practitioners are often the only professionals capable of quantifying the impact of the events that led to the dispute. Their work product is therefore important in the litigation process. Each party in the proceedings may retain professionals to quantify and analyze the economic impact of events. Practitioners need to be able to evaluate and challenge the assumptions and calculations of other professionals as well as defend their own assumptions and calculations under rigorous cross-examination." (Litigation Services and Applicable Standards, paragraph 19)
• Rule 201, General Standards, Sufficient Relevant Data. This rule states that, "A practitioner attempts to obtain relevant data that is sufficient to provide a reasonable basis for conclusions or recommendations for any professional services performed." (Litigation Services and Applicable Standards, paragraph 23)

Remember: if the expert does not undertake the analyses by at least attempting to link the damages to the causal issues, it will be difficult to argue that the analyses are grounded in reliable principles and that methods designed to assist the trier of fact in understanding the damage issues in the case. Further, it won't be easy for the expert to defend his or her analyses with respect to the economic damages under rigorous cross-examination from the Defendant's counsel.

Conclusion

While an expert witness is not retained to prove or disprove the Plaintiff's case on liability, the expert is responsible for analyzing the damages and trying to attribute the damages to the alleged bad acts. If the expert can't, then the damage claim may be deemed to be speculative and unreasonable and could also leave the expert vulnerable to questions about his or her adherence to applicable professional standards in preparing the analysis.

Robert P. Gray, CPA/ABV, CFE, FACFEI, Principal, Forensic & Litigation Services, Parente Randolph, LLC, Dallas, TX. Gray has an extensive background in financial/accounting analyses, business valuation, economic damages, forensic investigation and litigation. He is a member of the AICPA’s Forensic & Litigation Services Committee, which provides professional guidance to CPAs who perform fraud investigations and determine economic damages. David Duffus, Principal, Forensic & Litigation Services, Parente Randolph, LLC, Pittsburgh and Collette Pinault, Senior Associate, Forensic & Litigation Services, Parente Randolph, LLC, Pittsburgh assisted Gray in writing this article.