NEW LAW JOURNAL
A guide to expert
accountants’ reports
Despite efforts to ensure quality, expert accountants’ re-
ports can often be deficient. George Sim explains why.
■ report contents – ensuring consistency
■ reliance on financial statements
E
xpert accountants’ reports vary
considerably. Some reports are short and
consist largely of sets of calculations,
whereas reports on large commercial cases may
be lengthy and complex, with several appendices
showing the detail of the expert’s calculations
and providing background information.
The Civil Procedure Rules and the Protocol
for the Instruction of Experts to Give Evidence
in Civil Claims, issued by the Civil Justice
Council in June 2005, set out basic requirements
for all expert reports such as the requirement
to provide details of experts’ qualifications
and of reliance placed on others’ opinions.
Nevertheless, solicitors and barristers will often
need to assess the value of expert accountants’
reports by reference to more detailed criteria.
This article provides a checklist covering issues
which may be important to an evaluation of an
expert accountant’s report.
General points
■ Does the report cover the experts,
instructions?
Expert accountants’ reports generally
summarise their instructions in the body of
the report or include a copy of the relevant
letter from the instructing solicitors as
an appendix to the report. Therefore, it
is normally easy to establish the matters
on which the expert accountants were
instructed to report and to assess the extent
to which the report addresses each issue.
If a report addresses various issues, it may
be that one is covered in detail but less
attention is given to the others. In some
areas in which there is limited information
it may not be possible to express firm
views. It is then a matter of judgment
for the experts as to whether they state
that they cannot form any meaningful
conclusions or whether they prepare a
report based very largely on assumptions
which will need to be stated in the report
and which may be subject to change if
more information becomes available.
■ Does the report express views on matters
outside the expert’s competence?
Accountants, perhaps because of their
general business knowledge, may consider
that they are competent to express
opinions in expert reports on matters
which are outside their areas of expertise
such as property values. Clearly any such
opinions may be of limited value: an
expert accountant needs to be provided
with information in any areas which fall
outside his or her competence.
■ Does the report state the assumptions
on which the expert’s computations are
based?
An expert accountant’s report will often
contain assumptions about variables such
as the future growth of turnover of a
business or its gross profit percentage. The
assumptions should not only be made clear
in the report but the expert’s justification
for adopting them should be stated. This
may, for example, be the past experience
of the business, e.g. a consistent gross
profit percentage in the previous five years,
industry background information, or the
approach adopted by the Courts in specific
types of case, e.g. dependency ratios used
in the computation of loss of dependency
in fatal accident cases.
The assumptions made may not
always be reasonable. For example, a report
in a personal injury case may assume that a
self-employed trader’s pension would have
been 50% of her pre-retirement earnings
despite the fact that there is no evidence
of her having made any significant pension
contributions before her accident and
despite the fact that it is highly unusual for
any pension scheme to provide a pension
equivalent to as much as 50% of pre-
retirement earnings.
■ Are the assumptions consistent?
If an expert accountant assumes an increase
in a business’s turnover, s/he should also
have considered whether there will be any
costs associated with the increased income.
For example, in addition to direct labour
costs, some of a business’s overheads such
as administrative staff costs and travel
and subsistence expenditure may vary
with turnover. It may also need to rent
larger premises to deal with the projected
increase in sales.
■ Has the expert included copies of the
principal documents relied upon?
Copies of evidential documents relied
upon in the report should be attached as
appendices or provided under a separate
cover.
■ Is the background information set out in
the report accurate and adequate?
Background information about a case
is a matter of fact. A report may include
information of which the “other side” was
not previously aware. There may also
be errors such as a reference to outdated
particulars of claim. A report may use
basic background information selectively
to support its conclusions by omitting
information or by failing to mention
NEW LAW JOURNAL
significant developments, such as the loss
of an important customer or the departure
of a key director. It may also mix fact
with comment which it is not possible
to substantiate such as: “this shows that
Mr Smith was determined to develop his
business into a leading concern in the area
from the outset”.
■ Does the report explain the expert’s
conclusions?
The report should develop in clear terms
the expert’s argument by reference to
the information relied upon and the
assumptions made by the expert. There
may be several stages to the computations
set out in a report, and these will need to
be explained clearly, so that the reader can
see how the figures quoted in the report are
derived.
■ Are the appendices consistent with the
body of the report?
Simple errors may occur. One common
source of inconsistencies is the situation in
which calculations set out in the appendices
are altered at a late stage but the changes
are not reflected in the body of the report,
or vice versa.
■ Do the conclusions of the report appear
reasonable?
An obvious example of a conclusion which
is not reasonable would be a projection
of annual earnings for an individual in a
personal injury or loss of profits case of,
for example, £200,000 when earnings over
the previous ten years were of the order of
£20,000 per annum.
■ Does the report deal with matters which
may undermine the expert’s opinion?
The credibility of an expert accountant’s
report will be enhanced if it acknowledges
and addresses facts and issues which
do not “fit” the argument which is being
advanced.
Accounting and financial issues
■ Does the report rely on final rather than
draft financial statements?
The financial statements of one or more
businesses are often the most important
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documents which forensic accountants
rely upon in forming their opinions. It
is important to establish whether the
financial statements on which reliance has
been placed are “final” rather than “draft”
as significant adjustments can be made at
a late stage.
■ Does the report rely on signed financial
statements?
Similarly, reliance should be placed on
financial statements which have been
signed by one of the directors on behalf
of the board rather than on those which
appear to be final but which have not been
signed - adjustments may have been made
before the final financial statements are
signed.
■ Does the report take account of recent
developments?
Even if a company files its financial
statements within the statutory time limits,
its most recent financial statements may
not provide useful information about its
current financial position. For example,
a private company whose year end is 30
June will have until 30 April 2006 to file
its financial statements for the year ended
30 June 2005. It is possible, therefore, that
the most recent publicly available financial
statements for such a company at present
will be those for the year ended 30 June
2004. In such circumstances, it will be
necessary to ask for financial statements
for the following year, if these have been
prepared, and management accounts
for as many periods as possible since 30
June 2004. It is often useful in any case
to take account of updated developments
by referring to management accounts even
if the latest available financial statements
relate to a recent year end.
■ Have the financial statements been
accepted by HM Revenue and Customs?
The financial statements of many smaller
companies are not audited. There is
therefore no independent source of
assurance as to whether such a company’s
financial statements show a true and fair
view of its results and financial position.
This is also a consideration which applies
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Chartered Accountants
to unincorporated businesses. In such
circumstances, experts can seek exchanges
of correspondence with HM Revenue
and Customs to establish whether they
have raised any issues in relation to,
for example, allowable expenditure e.g.
whether private expenses of the owners
have been “put through the business” or
the level of turnover and/or gross profit.
■ Has the expert examined relevant audit or
accounting working papers?
Given the limitations of financial
statements as noted above, it is often
useful for an expert accountant to review
the working papers of a business prepared
by its external accountants or auditors,
if the business is subject to audit. These
can be particularly useful in identifying
contentious issues and showing how such
issues were dealt with.
■ Are there any factual or arithmetical
errors?
Basic errors such as references to an
incorrect trial date or year end, inaccurate
page or paragraph references or arithmetical
errors indicate that a report has not been
checked carefully before being signed and
can reduce its credibility and that of the
expert witness. Computational errors and
mistakes relating to such matters as tax
rates or accounting standards are clearly
damaging to the credibility of expert
accountants.
The questions above focus on some
common weaknesses. However, they do not
cover all potential deficiencies, and it may
often be worthwhile for legal advisers to ask a
forensic accountant to review a report prepared
on behalf of the “other side”.
George Sim is a member of the Academy of
Experts, a founding member of the Expert
Witness Institute and a partner at Sim
Kapila, Chartered Accountants, London
W1 a firm which specialises in forensic and
investigative accountancy.
E-mail: mail@simkapila.co.uk.