Basis Legal Concepts: Beware Insufficient Knowledge of the Law

ACPA was hired to be an witness in a civil fraud case. On cross-examination the opposing attorney asked the a seemingly simple question: Would you please define 'fraud' for the jury? The CPA replied, Do you want to know the legal definition or my definition? The attorney countered, mean there is a difference? The expert's answer provoked a snicker from the judge and jury, and the CPA's credibility went downhill from there. Before the cross-examination was over, the was made to look like an idiot. The truth is, the CPA knew a lot about accounting and tic was well-versed in the facts of the case, but he knew little about the legal aspects of fraud--a crucial element for an antifraud witness. As a result, the case was lost. This article will summarize the basic common-law concepts of fraud, beginning with the requisite: The purpose of this article is to familiarize you with the law, not to provide legal advice. For that, check with your attorney. Appeals courts direct trial judges to closely examine the qualifications of purported experts before allowing them to testify. Failure to answer the basic question above could mean the expert might not be allowed to testify. Imagine the implications if the case had been lost because the rune for naming new experts had passed. To qualify as experts, CPAs have to give proof of knowledge, education and/or experience to convince the judge they bare reliable and valuable information for the jury. (See So You Want to Be all Expert Witness, page 23.) Qualification is on a case-by-case basis; despite public misinformation by some groups, a blanket qualification--even for CPAs--does not exist in any court system. Criminal and civil frauds differ in the level of proof required. For civil cases that burden is a preponderance of evidence. In criminal fraud the standard is beyond a reasonable doubt. WHAT CONSTITUTES FRAUD Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim's reliance on the statement and damages. A material false statement. Let's assume an attorney hires you to examine the financial statements of ABC Corp. The attorney represents shareholders who have filed a lawsuit against ABC claiming the financial statements are fraudulent. Your job is to help the attorney determine whether the claim constitutes fraud: You begin by seeking to find out whether the financial statements contain false statements, and if so, whether they are material. For CPAs, materiality is a familiar concept. Generally speaking, a transaction is material if prior knowledge would have changed the outcome of the investor's decision to part with money. The good news for CPAs is that this element of proof typically involves familiar ground: determining the real numbers. But CPAs inexperienced in fraud cases might stop there. In reality, they should just be getting started; the real work comes when proving intent. There is no such thing as an accidental fraud. What separates error from fraud is intent, the accidental from the intentional. Assume ABC's financial statements contain material false statements: Were they caused by error or fraud? The problem with proving intent is that it requires determining a person's state of mind. As a result, intent usually is proven circumstantially. Some of the ways we can help prove intent by circumstantial evidence include Motive. The motive for fraud is a strong circumstantial element. In the case of ABC Corp., for example, the CPA could attempt to prove the company was in financial trouble or that earnings per share, if correctly stated, would have fallen below analysts' expectations. Or, if managements' compensation is tied largely to earnings performance, documenting that would help establish motive. Opportunity. Management typically has the opportunity to circumvent or override controls over financial reporting. …