Cross-Examining a Financial Expert

Article, For the DefenseJune 2007

Legal / Disputes

The trial’s going well, and you’ve arrived at a crucial point in the case: the cross-examination of the opposing financial expert. Ken Neumann and Hank Kahrs delve into the intricacies of examining this expert.

The trial’s going well, and you’ve arrived at a crucial point in the case: the cross-examination of the opposing financial expert. For many attorneys, this can be a watershed moment: how well you are able to cross-examine this expert, and convey the appropriate message to the jury or judge, can significantly impact the damages sought.

With their specialized training, financial experts can often have the advantage when facing a questioner inexperienced with complex financial terms or concepts. Attorneys may inadvertently interchange common language with “terms of art,” or use terms in ways that demonstrate a lack of familiarity with the theories of the discipline. Resulting answers from the expert may vary dramatically from the expected or, in the alternative, provide the expert with an opportunity to show his command of the topic. This can lead to confusion in the court, or give the opposing expert additional credibility.

The best way that attorneys can prepare for this important moment in the courtroom is to start with three primary steps. First, gain an understanding of the basic methodologies used in forensic damage analysis and the generally accepted processes employed in the application of the methodologies. Second, become familiar with records and resources available to the opposing expert in your case. And finally, take a comprehensive discovery deposition of the expert that locks down the opinions that will be offered at trial. Prepared with this foundation, you will be well armed to face the opposing financial expert.

  • Generally, there are three approaches to the cross-examination of a financial expert:
  • Exclude or discredit the financial expert’s opinion
  • Put into question the expert’s credibility or integrity, or
  • Support your own legal theory or assumption by using the opposing expert’s opinions or calculations.

Regardless of the approach you adopt in cross-examination, your success is dependant on understanding the basic approaches and methodologies employed by financial experts. Because the specific methodology will vary from case to case, this article cannot address the plethora of details and variations that you will encounter in your career. What is presented here are some basics of forensic financial analysis to help you develop a plan and approach to cross-examining these experts.


When the goal is to exclude or discredit the opposing financial expert’s opinion, attorneys may opt to:

  • Proceed with a Daubert Challenge
  • Attack the Appropriateness of the Expert’s Methodology
  • Attack the Underlying Assumptions
  • Attack the Quality of the Work
  • Daubert Challenges

In the past year, the number of Daubert challenges of accounting experts was 33; a modest increase over the previous year’s count of 30. The number of successful challenges will increase as attorneys improve their skills at demonstrating the following:

  • Qualifications - The expert does not possess the prerequisite qualifications
  • Methodology - The expert did not use appropriate methodologies
  • Application - The expert failed to apply the methodologies properly, and
  • Support for Opinions - The expert failed to support his conclusions or establish a direct link between the litigated actions and the calculated damages

There are twelve lines of investigation that will help you assess the likelihood that a Daubert challenge will be successful. Following the four broad categories above, these lines of investigation should become the starting point in your evaluation of an opposing expert.


  • Does the opinion offered require specialized financial knowledge? Each case is different, and the financial skills required will differ – economic damages, cost accounting, statistics, valuation etc.
  • Does the expert have appropriate credentials? This can be evidenced by training, experience, prior testimony, authored publications, and positions held in industry associations.


  • Is the damage model appropriate for the legal cause of action? Damage models should measure the legal interest being claimed, and be generally recognized as an appropriate method of measuring the damages by other financial experts and the courts.


  • Has the expert considered appropriate relevant documents? Are the records relied upon complete, and what relevant records appear to have been ignored?
  • Has the expert considered answers to interrogatories, admissions, and appropriate testimony given in the action?
  • Does the standard of value match the legal cause of action?
  • Has the expert applied methodologies correctly?
  • Has the expert performed analyses/investigations typical of other experts? This can be evidenced by financial literature, professional standards, case law, or other investigations performed by the expert.

Support for Opinions

  • Has the expert adhered to applicable professional standards?
  • Has the expert established that there is a reasonable link between the allegations and the measured damages?
  • Has the expert ruled out intervening events or other potential causation factors as contributing to the measured damages?
  • Has the expert tested his analyses against competitor or industry experience for reasonableness?*

*Citation: The concept and portions of content of the questions are from the Litigation Services Handbook, “The Role of the Financial Expert,” Third Edition, 2005 Cumulative Supplement, by Roman L. Weil, Michael J. Wagner and Peter B. Funk. The specific information is from Chapter 2A, “Challenges to the Admissibility of Financial Witness Expert Testimony (New)” by Lawrence F. Ranallo, CPA, and Keith R. Ugone, PhD.

Appropriate Methodology

The financial expert will generally structure and build a damage model based on a goal to measure the financial amount required to make the injured party whole. If you can find errors or inconsistencies in the opposing expert’s damage model, then you will have an opportunity to discredit the witness and build credibility for your own case.

Components and Structure. Attorneys need to understand the components and structure of the damage model. First and foremost, the damage model needs to comport with the legal story being told. For example, if a party to the litigation incurred an expense to repair damage sustained as a result of the litigated event, then that repair expense would become a component in the damage model. If, on the other hand, there was the loss of a sale to one customer, and there were no mitigating or extra expenses incurred as a result of the event, then the model would include a component for lost sales along with component deductions for any un-incurred or saved costs of the lost sale. In this model there would be no component for mitigating or extra expenses. Depending on the facts, the claim line items can vary from case to case, but typical component categories include lost revenue, saved expenses, loss of business value, mitigating expenses, extra expenses, repair costs, punitive damages, and prejudgment interest.

Although basic economics may be the basis for the model, damage models should also be appropriate to the case and consider appropriate statutory guidance [as with patent infringement (Title 35 Section 284 of the United States Code), trademark/trade name (Title 17 Section 1117 of the United States Code – Lanham Act), and copyrights (Title 17 Section 504 of the United States Code) cases], contract language (breach of contract and insurance coverage matters), and case law.

Conceptual Viewpoints. Each model should be constructed based on an appropriate measurement date and point of view. The selection of this measurement/viewpoint will be dependent on the legal requirements, an evaluation of the facts of the case, the documentation available, and relevancy. There are two basic conceptual viewpoints for building a damage model. In some cases, the expert may adopt an Ex Ante (“from before”) model in which damages are measured on the date of the subject “event” using information that was known or knowable at the time of the event. The other viewpoint is an Ex Post model (“from after”), in which the damage model is constructed as of the date of the analysis, or an anticipated trial date. In this model, all information available after the event is considered in the analysis. Hybrids of these viewpoints are commonly employed as well, and you should consider the law in your jurisdiction to determine if the conceptual viewpoint adopted is appropriate.

The conceptual viewpoint is important because it will not only dictate what information is considered in the model, it will also set the structure for addressing pre-judgment interest and present value calculations. The expert will have several interest or discount rates to apply, including risk adjusted rates, risk free rates, party-specific borrowing rates and jurisdictional rates. The relative magnitude of each of these rates and the model chosen can have significant impact on the final measurement.

Interest Claimed. The legal story and the legal interest being claimed must comport with the damage model. For example, the party may make a contract claim for restitution, in which case, the model will project the financial picture that will restore the injured party to the financial position prior to entering into the contract. Alternatively, in a breach of contract matter in which the plaintiff is alleging a loss of profits due to the contract’s rescission, the plaintiff will be claiming an expectation interest and thus the damage expert will need to project the revenue expected from the fulfillment of the contract. In contrast, a plaintiff who is seeking reimbursement for costs he incurred on belief that a contract would be honored, will be claiming a reliance interest and the damage model will differ accordingly, focusing on the costs that would not have otherwise been incurred.

Projection and Comparison. Understanding the legal interest being claimed and the resources available, the expert will develop a model using the concept of projection and comparison. In selecting an appropriate model, the expert will consider factors that could impact operations independent of the litigated event. Understanding the comparative model used by the expert will determine what adjustments or modifications will need to be made in order to address possible contributing factors such as new competition, change in management, industry influence, new locations, and changes in relationships with customers or suppliers. The projection can be made using several methodologies:

  • Before and After
  • But For
  • Yardstick
  • Market Share

The “Before and After” method takes a business’ historic experience and uses it to project future performance. This method can be effective as it uses actual business performance and explores what would have happened if no incident occurred. In most cases, the pre-incident performance is used as a proxy for what the business’s performance would have been absent the injury. (In situations in which the financial impact is limited in time and scope, subsequent business performance can be used as well). A central assumption in this model is that historic business performance is predictive of future performance. If it is not, either another comparison model should be considered, or appropriate adjustments should be made.

Under the “But For” theory, the expert uses the information available to construct a financial model that is designed to project what the business would have done “but for” the wrongful action. In this model, historic performance may be adjusted for other unrelated events. For example, if a breach of contract occurs on August 30, 2005 (day after Hurricane Katrina), the projection of “but for” sales for a New Orleans based business would look much different than the business’s historic sales.

The “Yardstick” theory utilizes the experience of a specific benchmark to project the business’s performance absent the wrongful act. The benchmark can be industry, economic, market data, and/or competitor or comparative product line/business location within the subject company. In cases where business appraisal is an issue, the market approach would be considered a yardstick method.

Under the “Market Share” theory, the expert will use the market’s actual performance to project the subject company’s performance by applying the subject company’s historic market share.

Underlying Assumptions

Embedded in all damage models are assumptions, and identifying and understanding these embedded assumptions will allow you to articulate the weakness or inconsistencies in the model. This can be an effective way to undermine or discredit the expert’s opinions. Once you break down the model to its component parts, and match them to the story, you will begin to identify inconsistencies or assumptions being made in order for the calculation to be correct. For example, consider a breach of contract case in which a party failed to meet its contractual obligation to deliver, install, set up, program and maintain ATM machines. Assume that the expert projected the lost revenue and saved ongoing expenses in calculating lost profits, but failed to consider the initial saved set-up and installation costs. In this case, the expert’s model assumed that the machines were already installed and operational. If that assumption did not comport with the legal story, then the model has an error.

In preparing for the cross-examination of an expert, it is important to understand the basis for selection of interest and discount rates. Most damage models, and certainly those involving a destruction of business value (or any business or intangible valuation issue), will make assumptions about risk and interest/discount rates. Depending on the length of time involved and the size of the business, a 1% to 2% change in either the interest or discount rate used can have a significant impact on the financial results of the damage model. The discount rate is the rate an expert will use to bring a series of future earnings back to present value on the measurement date. This rate can represent a risk free rate of less than 5% (sometimes approximated by the 90-day T-bill) or in excess of 40% depending on business risk factors including marketability and control. The discount rate can be derived from various sources of market data including published sources such as Ibbotson, Stocks, Bonds, Bills and Inflation, which are updated annually. There is often a subjective component related to specific company risk that is factored, and the expert’s valuation experience will play a significant role in his or her ability to set that rate.

The key to attacking the assumptions lies in understanding the legal story presented and the operational issues that would have been at the foundation of making the damage projections a reality.

Quality of the Work

It is important to question whether the opposing expert was thorough in using the appropriate documents and resources to build the damage model. In supporting a damage calculation, an expert should consider legal documents, corporate history, and available research data to craft a model that makes sense under the facts of the case. There are numerous tools and records that an expert can utilize in creating a financial damage model, including historic financial records, budgets, product line or location performance, competitor experience, industry performance, interrogatories, depositions, and admissions.

In a case where an expert relies on market or industry data, there should be an understanding of how the data was defined, gathered, tested, analyzed, and interpreted. The purpose of the survey or data should also be understood in order to assess any potential bias.

In general, the following questions will assist in evaluating the quality of the opposing financial expert’s work (note that some of these questions are repeated from the Daubert challenge questions):

  • Are there clerical errors in the calculation?
  • Has the expert considered appropriate relevant documents?
  • Has the expert applied methodologies correctly?
  • Has the expert adhered to applicable professional standards?
  • Has the expert tested his analyses against competitor or industry experience for reasonableness tests?


When the goal of cross-examination is to put into question the credibility of the expert, the same questions and issues that would be raised in a Daubert challenge are relevant. Additional factors to consider include independence, training and education, consistency with other testimony or writings, and adherence to professional standards.

Independence. An expert’s credibility largely depends on his objectivity and independence from the parties to the litigation. Establishing the nature and extent to which the expert has a business/working relationship with the parties and their attorneys is one way to establish potential bias. If the expert has done a great deal of work for a specific client, or if a significant portion of the expert’s income is derived from the client, this could present a perception of bias or lack of independence. Similarly, if the expert has a financial stake in the subject business, there will be a perceived bias. No expert should have a financial stake in the outcome of the case in the form of contingent fees.

Training and Education. The expert’s knowledge, skill, experience, training or education can be established through verification of educational degrees, professional certifications, continuing education, previous published writings and previous presentations.

Consistency with other Testimony or Writings. Although each case is different, the application of methodology and theory should be applied in a consistent manner. Looking at the expert’s authored publications, articles, presentations and transcripts of other case testimony will provide insight into the expert’s position and either support or question his credibility.

Professional Standards. There are many professionals who consider themselves qualified to offer financial opinions; however, depending on the issues and nature of the damage model, they may or may not be the appropriate expert for the case. You should become familiar with the professional standards that the expert’s credentials indicate were followed. Some of the most important and prestigious credentials include:

  • Certified Public Accountant (CPA) from the American Institute of Certified Public Accountants;
  • Accredited Senior Appraiser (ASA) from the American Society of Appraisers
  • Accredited Business Valuation (ABV) from the American Institute of Certified Public Accountants
  • Certified Fraud Examiner (CFE) from the National Association of Certified Fraud Examiners;
  • Economist – Many forensic economists hold a Ph.D. and are members of academia, and their expertise can be helpful when communicating with juries on complex issues.


Understanding the damage model, its assumptions, and the financial impact caused by changes in the assumptions can provide an opportunity to turn a cross-examination into an endorsement for your positions. There are two basic approaches:

Hypothetic Changes to Key Assumptions

Focusing on Agreement between the Experts

Working with the expert’s damage model and incorporating one or two new critical assumptions can alter the resulting opinion dramatically, and even support your client’s position. There have been cases where the opposing financial expert changed his opinions based on key assumptions previously ignored and entered new opinions that mirrored the other side. In some cases, there have been instances in which an expert confirmed that a change in a key assumption (often involving causation, intervening events, or client representations) would render his or her opinion invalid. Understanding the magnitude and impact of key assumptions is important in using this strategy.

It’s important to note that these cases are rare, as experts can become committed to their positions. It may be effective to get agreement from the expert on the validity of key assumptions or methodologies used by your own expert, and let the court evaluate the strength of each position.

Common Errors Financial Experts Make

Failure to Address Causation. Many damage experts fail to address issues of causation. Getting behind the numbers and linking the event to the claimed financial impact is an important component in a damage analysis. The mere change in financial component (for example a decrease in sales) after a litigated event may be nothing more than coincidental. Did new competitors enter the market? Was there a structural change in the industry? Was there loss of a major customer for unrelated reasons? These factors and others could provide other explanations for a decline in revenue, or provide additional support for the causal link to the litigated event.

Failure to Perform Reasonableness Checks. Many times experts simply fail to perform a reality-check on the analysis. Looking at the individual components of the calculation may make sense, but is the final result sensible? One such test is to add the calculated damages back to actual operations, and compare it to historic results. For example, if a company has historically reported annual earnings of $200,000, does a damage calculation that yields a restated annual earnings of $500,000 seem reasonable? The answer may be yes, if the expert can reconcile the restated results to other intervening factors; or it may be no, and further analysis of the anomaly may highlight errors in the theory or mechanics in the damage model.

Limited Access to Relevant Data. Another common error is a failure to consider all the relevant data. If an expert did not review key documents or testimony there could be faulty assumptions embedded in the calculation. Exclusion of relevant information can undermine the expert’s opinions as simply contradictory or, at worst, sloppy or incomplete.

Failure to Consider Independent Data. An extension of this is a failure to consider available outside sources of relevant data. The Internet provides a wealth of data including trade journals, industry data, and public government economic data. Forensic professionals can now find data from independent third party organizations that can either bolster or refute the subject damage claims. These sources should be used cautiously; to the extent possible, the expert should gain an understanding of the source of the data, how it was gathered, the purpose for its publication, and evaluate its relevance and reliability accordingly.

Fixed versus Variable Expenses. Another common error is failure to fully analyze the impact the litigated event will have on fixed versus variable expenses. Fixed expenses are those costs which do not vary in amount from period to period regardless of the sales volume. They include things like depreciation, rent, insurance, dues and subscriptions. Variable expenses are those expenses that will vary with sales, such as costs of sales, production costs, supplies, commissions, and shipping. Many expenses contain a fixed element as well as a variable element. For example, the monthly utility bill will include a fixed monthly charge plus a component for increased usage. It is also important to recognize that over time, many fixed costs can exhibit a variable nature. For example, a company with annual revenue of $1 million may be able to function with a bookkeeper for its accounting department. However, if sales increase to $6 million, there will likely be an increase in the accounting activities and functions, and an additional accounting manager may be required. These types of infrastructure changes may need to be considered in the damage analysis.

Failure to Consider Make-up. Another often overlooked area is make-up. It is not uncommon for a decrease in sales one month to be followed by an increase the following month. Sales may not have been lost, but merely delayed. In these cases, there may be additional expenditures that are incurred above normal (for example, production overtime) and will be components of the damage model.

Failure to Consider Mitigation. Finally, many damage models do not address the reasonableness of mitigation. For example, is it reasonable to claim the loss of millions of dollars because of an incident that could have been rectified by a $25,000 expenditure? Companies often have options; could production have been outsourced to competitors or other locations, or could a second shift have been added? All of these factors are possibilities that can be explored.


Planning is always critical to an effective cross-examination, and it starts in discovery. The damage model and its assumptions are driven by the legal story, so developing the timeline, determining the facts of the case and obtaining adequate financial documentation and the underpinnings of the expert’s findings will set the stage for the cross-examination.

After discovery and depositions, take stock of the financial side of your case. Have your own financial expert help you analyze the facts and the history and assess the strengths and weaknesses of both your case and your opponent’s case. Compare the financial history of the company to the expert’s projections to see if it all makes sense. In developing strategy, review the strengths, weaknesses and complexity of the damage model. Assessing the effectiveness of the expert and the strength of positions being presented will help you decide on the appropriate strategy to adopt in cross-examination.

Once you develop the plan of attack, stick to it. If you keep your cross-examination methodical and tactical, you are more likely to be successful and not provide the expert with openings to redeem himself or emphasize his own message. The overall theme of the cross-examination should also comport with the use of your own financial expert’s direct examination. Using the cross-examination to highlight major errors, and using your expert to explain those errors, can provide a powerful – and winning – combination.


As appeared in For the Defense, June 2007.


Additional contributor:
Ken Neumann

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