Background:
Federal Rules of Evidence 702, commonly referred to as “FRE 702”, governs the admissibility of expert witness testimony. This is the revised text of FRE 702:
“A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if the proponent demonstrates to the court that it is more likely than not that:
- the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
- the testimony is based on sufficient facts or data;
- the testimony is the product of reliable principles and methods; and
- the expert’s opinion reflects a reliable application of the principles and methods to the facts of the case.” (emphasis added)
The amendments to FRE 702 went into effect December 1, 2023.
What is the difference?
The amendment nominally does not impose new or specific procedures regarding expert witnesses but is instead intended to clarify a standard that was implied by the old Rule 702. The reality is the changes for expert witnesses are more nuanced, and is going to make it easier for experts to be excluded under a Daubert motion. Specifically, FRE 702 requires that the expert witness’ work be the results of “reliable principles and methods.”
Which raises the question: what are these “reliable principles and methods”? Within valuation, accounting and financial presentations, there are several generally accepted professional standards. This is not a comprehensive list:
Valuation: Valuations of all sorts, from businesses, real property, and personal property, are governed by the Uniform Standards of Professional Appraisal Practice (“USPAP”). USPAP aims to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers.
Additionally, CPAs engaged in valuation services are bound by the Statement on Standards for Valuation Services (“SSVS”). SSVS applies to any engagement to estimate the value of a business, business interest, security or intangible asset for numerous purposes, including sales transactions, financing, taxation, financial reporting, mergers and acquisitions, management and financial planning and litigation.
Valuation standards are frequently not followed by expert witnesses who nevertheless express opinions regarding asset values.
Accounting: Generally Accepted Accounting Principles (“GAAP”) are a set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board. GAAP governs how financial information gets reported by publicly traded companies. The only companies required by law to follow GAAP are those being publicly traded; however, banks will generally require financial statements be prepared in accordance with GAAP as part of loan covenants.
Auditing: Generally Accepted Auditing Standards (“GAAS”) are a set of systematic guidelines used when auditing a company’s financial records. GAAS aims to ensure the accuracy, consistency, and verifiability of auditors’ actions and reports. These rules are promulgated by the American Institute of Certified Public Accountants.
Additionally, CPAs engaged in preparation and issuance of audit and attestation reports are bound by the Statements on Auditing Standards (“SAS”), the Statements on Standards for Attestation Engagements (“SSAE”) as well as standards promulgated by the Public Company Accounting Oversight Board (PCAOB).
Financial Statement Review: Closely related to audit engagement, a CPA engaged to perform financial statement review or compilation services us governed by Statements on Standards for Accounting and Review Services (“SSARS”).
Tax Preparers: CPAs involved in preparation of tax returns and related tax services are governed by tax standards that outlines their responsibilities to taxpayers, the public, the government and the profession called the Statements on Standards for Tax Services (“SSTS”)
There will likely be a greater focus on the application of these professional standards when addressing expert witnesses.
What should you do?
Before hiring an expert witness, understand the professional standards that potentially govern the fields of practice to which your expert witness will testify. We can help you with that.
Talk to your expert about whether and how their work will comply with the applicable standards. We can help with that.
Hire a competent expert (like us). As an expert, we will save you time and money because:
- Our Experts all have professional credentials from the most well-regarded professional organizations in our respective fields.
- We follow the expected standards and applicable case authority.
- We can provide expert witnesses testimony in a simple, efficient manner so that triers of fact can understand otherwise complicated subjects.