Since accountants are often hired as expert witnesses on forensic accounting, economic damages and business valuation issues, it’s wise to be aware of the rules governing the admissibility of expert testimony in both state and federal courts. Recently, changes were made to Federal Rule 702 to keep unreliable opinions away from juries, which has already resulted in the exclusion of expert testimony.

What is Federal Rule 702?

Rule 702 of the Federal Rules of Evidence governs the admissibility of expert testimony in federal courts. Prior to the changes made in December 2023, the last time Federal Rule 702 had been amended was in 2000 in response to Daubert v. Merrell Dow Pharmaceuticals, Inc. and to the cases applying Daubert, such as Kumho Tire Co. v. Carmichael and General Electric Co. v. Joiner.

In Daubert, the court noted it is the trial judge’s responsibility to act as a gatekeeper and exclude unreliable testimony. The changes made in December 2023 were designed to fix what has been deemed widespread misapplication of Rule 702 by the courts. Often, expert testimony was allowed under the theory that concerns can be addressed through cross-examination and because of this, there was inconsistency in expert exclusion. 

Intending to re-establish the court’s role as gatekeeper, Rule 702 (the updates highlighted in bold) now states that, “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.” (This was previously worded, “The expert has reliably applied the principles and methods to the facts of the case.”)

Does Federal Rule 702 Impact Accounting Expert Witnesses?

Forensic accounting, economic damages and business valuations often involve complex financial transactions, accounting principles, auditing standards and forensic techniques.

These topics may be beyond the common knowledge of the judge and jury, and therefore require the assistance of expert witnesses to explain the evidence and provide opinions on the existence and extent of damages, fraud, etc. Rule 702 sets the criteria for the qualification and reliability of such experts, and assigns judges the gatekeeping role of determining whether the expert testimony is admissible or not.

What are the Implications of Rule 702 for Accounting Expert Witnesses?

As financial experts, it is important to be aware of the requirements and challenges of Rule 702, especially if you are hired as an expert witness. Here are some implications of the rule for accounting experts:

1. Qualification as an expert witness: Rule 702 requires the expert witness to have sufficient knowledge, skill, experience, training or education in the relevant field of accounting. This means the expert witness must have a credible and verifiable background that demonstrates their expertise in the subject matter of the case. For example, an accounting expert who has a certification in fraud or forensics, a degree in accounting or finance, years of experience in conducting fraud investigations, publications or presentations on fraud-related topics, or memberships in professional organizations related to fraud examination may be more likely to qualify as an expert witness than someone who lacks these credentials. The expert witness must also be able to explain how their qualifications relate to the specific issues in the case, and how they have kept their knowledge and skills up to date.

2. Reliability of the testimony: Rule 702 requires the expert witness to base their testimony on sufficient and reliable facts or data and use reliable principles and methods in their analysis. This means the expert witness must conduct a thorough and objective investigation of the case, gather and document relevant and admissible evidence, and apply generally accepted principles and standards in their field. For example, an accountant who follows applicable professional guidelines may be more likely to produce reliable testimony than someone who does not. The expert witness must also be able to explain how they collected, verified and analyzed the data, and how they reached their conclusions based on the evidence.

3. Application of the knowledge and methods to the facts of the case: Rule 702 further requires the expert witness to reliably apply their knowledge and methods to the facts of the case. This means the expert witness must show how their opinions are relevant and helpful to the trier of fact, and how they are supported by the evidence. For example, an expert witness who can clearly explain their assumptions, limitations and alternative explanations, as well as demonstrate how their opinions are consistent with the facts of the case, may be more likely to provide persuasive testimony than someone who cannot.

4. Preparation for challenges from the opposing party: Rule 702 also implies that the expert witness may face challenges from the opposing party, who may try to discredit their qualifications, methods or opinions. This means the expert witness must be prepared to defend their testimony and to respond to any objections, criticisms or questions that may arise. The expert witness must also be able to maintain their professionalism, credibility and confidence throughout the testimony.

Recent Cases Highlighting the New Impacts on Expert Testimony

There have been recent exclusions of expert testimony that may have been a result of the recent changes. For example:

• In re: NFL Sunday Ticket Antitrust Litigation, the jury awarded $4.7 billion in damages in favor of the plaintiffs; however, the judge set aside the jury verdict citing flaws in the testimony of the plaintiffs’ two damages expert witnesses. The judge excluded the expert testimony after both the trial and jury award, due to flaws in their methodologies that were not identified until cross-examination.

• In the Missouri breach of contract case Bextermueller News Distributors, Inc. et al v. Lee Enterprises, Inc. et al., the expert testimony was excluded since the approach would put the plaintiff “in a better position than they would have been in if there had been no breach—an approach expressly prohibited under Missouri contract law.” The court cited Federal Rule of Evidence 702 numerous times in the opinion.

• Lastly, in the Illinois breach of warranty case Motobilt, Inc. v. Bystronic, Inc. et al, the expert was excluded before even testifying. When a fraud examiner was hired to calculate damages relating to the value of industrial equipment, the defendant’s motion to exclude the expert’s testimony was granted under Rule 702 as the plaintiff did not show that the expert was qualified to offer the expected testimony.

As the standards for admitting expert testimony tighten, it is increasingly important for accountants who serve as expert witnesses to stay informed. Recent developments emphasize the courts role as the gatekeeper and for the necessity of experts to have applicable relevant qualifications and sound methodologies.