The role of forensic accountants in international arbitration

We all understand the role of lawyers in an arbitration, to argue over points of liability and who was at fault. But most commercial cases are brought because one or more parties has suffered financial loss, so the ‘quantum’ issues are central to most arbitrations and need to be considered together with liability from the very start.

For a century now, lawyers have played the pivotal role in arbitrations conducted under the auspices of the International Court of Arbitration of the International Chamber of Commerce (“ICC Court”) . However, the landscape has evolved over the past years, with the emergence of forensic accountants over the last 25 years working with legal teams as expert witnesses, sometimes investigating financial details to pinpoint irregularities and wrongdoing, and often helping to calculate the quantum of losses.

Their contribution can be critical to an arbitration process reaching a just conclusion. Parties in international arbitration routinely engage forensic accountants to untangle financial intricacies and provide crucial insights for the decision-makers, adding significant value.

Such is their specialisation, the ICC International Centre for ADR as a leader in best practice dispute resolution globally, may be called on to propose forensic accountants as experts to assist parties or arbitrators during an arbitration, as a neutral to facilitate negotiations or even as an expert/neutral in expertise or early neutral evaluation proceedings.

There are two main parts to the role of a forensic accountant acting as an expert witness in arbitrations. One is to be, in essence, a ‘financial detective’, meticulously examining financial records and transaction documentation to uncover irregularities, discrepancies, and instances of fraud. The other is to quantify the losses suffered as a result of an alleged breach.

The basic principle underlying loss quantification is that an award of damages should, as far as money is able, restore the claimant to the same financial position they would have been in, but for the wrongful act. A forensic accountant can provide invaluable assistance to an arbitral court in loss quantification, by leveraging their experience in financial analysis, investigations, valuations and knowledge of the relevant industry.

Qualities and Skills Required of a Forensic Accountant as an Expert Witness

Three broad areas of qualities and skills are key to acting as an expert witness: independence, technical capability and the ability to communicate well.

Independence

In the context of an arbitration, whether the expert is party-appointed, jointly-appointed, or tribunal-appointed, the overarching duty of an expert witness is to assist the tribunal by providing independent evidence in the form of opinions that are within their expertise.

In practice, this means that the objective of an expert’s evidence is not to present the most favourable case for the instructing party, but instead to present, within their expertise, objective opinions based on the information and evidence available, and within the boundaries of instructions on matters of fact and law.

 Technical capabilities

For a loss quantification expert, a deep understanding of financial reporting and auditing standards, valuation methods and standards, as well as business strategy and relevant financial regulations, are essential. These proficiencies should form the basis for the expert evidence produced.

Disputes can often involve a high degree of complexity. There could be multiple grounds for claims, including but not limited to: breach of contract, illegal expropriation of assets, negligence, or infringement of intellectual property rights. In arguing about the quantum of damages, each party to a dispute may put forward a significantly different scenario both as to the nature of the alleged wrongdoing, and as to what would have happened but for the alleged wrong(s).

To the extent that it is within their expertise, a forensic accountant quantifying losses may need to assess the credibility of these scenarios in light of the evidence available, for example as regards commercial relationships, macroeconomic conditions, and the actions of the parties to the dispute and third parties at various points in time. This assessment often takes place against a rich factual background.

It is also vital that an expert witness knows where the appropriate boundary of their evidence lies, clearly sets that out in their evidence, and takes care to stay within the scope of their mandate. For example:

• They should only provide evidence within their own area of expertise. Where an important input to their assessment requires knowledge of a different area of expertise, it is common for loss quantification experts to rely on the evidence of other subject matter experts, or instructions from the party they are working with, to inform the inputs required for their assessment.
• They should follow standard investigation, accounting or valuation approaches as defined by for example any regulatory guidance, various industry bodies, and valuation standards.
• Their work should align with the legal and contractual framework relevant to the dispute. Consequently, an expert will need to understand legal and contractual provisions that are relevant to their work (for example, the correct interpretation of a ‘put option’ clause within a shareholders’ agreement). As the interpretation of such provisions is typically a matter of law, an expert should seek instructions from counsel / their instructing solicitors in this regard.

Communication skills

 Because of the complexities described above, it is important that the expert can articulate their findings, first to the instructing counsel and party, and then to tribunal members – who are mostly trained and experienced legal professionals, but often do not possess the same degree of technical understanding in financial matters or experience in loss quantification as the expert.

At a high level, there are two important means by which an expert communicates their evidence:

• Expert reports. These should be complete, clear and concise, with important matters sufficiently explained and evidence adequately referenced. This requires skilful
• Oral testimony. This requires effective verbal communication of the expert’s findings to the tribunal, counsel and other stakeholders, to ensure their analyses, assumptions, and calculations are properly understood and considered in the process.

Conclusion

The role of a forensic accountant in arbitrations, particularly as an expert witness, is in many cases indispensable to the pursuit of justice. Their expertise in unravelling financial complexities, coupled with proficiency in presenting their findings, help different stakeholders in a dispute resolution process make informed decisions.

The combination of analytic and communication skills, the need to work to often-changing and fast-moving deadlines, and to withstand robust challenge from opposing parties and experts, makes the discipline of forensic accounting demanding. For professionals who enjoy a challenge and working to the highest standards, it can provide a fascinating and varied career. And expert witnesses with the skillset add significant value to arbitrations.

James Nicholson is the  former President of the Standing Committee of the ICC’s International Centre for Alternative Dispute Resolution (ADR). Yaoguo Lun and Zhang Zhang work for FTI Consulting Singapore.