#19 Lessons from the Courtroom – Reliance on Third Party Information

As business valuation and forensic accountants expert’s, during the course of an engagement, we (almost) always encounter issues ‘outside’ of our area of expertise, for example:

• the economic conditions affecting the mining services sector in 2012; or
• the commercial remuneration of a managing director of a business with a turnover of $25 million in the temporary employment industry; or
• the appropriate market rental return expected on rural farmland.

So as Experts, in lieu of instructed assumptions regarding these matters, we have relied on publically available or easily accessible ‘market data’ to assist in the composition of our Expert report and the ultimate conclusion.

Where is this ‘third party information’ sourced from?

(For whats it's worth), there wouldn’t be a week that goes by where I am not on the IBISWorld website researching a particular industry to ascertain the current and forecast economic analysis to assist in my understanding of the subject business.

Other sources that I commonly use include:

• Salary Surveys produced by organisations such as HAYS, ?Australian Institute of Management;
• Macro-economic data and monetary policy information from the Reserve Bank of Australia and Australian Bureau of Statistics; and
• Industry-specific information published by industry bodies such as the HIA and Pharmacy Guild of Australia.

BUT, how does the Court feel about this?

In two recent judgments (interestingly both in the QSC) the reliance by forensic accountants (and by extension, other experts) has been brought into questioning.

Set out below are relevant extracts from the two judgments:

Re Earlturn Pty Ltd?[2021] QSC 137 (https://jade.io/article/818110)

The present tension is in part whether the sources of data authored by others were within Mr Goggin’s field of expertise.?

It may be accepted some degree of divergence in the fields of expertise as between the expert witness and the source author will not be fatal.?There are after all, subsets of expertise within fields, just as there can sometimes be multi-disciplinary teams of experts drawn from different fields who, collaboratively, author publications.?An example of the latter encountered from time to time in personal injury cases, is actuaries working in tandem with medical experts to generate articles about the impact on life expectancy of certain injuries.?

Where there is some divergence, it is logically necessary to consider whether the nature or degree of overlap between the fields under consideration is such that the expert witness’s expertise equips the witness to know the trustworthiness of the source and comprehend the source’s methodology and data, including its reliability.?If the relevant expertise does not so equip the witness, the exercise would not have the characteristic of accepted methods of professional work, and would be no different from a lay person impermissibly alleging some facts which he or she has learned of by reading of them in some publication.?

In the present case, there was a marked difference regarding this quality in Mr Goggin’s testimony about the IBIS report, as compared to his testimony about the Payscale.com information.?In summary, it was just present in respect of the IBIS report but not present at all in respect of the Payscale.com information.?

Mr Goggin is an experienced professional accountant with expertise in forensic accounting.?His expertise renders his forensic findings based directly upon the company’s financial information admissible.?Those findings, though, relate to the uncontroversial first aspect of each of his ultimate conclusions.?His expertise as relevant to the second aspect in each instance, by which he adopted the IBIS report and the Payscale.com information, appears to be his expertise in business valuations, business restructuring and turn-around management referred to in his summary of expertise in annexure 1 to his report.?That is a range of expertise as to the financial health of companies, described by Austin J in?ASIC v Rich?(2005) 190 FLR 242?[278] as a broader field of expertise in accountancy and auditing.

One can readily understand that Mr Goggin’s knowledge and understanding of data of the kind referred to in both external sources at issue here, would be integral to his application of his expertise to the topic of the financial health of companies, and equip him to comprehend it and assess its reliability and the trustworthiness of its source in a way readily distinguishable from mere lay reliance on a publication.?

That reasonable inference gives good reason for adopting a liberal attitude toward admissibility here.?Mr Goggin described the IBIS reports as industry benchmark reports commonly used, not merely by him, but by lots of other forensic accountants.?Implicit in this is comprehension of the trustworthiness of the source and reliability of its data.?The respondent’s counsel submitted the evidence fell short, beyond satisfying the subjective requirement in Mr Goggin’s view, of the trustworthiness of the source.?The objective test was described in the following way in another passage from Wigmore, cited in?Borowski v Quayle?at?388:

“There is an objective test, in that the habitual use of the work by the trade or profession has tested its usual and practical accuracy and has sanctioned its trustworthiness.”?

I infer on the balance of probabilities, from Mr Goggin’s reference to the use of IBIS reports by his fellow professionals, that those in his field do sanction the trustworthiness of IBIS reports.?I would also infer Mr Goggin comprehends the IBIS reports’ methodology, more readily drawing that inference because the report itself contains comprehensive analytical detail in stark contrast with the spartan information in the Payscale.com document.?

In further stark contrast, the high point of Mr Goggin’s testimony about Payscale.com was that he used it as a source in his work.?He is unaware of it being used by others in his field.?He seemed unaware of Payscale.com’s methodology, merely observing, in effect, that they do their own research and settle on their own benchmark figures.?His response to a question about Payscale.com’s reliability as a source went to its use and was unresponsive as to its reliability.?

In light of the extent of these evidentiary shortcomings, I am unwilling to bridge them by inference.?Payscale.com may well be a handy desktop tool, but the evidence does not support the conclusion that Mr Goggin’s comprehension of the Payscale.com information, distinguishes his reliance on it as being any different from a mere lay person’s reliance on it.?The Payscale.com information is not an admissible basis for Mr Goggin’s adoption of the hourly rate relied upon to in turn, opine the salaries exceeded what would be expected in the industry.?That adoption and opinion in the report occurs in paragraphs 7.13 to 7.17 inclusive, and 8.6.?I, accordingly, strike out and disregard those paragraphs.?

For the reasons I have given, and while the issue is very finely balanced, I am, in the end, satisfied Mr Goggin’s reliance on the IBIS report does meet the basis rule.?That finding does not, of course, preclude challenge to the weight to be given to the evidence about an opinion premised upon the IBIS report.?

Another more specific basis submitted for exclusion in respect of the IBIS report, was that it contains inadequate information to allow its meaning to be determined.?The issue, in effect, is whether its content is sufficient to allow Mr Goggin to adequately comprehend it and he was not cross-examined on voir dire about that.?I have already observed the report’s substantial detail bolsters the inference of Mr Goggin’s comprehension of its methodology.?Mr Goggin can, of course, be tested in cross-examination about this issue, which may well undermine the weight to be given to his evidence.?However, I reject the submission insofar as it goes to the issue of admissibility.?

Kate Ann Sutton v Lauren Nicole Hunter?[2021] QSC 249 (https://jade.io/article/840938)

Third, the basis for the salary ranges assessed by Vincents are?Hays?Salary Surveys, IML Salary Surveys and Australian Tax Office statistics. Those surveys are not proved or in evidence. No person attested to their accuracy; not even Vincents. The Vincents report merely attached extracts.?Thus, the veracity of the surveys is unknown. [80]

Counsel for Ms Sutton expressed surprise that I was unaware of the existence of the?Hays?Salary Survey.[95]?Even in the absence of that (admitted) ignorance, it is difficult to see how the Court can accept the survey extracts as an evidentiary foundation for Vincents’ opinions. It was not contended that, despite my ignorance, judicial notice ought to be taken of the surveys. And, of course, the most troubled debate in the context of the ‘basis rule’ has been whether and when the Court should accept survey evidence. [81]

….

Tender of the?Hays?Survey

As a fallback, counsel for Ms Sutton sought to tender the?Hays?Survey (called the FY 2019/20?Hays?Salary Guide).?After argument, I refused the tender of that document on the basis that it was inadmissible. [86]

So what does this all mean?

Well, the Court is telling us two key points in relation to the reliance by Experts on ‘third party information:

• the Expert MUST be able to adequately describe how the data has been complied; AND
• the Expert must be able to attest that the information is commonly used by other Experts.

Personally, I think the Court’s reminder is prudent. As Experts, we cannot simply blindly rely on ‘third party information, we must do our own due diligence as to its reliability as it does provide a key pillar in our conclusion.

For more information on the services the Forensic consulting team at Grant Thornton Australia provide to family and commercial lawyers, please contact myself or your local contact.