Wednesday, November 28, 2012

Critiquing an Expert Report: Step 4 - Nature of the Opinion

You have finished researching the author’s credentials, checking for scope limitations and identifying the major and minor assumptions underlying the conclusions. 
The fourth step in reviewing an expert report involves considering the actual conclusion itself and seeking to ascertain whether it reflects an expert opinion or merely calculations based on representations provided by management.  The extent to which the expert has relied upon inputs from management for underlying assumptions will affect the report’s credibility and the extent to which it can be relied upon as expert evidence.
According to the Rules of Civil Procedure, it is an expert’s duty to:
  1. Provide opinion evidence that is fair, objective and non-partisan;
  2. Provide opinion evidence that is related only to matters that are within the expert’s area of expertise; and
  3. Provide such additional assistance as the court may reasonably require to determine a matter in issue.
Has this duty been fulfilled if the expert report is based on input assumptions provided by management?  Has the expert provided opinion evidence?  Has the expert been objective and non-partisan?  Has the expert provided evidence within his/her area of expertise?  Has the expert provided the court with additional assistance required to determine a matter in issue?
To address these questions while reviewing the report a list of the assumptions that have been based upon information provided by management should be created.  The greater the reliance on assumptions provided by management the greater the likelihood that the conclusion represents calculations as opposed to "opinion evidence".
On this issue, The Litigator’s Guide to Expert Witnesses states that it is important to identify the basis upon which the expert has undertaken his/her work and the way in which the resulting analysis and conclusions can be used. [1]
The nature of an expert’s opinion depends on whether it is based on:
  1. Facts and assumptions provided to the expert specifically for the purposes of calculation; or
  2. Facts and assumptions drawn from independent research.
In the first instance, the quality of the expert report would not be improved with independent research since the underlying assumptions are subject to proof by other experts or by the introduction of facts.  Accordingly, any opinion rendered can only relate to a calculation conclusion and not the reasonability of the financial information included in the calculation. 
The second instance requires the expert to perform independent research with respect to the quality of all information being used to arrive at an opinion.  The quality of this research will often be the deciding factor in the acceptance with which the expert’s opinion meets.
The above two scenarios represent the extremes.  In reality, many expert reports will be based on a combination of these situations.  An effective reviewer will be able to identify the assumptions that the expert should have corroborated with independent research but chose to rely on information provided by management.  The greater the number of these types of assumptions the greater the chances that the report provides calculations as opposed to independent expert opinion evidence that can assist the court.
1.  The Litigator’s Guide to Expert Witnesses, Mark J. Freiman and Mark L. Berenblut, 1997, pages 83 and 84.

      Friday, November 23, 2012

      Building a Business for a Successful Transition

      Recent studies show that 75% of boomers will exit their businesses within the next 10 years, 50% within 5 years.

      "According to CIBC, an estimated $1.9 trillion in business assets are poised to change hands in five years — the biggest transfer of Canadian business control on record." [1]

      The increasing supply of businesses for sale over this time period will put tremendous downward pressure on sale prices.
      More than half of small to medium-sized business owners in Canada do not have a succession plan and many more do not have one formalized.  Without a proper plan, business owners will find themselves selling at a significant discount to those that come to market prepared.
      Effective pre-sale planning involves preparing the business and the business owner for a sale or transition and will make the difference between selling for a discount or premium to average industry multiples.

      Whether business owners are planning an external sale or an internal transfer, building a business for a successful transition takes time and must begin 3 to 5 years in advance.
      A common goal amongst business owners is to maximize the net proceeds on sale.  In order to do so, a business owner must:
      a)   Maximize value/sale price; and
      b)   Minimize disposition costs (e.g. taxes, transaction costs and other liabilities).
      On December 4, 2012, we are hosting a morning session for business owners to provide vital information to assist with a) above. 
      Join us in Markham, ON, the morning of December 4, 2012 to learn valuable information needed to understand the critical aspects of valuation, value enhancement and pre-sale planning, as they relate to building a business for a successful transition.
      For further details and registration information, please visit us at
      Please pass this along to any business owner clients, colleagues or contacts you have.  They will thank you for it. 
      I look forward to seeing you there. 
      1. Ottawa Citizen, November 13, 2012

      Tuesday, November 20, 2012

      Critiquing an Expert Report: Step 3 - Assumptions

      The third and, in my view, most important step to critiquing an expert report involves identifying and assessing the reasonableness of the assumptions relied upon by the expert.  The extent to which the underlying assumptions are not reasonable and/or not supported can significantly impact the reliability of the findings.
      An expert report should identify the underlying assumptions.  In Canada, Chartered Business Valuators (CBVs) must follow CICBV Practice Standard 310 for Expert Reports which states,
      "At a minimum, all Expert Reports that will (or likely will) be disclosed publicly (e.g. in open court, in a prospectus, etc.) shall include the assumptions used and the procedures followed to determine the reasonableness and appropriateness of key assumptions." [1]
      While reviewing an expert report, key questions to consider regarding assumptions include:
      • Are they reasonable?
      • Are they supported by the facts of the case, independent research or third party evidence?
      • Are they within the expert’s area of expertise?
      These questions apply to many expert reports, including those that quantify economic damages in a civil or commercial dispute as well as those that include a business valuation in a shareholder or matrimonial dispute.
      Reviewing a complex technical expert report on damages or business valuation can be a daunting task.  There will likely be many minor assumptions and a few key major assumptions.  Major assumptions are those that, when altered, will alter the conclusions significantly.  Conversely, minor assumptions will have less of an impact on the conclusions when changed.  A list of the major and minor assumptions relied upon by the expert should be prepared while reviewing the expert report.
      In my experience, it is common to find fewer than 5 major assumptions underlying a damages calculation or business valuation.  The goal is to identify the key major assumptions and assess their reasonableness in light of the facts of the case and the independent research conducted by the expert to support those assumptions.  Where assumptions are found to be unreasonable or unsupportable, a sensitivity analysis should be performed to identify the impact on the conclusions of using more reasonable or supportable assumptions.
      Examples of major assumptions in a commercial dispute involving a lost profit claim include:
      • Volume and/or pricing assumptions with respect to the revenue projections;
      • Incremental direct cost assumptions and the resulting profit margin assumptions;
      • Time period assumption over which the lost profits have been calculated; and
      • Discount rate assumption which has been applied to present value the future lost profits.
      I was asked to review an expert report on damages in a breach of tender matter involving a school board and one of its suppliers.  The supplier was not selected as the winning bidder and sued for lost profits.  The plaintiff’s expert quantified lost profits based on the estimated volumes in the original tender bid and did not consider the fact that: a) the actual volumes awarded to the successful bidder were much lower; and b) the school board was not obliged to order the quantities indicated in the original tender. 
      Our responding report identified this, among other things, as a major concern.  This case never proceeded to trial as the parties ended up settling for much less than the plaintiff’s expert’s assessment.
      In another matter, I was retained to review and critique the plaintiff’s expert report in an estate litigation involving a business valuation and damages quantification.  Ultimately, I presented expert evidence in Court on, among other things, the opposing expert’s underlying assumptions.  This is noteworthy because the plaintiff’s claim was dismissed with the Judge indicating in the Reasons for Judgment that:
      "There are a considerable number of assumptions made by the plaintiff’s expert that I do not accept as being reasonable." [2]
      Both of these cases illustrate the importance of reasonable and supportable assumptions underlying the conclusions contained in an expert report.  In my view, being able to identify and assess the major assumptions in an expert report is the most important factor in effectively critiquing an expert report.
      The fourth step, to be discussed next week, involves assessing the extent to which the actual conclusion contained in the expert report represents an expert opinion or simply calculations based upon management representations.
      1.  CICBV Practice Standard No. 310 – Report Disclosure Standards and Recommendations (Section 9.2)  (

      Wednesday, November 14, 2012

      Critiquing an Expert Report: Step 2 - Scope Limitations

      After checking the author’s credentials, the second step to critiquing an expert report involves identifying any major scope limitations, restrictions and qualifications rendered on the conclusions.  This will help ascertain whether or not sufficient work was conducted by the expert to support the conclusions arrived at.  The extent to which the expert’s scope of review has been restricted can seriously impact the reliability of the findings contained in the report.
      An expert report should explicitly identify any limitations in the author’s scope of review.  In Canada, Chartered Business Valuators (CBVs) must follow the Practice Standards of the CICBV for Expert Reports. Practice Standard 310 states,

      "The Expert Report shall contain a detailed scope of review that clearly identifies the specific information upon which the Expert relied to arrive at a conclusion.  Where the conclusion is qualified by a scope limitation, the limitation shall be explained, setting out the reasons for the limitation and disclosure of the potential impact on the Expert’s conclusion." [1]

      Some potential scope limitations to be mindful of while reviewing an expert report include:
      • Not having access to relevant information or key documentation; 
      • Not being permitted to interview key individuals;
      • Not conducting a site visit or a tour of the company’s operating facilities;
      • Not relying upon other specialists outside the author’s area of expertise (e.g. real estate appraiser, machinery and equipment appraiser, economist, market research specialist, etc.); and
      • Not having reliable financial information (e.g. financial statements prepared internally by management and not audited or reviewed by an external accountant).
      Where do you find scope limitations in an expert report?
      Scope limitations should be separately identified in the expert report and may be set out in one of the following sections of the report:
      • Scope of Review & Limitations
      • Restrictions & Qualifications
      • Conclusion (e.g. immediately preceding or after the conclusions)
      • Methodology or Approach to Quantification (e.g. within the section that explains the procedures undertaken to quantify the damages)
      Limitations in the scope of an expert’s review can negatively impact the quality and reliability of that expert’s findings.  Scope limitations are generally easy to spot as there is typically a section in the report designated for their identification.  Occasionally a scope limitation may not be explicitly highlighted in the report.  It may, however, be alluded to where the calculations are being explained or in the notes to the schedules where the calculations themselves are contained.  It is, therefore, worthwhile to scrutinize the report for any indication that the author was limited in his/her scope of review and question what impact that limitation may have had on the conclusions contained therein.
      Next week we discuss the third, and by far the most important, step in critiquing an expert report… Identifying the Underlying Assumptions.
      1.  CICBV Practice Standard No. 310 – Report Disclosure Standards and Recommendations (Section 8)

      Thursday, November 08, 2012

      Critiquing an Expert Report: Step 1 - Credentials

      The first step to critiquing an expert report on damages involves reviewing the author’s credentials and qualifications.

      The Rules of Civil Procedure stipulate that it is the expert’s duty to provide opinion evidence that is related only to matters that are within the expert’s area of expertise.  It therefore makes sense to conduct a thorough review of the expert’s area of expertise.  I suggest obtaining and reviewing the author’s curriculum vitae, or CV, which should be attached to the report as an exhibit.

      According to The Litigator’s Guide to Expert Witnesses,
      "A critical review of the opposing expert’s resume is the most often overlooked but wonderfully useful source of cross-examination ammunition.  An expert may have carefully reviewed the available information, critically reviewed the literature in the area, meticulously arrived at his opinion and artfully drawn his conclusions, but if he padded or fudged his resume he will be destroyed on cross examination." [1]

      A summary of some questions to consider while reviewing the author’s CV is as follows:
      1. What training and education has the author obtained?  What professional designation(s) does the author have (e.g. CA, CBV, IFA, etc.)?  
      2. What professional standards must be followed in light of those professional designation(s)?  For example, Chartered Business Valuators (CBVs) are required to follow the professional standards of the CICBV for Expert Reports (
      3. What experience does the author have?  Does it include loss quantification, valuation, accounting, statistics, industry, etc.
      4. Has the author provided expert testimony before?  If so, what was the outcome?
      5. What publications and/or speaking engagements has the author prepared/presented?  Are there any inconsistencies between his/her present opinion and those prior writings?
      I was once retained by the defendant in a breach of tender matter (with respect to a construction project) to review the plaintiff’s expert report with respect to a claim for lost profits. The plaintiff’s expert report was prepared by a Chartered Accountant that did not appear to have any specific training or experience with loss quantification.
      The plaintiff’s expert report quantified lost revenues as a result of the breach but did not take into account a profit margin on the revenues.  As a result, the costs that would have been incurred to generate the lost revenues were disregarded.  This was a serious deficiency which led to a significant overstatement of damages.  Our responding report highlighted this as one of our major concerns with the conclusions contained in the plaintiff’s expert report.

      I suspect that the lack of training and experience in damage quantification may have contributed to the quality of this expert report, including the reasonableness of its findings.  This case never did proceed to trial as the parties ended up settling the matter out of court for much less than the plaintiff expert’s assessment.  However, this case illustrated the importance of reviewing the author’s credentials and qualifications in critiquing an expert report.
      1.   The Litigator's Guide to Expert Witnesses, Mark J. Freiman and Mark L. Berenblut, 1997, page 41.