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)

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