Accounting evidence can be either:
(a) Factual evidence; and/or
(b) Opinion evidence.
Evidence which is not opinion evidence
In Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd [2011] FCAFC 55 (20.04.11), a unanimous decision of the Federal Court consisting of Keane CJ, Lander and Besanko JJ stated that:
“203. The exercise carried out by Mr Acton is often carried out by expert forensic accountants who identify the financial documents which are relevant to the inquiry. To the extent necessary, the documents are explained including their contents in order that the Court can understand the company’s business. They are often explained to establish some trend in the company’s business activities both before and after the cause of action arose. The Court could carry out the inquiry for itself. It could have regard to the underlying source documents and construct for itself the trends upon which reliance is put. However, the practice is to have forensic experts carry out the exercise in advance of the hearing in order to save the Court the time and trouble of the exercise. It is an appropriate way of presenting evidence relating to the financial affairs of a company which claims to have suffered a loss. Their evidence assists a Court in understanding transactions which involve complex accounting treatments. The evidence is a summary of the financial records of the company and admissible: Potts v Miller [1940] HCA 43 ; (1940) 64 CLR 282 per Dixon J at 302-303. It is not opinion evidence at all. It is a summary of the company’s financial records.
204. In Australian Securities and Investments Commission v Rich [2005] NSWSC 149 ; (2005) 53 ACSR 110 , Austin J when speaking of forensic accountants said at [272]:
‘It seems to me that some of the work of a forensic accountant is to be treated as admissible in the same fashion as scientific facts. Suppose the report of a forensic accountant contains a complex financial calculation. The result of the calculation is not an opinion because, if the calculation is done correctly and the financial records from which it has been derived are proven, it is true as an analytic mathematical proposition without reliance on any inferences or questions of judgment. The expert’s work is mathematical and analytical rather than based on scientific observation, but in both cases there is a factual conclusion, admissible as evidence of fact, derived from the application of specialised knowledge.’”
In Potts v Miller (1940) 64 CLR 282 at 303, Dixon J states that when:
“Books are allowed in evidence or their production is not insisted upon, an accountant’s statement of the result of his examination is receivable as the evidence of a person of skill”.
In ASIC v Rich [2005] NSWSC 149, Austin J stated that:
“What the accountant is permitted to do, according to Street CJ in Lakeman v Finlay (1959) 59 SR(NSW) 5, at 7, is to ‘summarise and give his opinion as to the trading results or financial results disclosed by the figures contained in the books which are in evidence’. In R v Hally [1962] Qd R 214, at 228, Gibbs J said the accountant who has examined ‘books and accounts’ could give evidence of ‘the effect of their contents’. In Re Montecantini’s Patent (1973) 47 ALJR 161, at 169, he said that when books are produced, the accountant may ‘state their general effect’.”
Austin J in ASIC v Rich referred to the requirement of “specialised knowledge”. The Common Law and s.79 of the Uniform Evidence Legislation which is applicable to the Commonwealth and New South Wales, Tasmania, Victoria and the Australian Capital Territory and Norfolk Island has adopted a test of whether “the subject matter of inquiry is such that inexperienced persons are unlikely to prove capable of forming a correct judgement upon it without such assistance. (Refer Clark v Ryan (1960) 103 CLR 486 at 491)
At paragraphs 277 and 278 of ASIC v Rich, Austin J stated that:
“277. Obviously accountancy and auditing are fields of expertise (cf S Adrogue and A Ratcliff, ‘Kicking the Tires after Kumho: The Bottom Line on Admitting Financial Expert Testimony’ (2000) 37 Houston Law Rev 431, at 477), but there is also, in my opinion, a field of expertise that extends further into the interpretation and analysis of complex financial information, going beyond the preparation and auditing of financial statements. It is a broader field of expertise, relating to the assessment of the financial health of a business enterprise. Thus, in Quick v Stoland, Branson J recognised that a qualified accountant who is also an insolvency practitioner may have a field of specialised knowledge which goes beyond accountancy. She said (at 375):
‘Corporate accounts, and corporate accounting practices, have become increasingly complex. I consider that it is generally recognised that persons with training, study and experience of the kinds enjoyed by Mr Madden possess peculiar skills in an area in which ‘inexperienced persons are unlikely to prove capable of forming a correct judgment upon it without such assistance’ [citing JW Smith’s notes to Carter v Boehm].’
278. This broader field of expertise, generally relating to understanding the financial health of a business enterprise, is the realm of forensic accountants. It has been said that ‘their role is really to assist the court to understand the financial information, using their skills to organise, display and communicate financial information’ (J Gibson, ‘Forensic Accountants Getting the Scent’ (1993) 28 Australian Lawyer 40, at 41), or to ‘help explain complex financial and accounting issues raised in criminal and civil proceedings’ (D van Homrigh and M Garnett, ‘Forensics’ New Bloodless Hounds’ (2001) 21 Proctor 16, at 17). Thus, in modern litigation forensic accounting evidence is admitted to assist, not only in determining the state of insolvency of the company at the particular time as in Quick v Stoland, but in a variety of other broadly similar financial tasks, exemplified from Australian cases decided in the recent past as follows:· calculation of present or future economic loss (eg Rigney v Browne [2004] QSC 265, Dallas v P & M Denton Building and Constructions Pty Ltd [2003] NSWSC 833);· quantification of loss of earning capacity (eg Fail v Hutton [2004] QCA 61);· quantifying profit or calculating loss of profit (eg Fidgeon v Westpac Banking Corporation [2002] VSC 85, Hartglen Pty Ltd v Geoff Mitchell & Associates Pty Ltd [2004] QSC 67);· business valuation or the calculation of a partnership share (South Australian River Fishery Association v South Australia [2003] SASC 38; (2003) 84 SASR 507, Fagenblat v FGT Custodians Pty Ltd [2004] VSC 196); and· a variety of other financial work such as calculating an amount owing (Magill v National Australia Bank Ltd [2001] NSWCA 221), or quantifying amounts allegedly stolen (Idea Technology Services Pty Ltd v Nguyen [2002] QSC 432), or quantifying unexplained income (R v Donovan Kimball Christie [2003] QCA 413).
…
310. These observations seem to envisage a straightforward summary of the financial evidence, rather than an elaborate analysis. Thus, Young J, writing extra-curially, referred to an ‘expert summary of books and financial records’ [emphasis supplied]: ‘Practical Evidence — Affidavits – Part II’ (1982) 66 ALJ 298. In Spassked Pty Ltd v Federal Commissioner of Taxation (No 2) [2002] FCA 489; (2002) 49 ATR 642, at [13]-[14] Lindgren J referred to Potts v Miller as permitting the accountant who has inspected financial records to ‘summarise their effect’ in evidence. So far as one can tell from the law reports, the evidence to which the older cases was directed was not the kind of elaborate analytical report that is under consideration the present case.
311. One can understand that where the accountant’s evidence is understood to be merely a summary of books and records which have been produced or identified, elaborate reasoning will be unnecessary and there will be no practical issue as to the identification of the assumed facts, because it’s books and records will be identified. It is therefore not surprising that the older cases assert, without qualification, that the accountant’s summary of the books and records is admissible. That is not to say that accountants’ reports are exempt from the general principles as to admissible expert opinion evidence. Rather, the point is that compliance with the general principles will be obvious or can be readily established. As Giles JA said in Adler v ASIC (2003) 179 FLR 1, at [631], what is required by way of the explanation of which Heydon JA in Makita will depend on the circumstances. Thus (at [632]):
‘A solicitor shown to have specialised knowledge of conveyancing practice can give opinion evidence of general conveyancing practice without spelling out links between his training, study and experience and his opinion. The links are apparent from the nature of the specialised knowledge.’
Similarly an accountant can give evidence summarising books and records of a business enterprise without having to spell out the link between his or her opinions and specialised knowledge.”
Specialised knowledge is not normally required for a judge to read financial statements. Refer ASIC v Rich para 280; Quick v Stoland 87 FCR 379 per Emmett J and Switz Pty Ltd v Glowbind Pty Ltd (1999) NSWSC 1296 at 35. In ASIC v Rich, Austin J stated at para 284:
“284. In Switz Pty Ltd v Glowbind Pty Ltd [1999] NSWSC 1296, at [35], I drew from Quick v Stoland the proposition that if there is evidence in the form of financial statements which the court can read for itself, the opinion of an accountant based solely on those statements is not based on specialised knowledge for the purposes of s 79; but if the accountant’s report contains some financial analysis based on financial statements or accounting records, the accountant’s opinion is to that extent admissible as expert opinion evidence.”
In Quick v Stoland, Emmett J at 379 stated in relation to accounting evidence that:
“… could bring his or her specialised knowledge to bear on the analysis of accounting records, expected cash flows, liquid and realisable assets such as debtors and the like.”
Cross on evidence at (29020) states that:
“An expert can be called to carry out complex mathematical calculations.”
Many accountancy reports which are provided in actions for damages for personal injuries which purport to calculate past and future economic loss fall within this first category i.e. it is not opinion evidence. The reports usually provide a summary of past earnings, a calculation of tax rates, and assumptions are usually stated upon which an increase in earnings are based and various calculations performed.
Opinion evidence
“Opinion” means any inference drawn from observed facts (cross on evidence 29010); Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 5)(1996) 64 FCR 73 at 75 per Lindgren J; Quick v Stoland [1998] FCA 1200; Lithgow City Council v Jackson [2011] HCA 36.
The following conditions exist for the admissibility of expert evidence:
(a) There must be a field of specialised knowledge;
(b) There must be an identified aspect of that field in which the witness demonstrates that, by reason of specified training, study or experience, the witness has become an expert;
(c) The opinion proffered must be wholly or substantially based on the witness’s expert knowledge;
(d) So far as the opinion is based on facts “observed” by the expert, they must be identified and admissibly proved by the expert;
(e) So far as the opinion is based on assumed facts, they must be identified and proved in some other way;
(f) It must be established that the facts on which the opinion is based form a proper foundation for it;
(g) The opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached. That is, the expert’s evidence must explain how the field of specialised knowledge in which the witness is expert by reason of training, study or experience, and on which the opinion is wholly or substantially based, applies to the facts assumed or observed so as to produce the opinion propounded (refer cross on evidence at 29045 and Makita (Australia) Pty Ltd v Sprowles (2001) NSWCA 305 at [85]).
In ASIC v Rich, Austin J stated:
“312. The question of compliance with the general Makita requirements will come to prominence where the accountant’s evidence is more than a mere summary, and where the subject matter extends beyond a contained set of books and records. In such cases compliance with the general requirements will involve ‘questions of degree, requiring the exercise of judgment’ (Makita, at [87] per Heydon JA), remembering that the question under s 79 is whether the opinion is substantially based on the specialised knowledge and ‘absolute certainty … is not required’ (Adler, at [632] per Giles JA).”
In Quick v Stoland, Branson J at 375 stated that a statement by an accountant and insolvency practitioner made on the basis of an examination of financial accounts and other company records, that a particular company is or is not insolvent, is an expression of opinion rather than a statement of fact.
Does the factual basis of the accountancy report have to be proven?
There is difference in the approach by some of the State jurisdictions and the Federal Court.
In Makita (Australia) Pty Ltd v Sprowles, Heydon JA interpreted s.79 to require identification and proof of the factual basis of an opinion, and the exposure of the expert’s reasoning process in order to demonstrate that an opinion is based on specialised knowledge.
Other jurisdictions have held that the basis of an opinion is an issue which affects the opinion’s weight as distinct from its admissibility.
The High Court recently referred to but specially did not decide the applicability of the Common Law rule that opinion evidence is excluded unless the factual bases upon which the opinion is proffered are established by other evidence. (Refer Dasreef Pty Ltd v Hawchar [2011] 277 ALR 611, 622 [41] French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ.) This is known as the “basis rule”. However, the Court stated at paras 41 and 42:
“41. Contrary to submissions on behalf of Mr Hawchar, this analysis does not seek to introduce what has been called ‘the basis rule’: a rule by which opinion evidence is to be excluded unless the factual bases upon which the opinion is proffered are established by other evidence. Whether that rule formed part of the common law of evidence need not be examined. It may be accepted that the Law Reform Commission’s interim report on evidence denied the existence of such a common law rule and expressed the intention to refrain from including a basis rule in the legislation the Commission proposed and which was later enacted as the Evidence Act 1995 (Cth) and the Evidence Act 1995 (NSW). What has been called the basis rule is a rule directed to the facts of the particular case about which an expert is asked to proffer an opinion and the facts upon which the expert relies to form the opinion expressed. The point which is now made is a point about connecting the opinion expressed by a witness with the witness’s specialised knowledge based on training, study or experience.
42. A failure to demonstrate that an opinion expressed by a witness is based on the witness’s specialised knowledge based on training, study or experience is a matter that goes to the admissibility of the evidence, not its weight. …”
Experts can base their opinions on sources. (Refer Bodney v Bennell (2008) 167 FCR 84, 92-93.)
In an article titled “Admissibility of Expert Evidence: Proving the basis for an expert’s opinion”, Sydney Law Review 2011 Vol 33 427 at 432 the author lists several authorities which support the proposition that the basis rule exists as a rule of admissibility and other authorities which state that it is a matter of weight p.433.
The Australian Law Reform Commission (“the ALRC”) in recommending the Uniform Evidence Legislation noted that there was uncertainty whether the Common Law basis rule operated as a criterion of admissibility or merely of weight. The ALRC concluded that the better view was that there was no basis rule which operated as a rule of admissibility. The ALRC stated that:
“It is proposed to refrain from including a basis rule in the legislation, thus allowing opinion evidence whose basis is not proved by admitted evidence prima facie to be brought before the court. Under these circumstances the weight to be accorded to it will be left to be determined by the tribunal of fact.”
The Federal Court has not embraced Makita. Refer Sydneywide Distributors v Red Bull Australia (2002) 55 IPR 354 where the Court concluded that s.79 did not require the identification of the assumptions for an opinion, proof of the factual assumptions or the reasoning process to be exposed. Refer also Neowarra v Western Australia (2003) 134 FCR 208.
In Dasreef Pty Ltd v Hawchar (2011) 277 ALR 611 to 628 [62] the majority stated that:
“In order for Dr Basden to proffer an admissible opinion about the numerical or quantitative level of Mr Hawchar’s exposure to silica dust it would have been necessary for the party tendering his evidence to demonstrate first that Dr Basden had specialised knowledge based on his training, study or experience that permitted him to measure or estimate the amount of respirable silica to which a worker undertaking the relevant work would be exposed in the conditions in which the worker was undertaking the work. Secondly, it would have been necessary for the party tendering the evidence to demonstrate that the opinion which Dr Basden expressed about Mr Hawchar’s exposure was wholly or substantially based on that knowledge.”
At paragraph 32 the majority stated that s.79 required the two criteria, i.e.:
“The first is that the witness who gives the evidence ‘has specialised knowledge based on the person’s training, study or experience’; the second is that the opinion expressed in evidence by the witness ‘is wholly or substantially based on that knowledge’.”
Disclosure by the expert of his or her reasoning process
It is necessary for the expert to disclose the reasoning which led to the expert’s opinion. (Refer Makita at para 85.)
In Clowyn v Tameside Health Authority [1998] 2 ALL EN971 at 976-7, Bracewell J expressed the view that the information supplied to the expert should be disclosed “in order to ascertain whether all appropriate information was supplied and how the expert dealt with it”.
If the opinion is based on inadmissible evidence
In ASIC v Rich, Austin J stated:
“320. In its Interim Report No 26 (1985), Evidence (vol 1, para 161), the Australian Law Reform Commission described the status, at common law, of opinion evidence based on material that has not been admitted into evidence as ‘a matter of some controversy’. On one view of the common law, evidence of an expert’s opinions is inadmissible unless the assumed or accepted facts on which the opinions are based are proven, or at least are sufficiently like the proven or admitted facts (without precise correspondence) to make the opinions relevant and probative: Paric v John Holland Constructions Pty Ltd [1985] HCA 58; (1985) 59 ALJR 844, at 846 per Mason CJ, Wilson, Brennan, Deane and Dawson JJ. Another view is that proof of the assumed or accepted facts, or facts sufficiently like them, is not a prerequisite to admissibility but goes only to weight: Ramsay v Watson [1961] HCA 65; (1961) 108 CLR 642, at 649; see also Milirrpum v Nabalco Pty Ltd (1971) 17 FLR 141. The Commission described the former alternative as ‘the basis rule’.
321. The Commission concluded that the better view was that the basis rule does not exist, and the fact, if it be so, that the expert’s opinions do not have their basis in admitted evidence, goes to weight rather than admissibility: Report 26, vol 1, para 760. The focus of the Commission’s attention seems to have been the problem that if there is a basis rule, expert opinion evidence will be impossible where the basis of the opinion is the views and assistance given by other experts in the field: see Report 26, paras 362-3, 750. In other words, the problem upon which the Commission concentrated was the case where the basis for the expert’s opinion is hearsay. The Commission decided not to include a basis rule in its draft legislation, because such a rule would be too inflexible to take into account ‘the normal means by which experts generally form their opinion – by means of reports of technicians and assistants, consultation with colleagues and reliance on a host of extrinsic material and information that it would be an endless and unfruitful task with which to burden the courts’. The Commission decided to leave it to the courts to exercise a ‘relevance discretion’ to control the admissibility of expert opinion evidence based on hearsay material.”
In ASIC v Rich, Austin J stated:
“326. Where an expert’s opinion is based on a number of facts, some of which may be proven only by inadmissible evidence while others are amenable to proof in the ordinary manner, the position is more difficult. In Pownall v Conlan Management Pty Ltd, 16 ACSR at 233, Ipp J contemplated that in some cases it will be possible for the evidence to be trimmed, with the objectionable material being discarded so that the legitimate evidence remains. He added:
‘But there may be cases where the inadmissible and the admissible evidence is so intertwined that they cannot readily be separated. In such an event, the entire body of evidence will be rejected. The same result follows where it is not possible to say which of the evidence is admissible in which is not, or to what degree the witness has relied on inadmissible evidence.’”
John Kimmins
