Expert witness | Adding value to forensic accounting

As a partner in the valuations team at PwC, focused on matrimonial and private client disputes, I have seen the role of and need for accountants grow significantly over the last five years and believe there will be much more change to come.

While the landmark case of shifted the emphasis of the accountant’s role in matrimonial disputes towards the value of the matrimonial assets, rather than the financial needs of husband or wife, it was perhaps the Charman v Charman Judgment [2006] EWHC 1879 (Fam) which emphasised a growing requirement for matrimonial valuations to be commercial and to reflect reality, as compared to a more hypothetical or text book approach: “Where for instance a case proceeds on the basis that a sale at less than true market value is inevitable to satisfy a likely court order then discounts at high levels are often appropriate. But where a sale can be avoided or delayed to enable full value to be extracted over a reasonable time that too must, in fairness, be properly reflected in valuation.”

The judgement continued: “Exactly the same kind of considerations apply when looking e.g. at discounts for valuation of minority interest in private companies. Sometimes they apply, sometimes, especially in family situations, they do not...”

Since that case, I have seen increasing demand for specialist valuation services, sometimes combined with asset tracing and tax expertise, rather than the more general accounting advice that was previously relied on. What is the difference?

Specialist valuers may bring industry expertise (for example, hedge fund or care home valuation experience) and will usually be conducting valuations for other, commercial purposes – such as for restructurings or deals – as part of their day job and can therefore bring current and commercial valuation thinking and experience to the divorce issue. This specialist experience is also useful when considering liquidity – Understanding the latest views by banks on debt financing, and private equity houses on hurdle rates, can quickly bring a reality check to the matrimonial dispute

Five years ago, PwC didn’t have a focus on matrimonial disputes. However, the complexity and size of the cases, in addition to the court’s emphasis on experts being commercial and practical, has resulted in our core team of valuation, tax and asset tracing/forensic specialists now comprising over 15 senior individuals, with the majority of my client time focused on this area.

Sole and single joint experts

In addition to the expert’s role becoming more specialist and commercial, and some cases needing multiple experts to properly deal with the different technical issues that arise in a particular case (for example, separate valuation and tax experts), matrimonial valuation experts now need to be skilled in both sole expert and single joint expert (SJE) roles.

In both scenarios the expert has an overriding duty to the court to be objective and independent and therefore – in theory – the valuation conclusions reached should be consistent in either case. However from a practical perspective there are significant differences for the expert that impact on his/her role and the way the case is managed.

For example, in my experience, a sole expert role enables the valuer to better understand the background and context to the case and how it is being run from a legal perspective, it also facilitates closer working with the legal team and husband or wife. If acting as a sole expert for the party who owns the business assets or works in the business, there is significant interaction with that party in order to properly understand the business – its financial metrics, outlook, attractiveness to a third party and the role of the owner within the organisation – and in relation to the flow of information. The expert must then look at this information objectively to ensure they give a balanced and fair view taking into account that they have only heard one side of the story (albeit that down the line it is likely an opposing expert will be appointed and differing views held and heard). Working effectively with the opposing expert and ensuring consistent instructions is also fundamental for a sole expert. I recently worked on a case involving care home businesses where expert evidence was served sequentially, which meant that the experts were each adopting different valuation dates and using different sets of financial information. Trying to define the real issues in the meeting of experts was a real challenge.
When acting as a single joint expert, the process tends to be more formalised and there is less opportunity to understand the wider aspects of the case, as the expert is given very specific instructions and there is a framework in place to ensure that the expert’s communications with the parties is controlled and transparent. The single joint expert role is quite similar to the expert determination role typically undertaken by valuation or forensic specialists (for example, to fulfil requirements of articles of association when a departing employee must sell his shares back to a company). In both cases, the valuation conclusion is of course the most important outcome, but it is the process and way in which the expert conducts him or herself which sets the tone. My approach is to ensure that both sides have been heard and my role and involvement has been transparent. While the parties may not agree with the outcome (and indeed, as a single joint expert, often the right outcome is achieved if both sides feel mildly disappointed), husband and wife feel that they have been listened to and their views incorporated into the conclusion and therefore are more willing to accept the conclusion.

Do I have a preference for a sole expert or SJE role? Not really. Each has their own benefits and draw backs, and for the right cases can help to achieve an efficient and expedient way of resolving valuation, liquidity and tax issues. While we are certainly undertaking more SJE roles than ever before (and expert determination roles in a commercial context), it is good for the expert to have a balance as the roles draw upon different skills and generate different types of relationships with clients.

Evolution of the role

Finally, Prest v Prest [2012] EWCA Civ 325 and Law Commission review are expanding the expert’s role from applying more traditional valuation techniques and giving rise to opportunities for experts to be engaged at different points in the matrimonial lifecycle.

For example, with pre-nups gaining increased prominence and effect, I can envisage the situation where valuers are appointed to assign values in pre- and post-nuptial agreements, thereby helping solicitors and clients to reliably establish the starting points for the values of business assets at the beginning of the marriage. Alternatively, Prest v Prest may give rise to valuers and tax advisers being appointed to carefully structure personal tax affairs prior to marriage in order to facilitate a cleaner division of marital and non-marital assets and perhaps to try to protect business assets behind a corporate veil (it remains to be seen how courts view such structuring), should the marriage end.

One of the more difficult areas the Law Commission is seeking views on relates to non-matrimonial property – which is of particular significance for wealthier families where such assets are not always needed to meet requirements. One of the questions being asked is whether non-matrimonial property can ever become matrimonial – for example if it has increased in value because one or both spouses have worked in the family business. This is a difficult issue because the value of property, and in particular business assets, is not fixed. Value will vary over time, as a result of both active management such as investing time and money, which may generate active growth, as well as changes in wider market and economic conditions, which may generate passive growth. Identifying appropriate benchmarks (such as quoted market indices) to separate and assess active and passive growth is not straightforward as comparability is always debateable and reliable data is sometimes difficult to identify.

The core role of a financial expert in matrimonial proceedings is to produce objective and independent views on value, tax, liquidity and asset tracing issues and in recent times there has been a shift in emphasis to involve specialist input, whether that be as sole expert or single joint expert roles and covering technical or industry issues. There is an expectation the expert’s role will continue to expand as legislative changes take effect and husbands, wives and their solicitors navigate their way through the matrimonial legal process. As matrimonial experts, we look forward to the challenge.