By Kelly Wilbur, Esq.

Accountants often serve as expert witnesses.  Following is an example of a cross-examination of an accounting expert witness. This case involved an accounting expert testifying as in loan loss litigation resulting from the 2008 financial crisis and real estate development.  The accounting expert witness in the following sample transcript is cross examined on his assumptions, methodology, investigation, reliance on other experts and assignment.  Numerous hypothetical questions are posed to the accounting expert witness.

Example cross-examination of an accounting expert witness – nailing down issues the expert is not offering opinions in

Q. As I understood your testimony a minute ago, you were not engaged to develop an expert opinion as to whether any of the 23 loans in this case failed to meet minimal standards for prudent lending. Did I hear that right?

A. That’s correct.

Q. And so you wouldn’t have evaluated whether any of the 23 loans at issue in this case involved speculative land loans or land banking, for example; is that right?

A. That’s correct.

Q. So you didn’t evaluate whether any of these lenders – any of these developers at the time the loans were made were already facing a cash crunch or severe liquidity issues; is that a fair statement?

A. I think that’s a fair statement. That wasn’t my role. Although I did rely on the overall analyses by the OTS, by two different internal groups within Company I, and by external auditors that seemed to think that the asset quality was adequate or better. But you’re correct, I didn’t look at individual loans.

Q. So you can’t list for us which loans reflected developers who, at the time the loans were approved, had severe cash crunch and liquidity issues; is that a fair statement?

A. That’s correct. That would be other experts that studied that.

Q. Okay. You can’t identify whether any of these projects at the time the loans were approved were known to be near foul-smelling animal rendering plants, for example, can you?

A. I don’t know if that occurred, but that’s correct, that wasn’t part of my analysis.

Q. So you didn’t evaluate whether irresponsible loan approval set in motion a series of events that led to the losses on any particular loans, did you?

A. I did in an overall sense by comparing the different economic circumstances between the period when the loans were approved and when the losses occurred, but if you mean did I look at a specific loan, that was really other experts that studied that.


Example of Hypothetical Question asked on cross-examination of accounting expert witness

Q. Okay. So for specific loans, if the negligent — can you assume that the loan approval was negligent for any of these 23 loans?

A. Are you asking me to assume that?

Q. Yes.

A. Okay.

Q.So if you assume that the loan was negligently approved, can you rule out that the losses on a particular loan flowed from the negligent approval of that loan?

A. You can’t rule that out completely but you can look at what was happening before when the loan procedures were causing profits to be incurred and what was happening later when other economic circumstances were occurring.


Sample cross-examination of accounting expert witness – assumptions/investigation of the expert

Q. Okay. And we’ll get there. I understand you broke your work into looking at the — at least some information as to what defendants understood about the economics — economic environment at the time the loans were approved. Did I hear that right?

A. Yes.

Q. Okay. And so your first slide was this Slide 1; right?

A. Correct.

Q. So was your familiarity with the economic conditions for the markets in which these loans were made sufficient to tell us — I think you said on direct — I don’t want to misquote you — that there had been a rise in home prices during that period; is that right?

A. As a general proposition, that’s correct. Maybe not in every area, but as a general proposition in California and also in the nation, there was a general increase from the beginning of 2005 to the end of 2006.

Q. Right. You said real estate prices had gotten very high; right?

A. I think there were views that they had become very high because there had been a continual increase in home prices since the Great Depression.

Q. Well, that’s not — if you take out inflation, there had been ups-and-downs of home prices since the Great Depression; right?

A. There were some cycles within that, but I was talking about total home prices.

Q. Right. And this particular cycle was the longest upcycle not just since the great depression, but going back at least a hundred years. Did you understand that at the time you did your work in this case?

A. I didn’t study before the Great Depression, but I wouldn’t disagree with that.

Q. Okay. So is it fair to say that home prices during this period were going roughly in that direction and they’d been doing that for a number of years?

A. I think that’s a fair generalization, yes.

Q. But it wasn’t just that home prices were going up. They were going up relative to rents; isn’t that right?

A. You mean the cost of owning a home?

Q. Yes. Weren’t — wasn’t the cost of a home, home prices, going up far faster than the rate that rental rates for comparable properties were going up?

A. I think probably in many areas, that was true. Maybe not all areas.

Q. Right. And going up faster than incomes?

A. Again, in many areas, that was occurring and not in all areas.

Q. Right. And going up faster than construction costs?

A. I would say I agree with that.

Q. Right. And when those things happened, isn’t there a word for that? Some people call that an asset bubble?

A. Some refer to that as a bubble.

Q. Okay.

A. But as you can see, it was happening for a long time, and so along the way, people were saying hey, they’re going up. I wonder if they’re going to continue to go up. And I think that was a common theme that economists and people in the real estate industries had.

Q. Right. And bankers like Mr. K, the chief lending officer, when we got into this period here, was recognizing that this was near the end of the longest upcycle he’d ever seen. Have you heard that in the work you’ve done in this case?

A. I don’t know about the term the end of because I think other than it was softening, people weren’t sure exactly what was going to happen, but there’s no question that there was some questions about whether it was softening and whether it would continue in the future. And that’s what people are supposed to do, is identify and see if there is concerns and make decisions about should we keep loaning, how much and things like that.

Q. Right. They need to understand how big the bubble is rather than waiting for home prices to start declining; is that a fair statement?

A. I think that’s one of the things they would consider. They would have to make a determination about how do they manage their risk.


Cross-examination of an accounting expert witness – accounting expert’s reliance on other expert witnesses in the case

Q. And one of the things you looked at in this case was the expert report of Mr. B-E; is that right?

A. Briefly, yes.

Q. Okay. And you also looked at the expert report of someone called Mr. C; is that right?

A. I did. Again, I reviewed them for background information. I didn’t rely on them specifically for my analysis.

Q. Well, you actually cited Mr. C’s report in your report; correct?

A. Saying that he had come up with a consistent view, that’s correct.

Q. You cited his report in your report?

A. Yes.

Q. And your read his deposition?

A. I think I did, yes.

Q. Okay. Now, as I understand your testimony, it’s your view that for some or maybe all of the losses on these loans, it was the economic crisis that occurred later that caused the losses on these loans. Did I get that right?

A. I think it’s fair to say if you’re including in economic crisis the recession, the financial crisis, and the collapse in home prices.

Q. Right. Sir, was it part of your engagement to evaluate the reverse; that is, whether it was widespread negligent lending that caused in great part the financial crisis? Did you do that in the course of this engagement?

A. That was not my main focus. As I said, that was other experts. But I did look, as I said, at the OTS reports, the internal reports and the external auditor reports with respect to whether the loan underwriting process was adequate and also whether the asset quality was adequate.

Q. Well, when you read Mr. C’s deposition, did you take note that he had offered the opinion that the financial crisis was caused by the greed, short-term thinking and poor judgments of banking practitioners, sir?

A. I don’t recall reading anything significant about that or understanding what that discussion was about.

Q. I’m sorry. Do you deny reading that when you read Mr. C’s deposition or you just don’t remember?

A. No. I said I don’t recall understanding what that was about when I briefly reviewed his deposition.

Q. Okay. Did you bring his deposition with you today?

A. No.

Q. You didn’t read Mr. B’E’s deposition, did you?

A. I don’t recall reading his.

Q. Right. But you did read Mr. C’s deposition?

A. I think I briefly reviewed it, that’s correct.

Q. Would you be kind enough to put up Slide 2 from the presentation we heard. Just a couple questions on this slide, sir. First, you’d agree that the slide is somewhat misleading in terms of the magnitude of the losses compared to the magnitude of the net income; right?

A. I wouldn’t call it misleading. It is true that I used arrows to show that those red bars would go much lower than this chart, if that’s what you’re referring to.

Q. Right. And the reason the red bars would go much lower is because the losses included not just interest but a massive amount of a loss in principal that the developers did not repay on these loans; right?

A. Yes. When there’s losses on a loan, it includes loss of any interest that has been accrued and loss of the principal.

Q. Now, for the loans at issue in this case, you didn’t mean to suggest to the jury that within the loan term of 12 to 24 months that you would expect to see the developer failing to repay either interest or principal, did you?

A. I’m sorry. I don’t understand your question.

Q. Okay. You understood that for the loans at issue in this case, when the developer and the bank made that arrangement, the developer was not required to pay either interest or principal for the first 24 months of that loan.

A. In some cases that was true.

Q. Wasn’t that true in all cases, other than perhaps the N loan where there was a shorter time period?

A. I know there were some loans where that was not the case. I don’t recall how many.

Q. So weren’t the loans for which there was a two-year period where the interest and principal were not required to be paid by the developer out of his own pocket — wouldn’t that make those loans more like a two-year time bomb where the fuse would take two years to burn down?

Q. So for a construction loan, it’s correct, isn’t it, that part of the principal, if I’m a developer and I wanted to borrow a hundred dollars at ten percent, simple interest for two years, the principal loan amount would be about $120 and the $20 would be set aside to make interest payments on that loan during those two years; is that about right?

A. I think if — I’d look at it slightly differently. If you loaned money and didn’t make payments right away, it’s called accrued interest and it would increase your balance, just like if you didn’t make a payment on your mortgage or credit card. And I do know there’s about $16 million in the losses claimed by Mr. C of accrued interest, if that’s what you’re referring to.

Q. Right. That accrued interest, though, is part of the principal of the loan because it’s in an interest reserve set aside. That’s part of the loan, isn’t it? It’s not like my credit card. It’s part of this contract, isn’t it, sir?

A. It becomes — sure, but it becomes part of the loan because you’re not paying the interest. And if you didn’t pay interest on your credit card, it would increase the principal you owed.

Q. Right. It wouldn’t just increase the principal, though. I might be in default or get a nasty letter from the credit card company; right?

A. Or they may have agreed to do it, which they sometimes do.

Q. Not my credit card company. So for the loans at issue here, you wouldn’t expect, if the arrangement was that there wouldn’t be any payments by the developer out of their own pocket for at least two years -you wouldn’t expect to see losses of principal on those loans for at least two years. Doesn’t that stand to reason, sir?

A. That’s true. And that’s why I tried to look at all the loans that had been issued in the past, not just the 23 questioned by the FDIC.


Example of accounting expert witness cross-examination on assumptions 

Q. Okay. Let’s look at your Slide 4, if we could. Now, I want to ask you if the bank hadn’t made the loans at issue in this case, the 23 loans, or if they had been made on different terms — well, let’s start with if they hadn’t made the loans. Do you assume that they would have made loans to other developers reflected in your other HBD column?

A. It depends. If you’re talking about where I did an analysis of whether Mr. C’s analysis was proper or his report, yes, I did assume that because Mr. C assumed that. That was the approach that he took so I started off with that same approach.

Q. That’s not reflected — this Slide 4 doesn’t have to assume that if the bank hadn’t made these loans to these developers, that it would have used that same money on other loans, does it?

A. This chart does not assume that because this is focused on the losses of the ones complained by the FDIC versus all others.

Q. Okay. And you referred to the proper economic methodology for determining damages on a loan; right?

A. Well, in a matter like this, yes.


Cross-examination of an accounting expert witness on methodology of quantifying damages

Q. Okay. So if — you’re not telling the jury that that’s the only methodology reasonable for determining damages on loans that result in losses, are you?

A. It would depend on the circumstances, but as a general proposition you look at the difference between what happened and what would have happened. If there’s questions about conduct, you say what the losses were, what they would have been.

Q. Right. Do you assume that reasonable bankers know that markets go up and down at the time that they approve loans to real estate developers?

A. If you mean by that that they study and try and make their determinations about what has happened and what might happen in the future, I would agree with that.

Q. Well, I’m not sure why you have to qualify it. Do you agree that reasonable bankers in this country understand that housing markets go up and down over time?

A. I think that’s a fair statement.

Q. Right. And so anytime a housing market goes down, your losses are likely to be greater than they might otherwise have been if the market had continued to go up; is that a fair statement?

A. I think if you’re just comparing those two situations, that’s true. If housing prices go down, it doesn’t automatically mean there will be losses. There’s a lot of issues, collateral, guarantees that you would have to take into consideration. But if you’re just comparing the two situations, I’d agree, one would be better with prices continuing to go up.


Hypothetical Questions used to cross-examine an accounting expert witness

Q. We were talking about your methodology and loan losses. I’m going to ask you to assume — this is what we call a hypothetical.

A. Okay.

Q. You have testified many times as an expert; right?

A. Yes.

Q. You are used to hypotheticals?

A. Yes.

Q. Okay. I want you to assume that I loaned $5,000 to a friend of mine in Chicago. Are you with me?

A. Okay.

Q. He’s told me that he’s having a cash crunch, might be on the verge of bankruptcy, but he recently found a job that he thinks he’s going to be able to hold onto because people are still employed in Chicago and he’s optimistic. Assuming that I don’t get a personal guarantee from anyone else in his family and I don’t have any collateral for his loan and I recklessly loan him $5,000 after he tells me he’s on the verge of bankruptcy, if he subsequently loses his job because the economy takes a dive, do you need to analyze, make some comparative analysis, before telling me that maybe I lost the $5,000 in part because I made a bad decision?

Q. Oh, all right. Assume I wasn’t reckless; I was just negligent.

A. Okay. In my view, in your circumstance, it sounds like the reason the loan went bad was similar to things that were known at the time, and it was not the situation that we have here. So I would say in that case, I think that if you did an analysis, you might find that part of it or some significant portion of it was due to the loan underwriting as opposed to what happened to his job.

Q. Well, for these 23 loans, you didn’t evaluate whether a single loan had an adequate secondary source of repayment, did you?

A. Again, that was other experts that did that. I relied on 77 the overall results and the overall examinations of the loan process and the adequacy of the or the quality of the assets, the loans.

Q. I’m sorry. I was just asking you whether you evaluated -well, let me ask you this. You didn’t reach any judgment at all as to whether any of these 23 loans had an adequate secondary source of repayment in the event that the primary source was no longer available to repay the loan; is that correct?

A. That’s correct. That was not within my area to study.


Accounting expert witness challenged on cross-examination on his assumption that the loans in question were not negligently approved.

Q. Okay. Now, why don’t we put Slide 4 back up. Isn’t the real problem with what you’ve told us today that you assume the other HBD loans were not negligent at the time they were approved?

A. I don’t think it’s a problem. I think that I looked into that issue with respect to the OTS reports and the other reports that I said which indicated that during the time these loans were made, the process was adequate and the quality of the assets were adequate or better. So I don’t think it’s unreasonable to assume that the loans that the FDIC didn’t complain specifically about or put in evidence that there was something wrong — I think is reasonable, particularly for the purpose of looking at what the cause of the loss was to compare them.

Q. Sir, at the time you did your work in this case and prepared your expert report, your assumption was that the other HBD loans, other than the 23 loans at issue in this phase of the trial, were not negligently approved; true?

A. True.

Q. Okay. That’s an operative important assumption in the comparisons you’ve made for the jury here today; true?

A. For part of what I did. For the purpose of if you wanted to draw a conclusion about the reasonableness of the loan underwriting, that’s true. Not so much for the purpose of trying to determine what the cause of the loss was. The fact that all of the loans had losses I think is consistent with my view that it was the economic downturn.

Q. So wouldn’t your — and, by the way, you assumed that the — what’s Exhibit 1 down there at the bottom? You say T Exhibit 1. Is that the FDIC Complaint in this matter?

A. No. That’s my report. Exhibit 1 summarized my detailed analysis.

Q. Okay. How about when you say HBD loans in FDIC Complaint? Isn’t it true that at the time you did your work in this case and gave your testimony in deposition, that you assumed that the other loans were not improper because they were not alleged to have been improper in the Complaint in this case?

A. That’s generally correct. They were not specifically identified in the Complaint, and I understood that the FDIC hadn’t put forth any analysis showing that they were poorly underwritten.

Q. Your assumption rested on whether the FDIC alleged other loans were negligent, and because you didn’t feel they did, you referred to those as your benchmark loans; is that correct or not, sir?

A. Yes, for the reasons I just described.

Q. Right. And if you changed your assumption, then you would not have used those other loans, the ones we’re looking at on Slide 4, as the benchmark for your comparison; correct?

A. I would not have made this specific comparison, including the same loans, that’s correct.

Q. Well, this is the comparison you relied on today for your opinion that there was a similar loss rate on loans that were not negligently approved; correct?

A. Yes.


Cross-examination of accounting expert witness – assumption of expert inconsistent with the complaint

Q. So you reviewed the Complaint in this matter to reach this assumption?

A. I did.

Q. And you had a team of folks working with you. I think you described, I don’t know, four or five or six people; right?

A. Yes.

Q. And your work on this particular Slide 4 and the assumptions that went into your analysis that you shared with us was as thorough and careful as the other opinions you’ve offered here today; correct?

A. That’s what I tried to do, yes.

Q. So when you read the Complaint that you relied on for this assumption, did you get as far as Count 68?

A. I believe so.

Q. And so when you got to Count 68, you recognized that not only 66 specific loans were alleged to have been negligent, but that the balance of the loans in the HBD portfolio were also have alleged to have been negligently approved; isn’t that correct?

A. I don’t remember Count 68, but if you mean that there was a general statement that everything was bad, I think the FDIC said that. I was referring to whether there was specifically cited loans and whether there was going to be evidence put forth by the FDIC that the loans were bad.

Q. I’m sorry, sir. At the time of your deposition, were you relying on the fact that you thought the FDIC had not alleged loans, other than the 23 loans at issue, were negligently approved? Isn’t that what you just told us?

A. No. Twenty-three is just — is not all the ones in the Complaint. I studied all the ones in the Complaint which I included on the left side of Chart 4.

Q. How many loans then are — can you put Chart 4 back up, please. How many loans — when you say HBD loans in the FDIC Complaint, how many is that?

A. I think it’s about 65.

Q. So how many is the other HBD loans?

A. I don’t remember the exact number.

Q. Over a hundred?

A. I don’t think it was that high, but I don’t recall the specific number.

Q. And you’ve added to your assumption today that – something about whether the FDIC would put in evidence regarding loans that were not some of the loans in the HBD portfolio. Did I hear you say something about evidence of other loans being negligently approved?

A. I don’t remember adding to my assumption. I don’t know that that was discussed in my deposition. I just responded to questions. But that was part of my assumption all along.

Q. Assume, sir, that the FDIC alleged that all of the loans that HBD made were improper and should not have been made, hypothetically. Are you able to do that?

A. Yes.

Q. And if that were the assumption, merely that the FDIC had alleged that — had alleged that all of the loans that HBD made were improper and should not have been made, then that assumption would have caused you not to use the other loans in HBD as your benchmark; correct?

A. I think that is what I said in my deposition, and I agree with that. To the extent that there was not specifically identified ones in there and that they identified others that were going to be poor loan underwriting, I would have changed the — mathematically which loans I included in other loans or loans complained about.

Q. I’m not sure I understand, but let me ask you this question. When you reviewed the Complaint, including Count 68, did you understand that the FDIC was alleging that the other loans in the HBD portfolio, including over 108 loans sold to OW Bank, were made to borrowers and guarantors who were not creditworthy at the time the loan was approved? Did you understand that, sir?

A. I recall that the FDIC included a general statement that they thought all loans were bad.

Q. Well, didn’t they refer specifically to 108 additional loans sold to OW Bank?

A. Yes. That was their analysis of the total loans that had been sold to OW Bank.

Q. Okay. So you disregarded that allegation in your work developing a benchmark because those 108 loans were not specifically named; is that right?

A. Because when we got near my report, I understood that the FDIC was only going to be focusing on, in this case, 23 loans, and if there was any other cases, 66 loans. That’s why I made that determination.

Q. You assumed that this phase was only 23 loans, and therefore you could safely assume that other loans in the HBD portfolio were not also negligently approved; correct?

A. I could only rely on what the FDIC had identified in their Complaint, and they identified about 65 loans, so I relied on those 65 loans.

Q. That’s simply not true. They identified at least an additional 108 loans that were negligently approved; isn’t that right?

A. If you’re talking about the general statement that everything was bad, that’s correct.

Q. Sir, isn’t it more than a general statement? It’s a specific count in the Complaint, isn’t it, that you reviewed?

A. I do remember reviewing it and I do remember there being, in addition to the specifically identified ones, more of a general statement.

Q. Would someone looking at — wouldn’t it be, from a statistical analysis — wouldn’t it be fair to assume, given the similarity in loss rates, that if the one group were negligently made, the other group were negligently made? That would be a stretch for you?

A. Well, it would be no more than reasonable to assume that than to assume what I found in my analysis, that all of the losses were due to the recession, the financial crisis, and the collapse in the home prices.

Q. So did you try to analyze how far the downdraft in the housing market would have to go before these particular developers on these 23 loans would not have been able to repay some or all of the loan?

A. I did not do that. And the reason is that the downturn was so significant that I don’t think it would have affected my analysis. The circumstances were so different when the losses occurred.

Q. The circumstances were different because when these loans were made, it was the height of a market that numerous experts were calling the biggest bubble in a hundred years; right?

A. Some people were calling it the biggest bubble but a lot of people were saying, including IndyMac senior executives, Let’s continue to keep loaning because homebuilders are paying back their loans and we’re making profits. And they did what I would expect management to do which is question it: Hey, do we have to do things differently. Let’s manage our risk.


Sample Accounting expert witness cross-examination – failure to consider key facts

Q. You didn’t actually evaluate how many warnings between October 2004 and late 2006 senior management at the bank provided to the defendants in this case regarding market conditions, did you, sir?

A. I did not. We —

Q. Thank you, sir.

A. — looked at a number of them in my deposition.


About the Author

Kelly J. Wilbur, Esq., is a Trainer and Consultant for SEAK, Inc – The Expert Witness Training Company. She was an insurance defense and commercial litigator for five years prior to joining SEAK. Kelly received her J.D., cum laude, from the University of Massachusetts School of Law in 2015 and graduated from St. Mary’s College of Maryland with a B.A. in Political Science. While at St. Mary’s, Kelly was a member of the nationally ranked varsity sailing team and was a two-time All American. Kelly has experience preparing experts for deposition and trial testimony. Phone:  617-791-6802 Email: