CHAPTER 2:

THE LEGAL
ENVIRONME
NT
OF FORENSIC
ACCOUNTING

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Learning Objectives
1. Explain why it is necessary for a forensic
accountant to have a working knowledge of the
legal environment
2. Describe the classification (categories) of law and
the basic structure (three stages) of a civil trial
3. Explain the concepts of burden of proof and
standard of proof
4. Describe the court’s gatekeeping role in
determining the admissibility of evidence

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Learning Objectives
5. Identify the rules of evidence that address expert
testimony and the specific criteria for the
admissibility of expert testimony
6. Describe the purpose and process of a Daubert
challenge, and identify the factors that should be
considered when evaluating expert testimony
7. Identify the requisite elements for establishing
attorney–client privilege

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Explain Why It Is Necessary for a
Forensic Accountant to Have a Working
Knowledge of the Legal Environment
Learning Objective 1

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Understanding—Legal
Environment
 Law
 Governance by cumulative body of legal principles
 Rule of law doctrine
 Basic functions
 Dispute resolution
 Protection of property
 Preservation of the state
 Enforcement by sanctions

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Understanding—Legal
Environment
 Law and justice
 Constitutional promise of justice
 Forms of justice
 Civil justice
 Criminal justice
 Personal justice
 Social justice
 Substantial justice

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Describe the Classification (Categories)
of Law and the Basic Structure (Three
Stages) of a Civil Trial
Learning Objective 2

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Classification of Law
 Public law
 Regulates relationships of citizens with the state
 Major divisions
 Criminal law
 Constitutional law
 Administrative law

 Private law
 Regulates relationships between individual or entities
within a state

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Figure 2-1—Classification of Law

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Procedure: The Anatomy of a Trial
 Different from what is shown on television shows or
the movies
 Three stages
 Pleading
 Discovery
 Trial

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Procedure: Pleading Stage
 Filing of complaint
 Identifies the parties
 Outlines facts and violations
 Demand for relief
 Defendant files answer
 Failing to file may result in default judgment
 Defaultjudgment: Binding judgment against a party
based on some failure to take action

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Procedure: Discovery Stage
 Allows for gathering of information
 Interrogatories, requests for production of documents
 Subpoenas and depositions
 In civil cases, process governed by Federal Rules of
Civil Procedure (FRCP)

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Procedure: Discovery Stage
 Federal Rules of Civil Procedure (FRCP)
 Rule 26(a)(2)
 Disclosure of all experts expected to testify at trial
 Rule 26(b)(1)
 Limits discovery to “non-privileged” information
 Rule 26(b)(4)
 Limits discovery of expert’s communications with counsel
 Rule 26(e)(2)
 Supplementing testifying expert with any changes or
additional information

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Procedure: Trial Stage
 Selection of jury
 Selected through a process known as voir dire
 Opening arguments by both parties
 Plaintiff presents case
 Defendant presents case
 Closing arguments by both parties
 Verdict

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Structure of a Criminal Case
 Criminal complaint with investigator’s affidavit
 First appearance—arraignment
 Defendant informed of charges and rights
 Defendant pleas guilty or not guilty
 Discovery stage
 The trial stage
 Defendant found guilty
 Sentencing stage

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Table 2-1 : Comparison of Civil
and Criminal Actions

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Explain the Concepts of Burden of Proof
and Standard of Proof
Learning Objective 3

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Burden of Proof and Alternative
Dispute Resolution
 Burden of proof
 Obligation of the plaintiff
 Defendant presumed innocent
 Alternative Dispute Resolution (ADR)
 Mediation
 Arbitration
 ADR preferred over litigation
 Less expensive and faster
 Greater privacy

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Figure 2-2 : Ascending Levels
(Standards) of Proof

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Describe the Court’s Gatekeeping Role in
Determining the Admissibility of
Evidence
Learning Objective 4

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Evidence and the Expert
 Court’s gatekeeping role
 Opinion testimony discouraged
 Hearsay evidence excluded
 Rules of evidence
 Govern if, when, how, and for what purpose evidence is
allowed to be presented to the trier of fact for
consideration

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Evidence and the Expert
 Evidence: Something that tends to prove or disprove
the existence of an alleged fact
 Relevant evidence
 Tendency to make a fact more or less probable
 Of consequence in determining the action

 Probative value: Evidence be sufficiently useful to

help prove something during the course of a trial

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Identify the Rules of Evidence that
Address Expert Testimony and the
Specific Criteria for the Admissibility of
Expert Testimony
Learning Objective 5

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Evidence Rules—Expert Witness
Testimony
 Rule 702
 Testimony allowed if of assistance to trier of fact
 Rule 703
 Latitude allowed to expert witness
 Rule 704
 Allows to testify areas decided by fact finder
 Rule 705
 State an opinion without first testifying

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Describe the Purpose and Process of a
Daubert Challenge, and Identify the
Factors that Should Be Considered when
Evaluating Expert Testimony
Learning Objective 6

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Expert Methodology
 Daubert challenge
 Conducted before the trial judge
 Purpose is to measure the validity of expert’s opinion
 Set forth several factors to be considered when
evaluating expert testimony
 Either party can initiate a challenge
 Judge acts as a gatekeeper
 The Daubert Trilogy
 Applied to all expert testimony

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Identify the Requisite Elements for
Establishing Attorney–Client Privilege
Learning Objective 7

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Privileged Communication
 Legal principle that protects communications within
protected relationship
 Attorney–Client Privilege

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Privileged Communication
 Attorney–Client privilege
 Client’s right to refuse to disclose and to prevent any other
person from disclosing confidential communications between
the client and the attorney
 Communication must
 Relate to the rendering of legal services
 Be made in confidence
 Be made to a person the client believed was an attorney

 Work product doctrine

 Protection from discovery of documents, interviews,
statements, and other items prepared by attorney

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Working with Attorneys
 Keys to honest working relationship with engaging
counsel
 Communication
 Respect
 Responsiveness
 Responsibility
 Ethical obligations

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©2015 Pearson Education, Inc. All rights reserved