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Litigation Services Handbook: The Role of the Financial Expert, 5th Edition by David P. Hoffman, Daniel G. Lentz, Roman L. Weil

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Chapter 34

Financial Accounting Experts in Directors’ and Officers’ Litigation

Stephen D. HibbardTimothy T. O'Donnell John D. Wilson

34.1 Introduction

Director and officer litigation that requires advice or testimony from accounting experts often involves alleged failures to fulfill the fiduciary duties of care or good faith, or alleged failures to comply with specific federal laws or regulations or stock exchange rules.1 Examples of corporate scandals that have stemmed from incorrect or even fraudulent accounting are numerous and well publicized, including the recent incidences of Enron's aggressive use of off-balance-sheet vehicles and Lehman Brothers’ use of repo transactions to dress up its periodic balance sheets, each of which this chapter discusses. In some cases, the conduct furthered transactions in which individual members of management or directors had a separate financial interest in conflict with the corporation's interest, so the fiduciary duty claims alleged violations of the duty of loyalty to the corporation under state corporate statutes. Before turning to the role of financial accounting experts in these disputes, we discuss the legal standards that apply to director and officer conduct.

34.2 Legal Standards for Corporate Governance

Most U.S. public companies are organized as corporations. Under corporate laws in the United States, the board of directors oversees the business and affairs of a corporation.2 Directors exercise their powers by appointing and delegating ...

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