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Forensic accountants will be more involved

|Written By Helen Burnett

The e-discovery rules are set to change radically, and the new principles could likely get forensic accountants - and their computer forensic departments - more involved in the process in the near future, says one expert.

‘We’re going to be turning over the discovery process to forensic accountants; whether either side has recognized that yet or not, I don’t know, but that’s what’s going to happen . . . at least with respect to e-discovery,’

While e-discovery amendments have been made to the Federal Rules of Civil Procedure in the United States, and a second edition of the Sedona Principles on e-discovery has already been published, the Sedona Principles – Canadian Edition has undergone a consultation phase with the first edition reportedly set to be published in a few weeks.

Contained in the Canadian principles - which address the disclosure and discovery of electronically stored information in Canadian civil litigation - are 12 rules, including one that says parties should ensure that “steps taken in the discovery process are proportionate” and take into account factors such as the nature and scope of the litigation, the relevance of the available electronically stored information, and the costs.

Parties are also expected to be prepared to produce relevant electronically stored information that is reasonably accessible in terms of cost and burden.

The previous rule, still applicable to hard copies, was that everything was discoverable; thus, parties were required to produce everything.

Now, for electronic documents, it is a “pick and choose exercise,” says David Debenham, counsel with Lang Michener LLP in Ottawa, who is also an accountant and certified forensic investigator.

“They’re going to need an investigator to sort out what’s worth the cost of asking for and what’s the cost of producing, and it’s all going to be a financial exercise; and so that means lawyers are not really adept at doing cost-benefit analysis, and the accountants are and the accountants have their computer forensic divisions who can do it,” he says.

Forensic accountants have not historically played a role in the process, he says, with lawyers producing everything with a semblance of relevancy.

“Lawyers are up to speed on what the Sedona Principles are going to entail but they’re not up to speed on how to deal with them. Forensic accountants have the tools to deal with them but they’re not up to speed on the change in the rules,” says Debenham.

Accountants will have to learn the principles, says Debenham, as their computer forensics departments in particular, and forensic accountants as well, are going to have to become involved in document preservation and the discovery rules in a significant way.

“Because everything is now a cost-benefit analysis as to what you ask for or what you get, and [now discovery is] going to be as much an investigator’s device. . .as it is going to be a lawyer’s advocacy role,” he says.

“In a nutshell, we’re going to be turning over the discovery process to forensic accountants; whether either side has recognized that yet or not, I don’t know, but that’s what’s going to happen . . . at least with respect to e-discovery,” says Debenham.

Debenham adds that he doesn’t think that accountants are really aware of that market segment that is going to be heading their way.

In terms of how the changing rules are affecting the profession, forensic accountant Andrew Neuman, of A. Neuman Associates Inc., says that this is uncharted territory and, ultimately, while there is a conceptual outline of “how these things are going to be implemented and the repercussions, it’s sort of like we’re going to be learning how to walk all over again,” he adds.

Depending on the circumstances, the nature of the files may have significant implications in terms of what resources are required, he says.

“Strategically, firms are going to have to make choices. As time progresses, specialists in forensic accounting will become more familiar with the process and it’s going to become more a day-to-day activity,” he adds.

However, depending on the complexity of certain systems, it may be best to have an accredited expert in that area, he says.

“How one recovers and also protects the integrity of data is really an expertise, especially when it’s in an electronic format that is, I think, outside of the realm of a forensic accountant,” he says.

He says the role of the forensic accountant is to work almost as an intermediary between counsel and the expert, in terms of sorting and identifying the relevant information.

For example, he says, in matters that do go to court, while data recovery experts could explain how they retained the integrity of information, forensic accountants would explain how they received and analyzed the information, what they identified, and how it may affect liability and other events - which could translate into determining damages.

“One of the key words is going to be relevant information: how do you determine what is relevant. But to even be able to do that you have to. . .look at everything to be able to identify what the relevant portion is,” he adds.

Oleh Hrycko, president of H&A Computer Forensics Inc., says that all forensic accountants are going to have to be aware of the principles, because they are looking at evidence, and a majority of all corporate information is digital.

The Canadian Sedona Principles, says Hrycko, “encourage parties to get together at the commencement of litigation in order to sort of scope out what type of electronically stored information there is, et cetera, with both parties, so that it makes the whole process more efficient and more cost-effective.”

This is one big impact on forensic accountants, who have to have an appreciation of the principles and how the courts are dealing with e-discovery, he adds.

Hrycko notes that law firms are starting to recognize the need for this type of expertise. He adds that there are very few people who have specialties in e-discovery, computer forensics, and forensic accounting; and for forensic accountants who can do everything in house, he thinks it will open doors for that firm.

Debenham predicts that the transition will start in Toronto with the biggest cases, and the largest law firms will be the early adapters, either by hiring forensic accountants in house or by using outside forensic accountants to begin with.

As the practice grows, it will eventually filter down to everyone else, he says.

From a lawyer’s perspective, Debenham says he believes the discovery process will still be split with the traditional form of discovery - through hard copy - and that as the paperless office increases, it will be farmed out to the forensic accounting firms to deal with.

“I don’t expect that it be a landslide overnight but I expect that the market will shift just as we saw with the tax practice, where there are still tax lawyers, but the tax accountancy took over a lot of tax practice. And I think the discovery litigation practice will shift from litigation lawyers to litigation accountants or forensic accountants and their computer-forensics divisions,” he says.

The rules haven’t been formally changed in Canada yet, says Debenham, but, when they are, everyone will start getting files based on the principles. The exposure draft was released last February in Ontario, asking for comments from the profession on the 12 principles.

“If it came to pass early next year, 12 months from now, I wouldn’t be surprised,” he says.

“And when it does come . . . I don’t know that either side at this stage is ready for it - the lawyers or the accountants,” he adds.

“It would seem sensible to have a business plan sitting there waiting to take advantage of it when it comes down, because it’s inevitable,” he says.

Before the rules are introduced, joint lawyer-accountant conferences should be convened to study the American experience and sort out how the rules will be implemented in Canada, says Debenham.

“I think we’re going to, as we do many cases, have to look down south, in terms of seeing how this develops in certain states,” says Neuman.

One American case, Zubulake v. UBS Warburg, which outlined all the problems everyone has under the traditional rules with e-documents, resulted in the U.S. becoming aware of the issue a lot faster than Canada, says Debenham.

“We haven’t had a similar case in Canada to light the fire under us, but if we do, and I think it’s inevitable that we will, [this issue] is going to hit the ground running pretty fast,” he says.

“The technology precedes us, and businesses precede us, so those of us that do commercial litigation I think have an obligation to get up to speed really fast on what this is about and make our comments about the exposure drafts circulating in our various jurisdictions, and to get this thing on the boards in a fashion that we can deal with relatively fast,” he adds.

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