When to use an Accounting Expert and how the procedure works
In addition to being one of the most trusted arbitration institutes in the world, the SCC Arbitration Institute also frequently appoints financial experts. As a part of the interview series – the SCC Spotlight Talk – we talked with Joel Altschul, Partner at EY about when there is a need to use an Accounting Expert and how the procedure works.
Joel, you have vast experience when it comes to acting as an expert witness on damages in commercial arbitrations, and you are also regularly appointed as an Accounting Expert. Please tell us about the procedure and the need for such services.
I usually get appointed as an Accounting Expert concerning earnout disagreements between a buyer and a seller of a corporation with smaller to midsized business. An earnout is additional financial compensation after a transaction, on top of the initial purchase price. It is defined in the Sale and Purchase Agreement (SPA) between the parties. The earnout might be a pre-set financial target such as Earning before Interest, Taxes, Depreciation, and Amortization (EBITDA) for a certain period.
In the SPA, an Accounting Expert must often be appointed by the SCC Arbitration Institute in case the parties do not agree on the initial earnout calculation. Each assignment by the Accounting Expert must be adapted to the definitions in the SPA. The reason is that every SPA is unique, and the ruling cannot be outside the premises of what the parties have already agreed on in the SPA.
So now the parties have agreed to appoint an Accounting Expert through the SCC, what is the next step and when can they expect a decision?
Firstly, I formulate an engagement letter, which is based on the SPA. All parties must agree upon the engagement letter. Sometimes there are several buyers and sellers, which makes the process slightly more complex.
Secondly, once the engagement letter is signed by the parties, I will set out a timetable, which includes information requests in which the parties submit their earnout calculation, supporting documents, and explanations. Subsequently, the buyer and the seller are requested to make two additional written submissions.
Thirdly, based on the written submissions by the parties, I will hand them a written ruling which includes a detailed explanation of the earnout calculations. There is no oral hearing where the parties present their case. Usually, the process takes between two and three months, depending on the complexity of the case.
Based on your experience, what are the challenges of working as an Accounting Expert?
Naturally, if the parties had already agreed on the calculation, my services would not be needed. Having said that, the starting point of the assignment is normally a slightly or very hostile environment that I will have to navigate within. In addition, the parties as well as their legal counsels might not be familiar with the procedure, which will increase the need for pedagogical skills from my side.
As an Accounting Expert, I must overcome these challenges and not let them get in the way of me exercising professional skepticism when asking questions, even if the parties might be frustrated.
How about the costs? How are the prices for this service decided?
I usually say that the dispute should be substantial, otherwise there is a risk that the professional fees will be greater than the disputed amount. There is a fee for the appointment made by the SCC of EUR 3,000. The engagement will thereafter be charged by the Accounting Expert with hourly rates.
It is difficult to estimate these engagements since there are usually several unknown factors that make the process more complex, such as poor-quality supporting documents, etc. To tackle this and to increase the transparency in our fees, I send weekly updates to the parties with specifications on costs incurred last week and the total costs to date.
The costs are usually divided equally between the parties. However, the Accounting Expert could make a different distribution of the fees based on the outcome of the ruling, if the SPA allows it.
What are the benefits for parties to have the Accounting Expert appointed by the SCC?
When the SCC appoints an Accounting Expert, you can trust that the appointed expert has the right qualifications for the assignment. Leaving this decision to the SCC, the parties can avoid one issue that they otherwise could have a conflict about.
It is important for the parties to understand that, just like arbitrations are a quicker and smoother process than court proceedings, expert determinations by an Accounting Expert are fast and even faster than an arbitration. A ruling is not possible for the parties to appeal, unless there is a gross negligence by the Accounting Expert or if the Accounting Expert has considered other questions than the calculations of the earnout. Another benefit is that the proceedings are confidential, this is also true for all cases handled by the SCC.
In the interview series The SCC spotlight talk, SCC meets practitioners to discuss current issues, challenges, and opportunities in commercial dispute resolution of today.