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[2005] NSWSC 149
Supreme Court of NSW
2004-09-06
Austin J, Anderson J
Original judgment source is linked above.
Reported Decision : 53 ACSR 110 (2005) 23 ACLC 430
HEARING DATE(S) : Various dates between 6 September 2004 and 7 December 2004, then written submissions, and oral submissions on 4 and 7 February 2005
DECISION : Report inadmissible as a whole; in the alternative, to be excluded as a whole on discretionary grounds
CATCHWORDS : EVIDENCE - expert opinion evidence - forensic accountant's report on financial position and board reporting in complex corporate group - whether report, as a whole, admissible under s 79 as opinion evidence wholly or substantially based on specialised knowledge - whether report should be excluded on discretionary grounds under s 135 - applicability of Makita principles to an accountant's report - whether expert's prior relationship with litigant, involving access to additional information and formation of opinions for another purpose, rendered expert's evidence tendered by that litigant inadmissible under s 79 or open to exclusion under s 135 - whether lack of independence rendered expert opinion evidence inadmissible or open to exclusion
Australian Securities and Investments Commission Act 1989 (Cth), ss 19, 68 Corporations Act 2001 (Cth), ss 180, 206C, 206E, 1317H LEGISLATION CITED : Evidence Act 1995 (NSW), ss 55, 56, 60, 76, 79, 135, 137 Supreme Court Rules, Pt 36 r 13C and Sch K
Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504 Aktieselskabet de Danske Sukkerfabrikker v Bajamar Compania Naviera SA ("The Torenia") [1983] 2 Lloyd's LR 210 Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 5) (1996) 64 FCR 73 Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313 ASIC v Rich [2005] NSWSC 62 ASIC v Vines (2003) 48 ACSR 291 BP Australia Pty Ltd v Nyran Pty Ltd [2002] FCA 679 Cadwallader v Bajco Pty Ltd (2001) 189 ALR 370 Carindale Country Club Estate Pty Ltd v Astill (1993) 42 FCR 307 Carter v Boehm, 1 Smith LC, 7th ed, 1876, p 577 Clark v Ryan (1960) 103 CLR 486 Clough v Tameside Health Authority [1998] 2 All ER 971 Collins Thomson Pty Ltd (in liq) v Clayton [2002] NSWSC 366 Collins Thomson Pty Ltd v Clayton [2002] NSWSC 366 D & J Constructions Pty Ltd v Head (1987) 9 NSWLR 118 Dallas v P & M Denton Building and Constructions Pty Ltd [2003] NSWSC 883 Davie v Lord Provost, Magistrates and Councillors of the City of Edinburgh, 1953 SC 34 Dean-Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564 Elliott v Ivey [1998] NSWSC 116 Evans Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171 Fagenblat v Feingold Partners Pty Ltd [2001] VSC 454 Fagenblat v FGT Custodians Pty Ltd [2004] VSC 196 Fail v Hutton [2004] QCA 61 FGT Custodians Pty Ltd v Fagenblat [2003] VSCA 33 Fidgeon v Westpac Banking Corporation [2002] VSC 85 Filipowski v Island Maritime Ltd [2002] NSWLEC 177 Grollo v Macaulay (1993) 45 FCR 336 Guide Dog Owners' & Friends' Association Inc v Guide Dog Association of New South Wales (1998) 154 ALR 527 Hancock Prospecting Pty Ltd v Porteous (unreported, Supreme Court of Western Australia, Anderson J, 15 February 1999) Harrington-Smith v State of Western Australia (No 7) (2003) 130 FCR 424 Hartglen Pty Ltd v Geoff Mitchell & Associates Pty Ltd [2004] QSC 67 HG v The Queen (1999) 197 CLR 414 Idea Technology Services Pty Ltd v Nguyen [2002] QSC 432 Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 123 Instant Colour Pty Ltd v Canon Australia Pty Ltd [1995] FCA 870 Interchase Corp Ltd (in liq) v Grosvenor Hill (Queensland) Pty Ltd (No 1) [1999] 1 Qd R 141 Jarrama Pty Ltd v Caltex Australia Petroleum Ltd [2004] FCA 144 Johnson v Johnson (2000) 201 CLR 488 Kirch Communications Pty Ltd v Gene Engineering Pty Ltd [2002] NSWSC 485 Lakeman v Finlay (1959) 59 SR (NSW) 5 Li v R (2003) 139 A Crim R 281 Liverpool Roman Catholic Archdiocesan Trustees Inc v Goldberg (No 3) [2001] 1 WLR 2337 CASES CITED : Magill v National Australia Bank Ltd [2001] NSWCA 221 Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 Mallesons Stephen Jaques v KPMG Peat Marwick (1990) 4 WAR 357 McMartin v Newcastle Wallsend Coal Company Pty Ltd [2003] NSWIRComm 292 Milirrpum v Nabalco Pty Ltd (1971) 17 FLR 141 Murray v Macquarie Bank Ltd (1991) 33 FCR 46 National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The 'Ikarian Reefer') [1993] 2 Lloyd's Rep 68 Neowarra v Western Australia (2003) 205 ALR 145 Paric v John Holland Constructions Pty Ltd (1985) 59 ALJR 844 Potts v Miller (1940) 64 CLR 282 Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370; 16 ACSR 227 Pradhan v Eastside Day Surgery Pty Ltd [1999] SASC 256 Prince Jefri Bolkiah v KPMG [1999] 2 AC 222 Quick v Stoland Pty Ltd (1998) 87 FCR 371 R (Factortame Ltd) v Secretary of State for Transport (No 8) [2002] 3 WLR 1104 R v Donovan Kimball Christie [2003] QCA 413 R v Glennon (1992) 173 CLR 592 R v Hally [1962] Qd R 214 R v Kovats (Provincial Court of British Columbia, Judge D Pothecary, unreported, 10 November 2000) R v Perry (No 4) (1981) 28 SASR 119 R v Sing (2002) 54 NSWLR 31 R v Turner [1975] QB 834 R W Miller & Co Pty Ltd v Krupp (Australia) Pty Ltd (1991) 34 NSWLR 129 Ramsay v Watson (1961) 108 CLR 642 Re Montecatini's Patent (1973) 47 ALJR 161 Rhoden v Wingate [2002] NSWCA 165 Rich v ASIC (2004) 50 ACSR 242 Rigney v Browne [2004] QSC 265 Roach v Page (No 11) [2003] NSWSC 907 Rozmus v Illawarra Area Health Service (unreported, Supreme Court of New South Wales, Hidden J, 23 December 1996) Sebastian v Neufeld (1995) BCJ 1684 SmithKline Beecham (Australia) Pty Ltd v Chipman [2003] FCA 796 South Australian River Fishery Association v South Australia (2003) 84 SASR 507 Spassked Pty Ltd v Commissioner of Taxation (No 4) [2002] FCA 491 Spassked Pty Ltd v Federal Commissioner of Taxation (No 2) (2002) 49 ATR 642 Steffen v Ruban [1966] 2 NSWR 622 Stoland Pty Ltd v Thurn (1997) 29 ACSR 280 Switz Pty Ltd v Glowbind Pty Ltd [1999] NSWSC 1296 Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd (2002) 55 IPR 354 Temwell Pty Ltd v DKGR Holdings Pty Ltd [2003] FCA 948 Trade Practices Commission v Arnotts Ltd (No 5) (1990) 21 FCR 324 Whitehouse v Jordan [1981] 1 WLR 246
Australian Securities and Investments Commission (P) PARTIES : John David Rich (D1) Mark Alan Silbermann (D4)
R B S Macfarlan QC with J P A Durack SC, N J Beaumont and J E O'Sullivan (P) COUNSEL : D L Williams SC with M J Steele and S A Goodman (D1, D4)
Jan Redfern, Solicitor for Australian Securities and Investments Commission (P) SOLICITORS : Joanne Kelly, Solicitor (D1, D4)
INDEX Paragraph
IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION
5934/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V JOHN DAVID RICH & ORS JUDGMENT (Admissibility of Carter Report) HIS HONOUR:
5.2 The expansion of PwC's role in the investigation 64 In mid-October 2001, PwC's work for ASIC was expanded to include forensic accounting work. Mr Carter was approached by ASIC on 17 October, and on 18 October he met with Ms Redfern, then Deputy Director of Enforcement for ASIC, and Ms Rees, a senior lawyer engaged by ASIC as a consultant to assist in the One.Tel matter. On that day and on the following day, arrangements for the expanded work were finalised, and Mr Carter obtained clearance from his partners to accept instructions. 65 There is a dispute between the parties as to the nature of the engagement and, in particular, whether Mr Carter and his team acted as co-investigators with ASIC, or were there to provide forensic accounting assistance to the ASIC investigators. 66 On 17 October Mr Carter sent an e-mail to his partners in which he said PwC had been asked by ASIC "to consider acting as the investigators of One.Tel on behalf of the Commission". In cross-examination Mr Carter said that his e-mail overstated the position, and that PwC's role was "acting to assist in the investigation" conducted by ASIC (T 2283.39-2284.9; T 2790.6). In the report that he prepared for ASIC dated 21 November 2001, he said that the investigation into One.Tel was "being conducted by ASIC and ourselves". The reference to "ourselves" was added by Mr Carter to a previous draft of the report, because (he said) the draft had wrongly suggested that ASIC was to choose the documents for Mr Carter to consider (T 2790.6-11). 67 In the engagement letter for forensic accounting services sent by Mr Carter to ASIC on 19 October, he said that PwC had been requested to assist ASIC in its investigation of the affairs of One.Tel and its directors, and that "the scope of the Services is to be wide, although initially limited to reviewing and providing advice concerning materials obtained by ASIC in relation to the Investigation". 68 I do not regard Mr Carter's evidence in cross-examination as "resiling" from what was said in the documents, but rather as clarifying the precise role PwC had been retained to perform and had performed. In my view Mr Carter and his team were not engaged to carry out all or part of the investigation which it was ASIC's statutory function to perform, but rather to assist in that process by performing forensic accounting work (see also Ms Redfern's evidence at T 2887.37). That work included matters which could accurately be called matters of investigation, such as the interviewing of witnesses and the comparison of bundles of documents to see if anything was missing. But it was by way of professional assistance to the ASIC investigators, rather than any sharing of their primary role. 69 Nevertheless, in ways that I shall explain, their forensic accounting work led to Mr Carter and his team being extensively involved in the investigation process. I do not mean to suggest that extensive involvement was in any way improper. No doubt it was thought necessary and appropriate, by ASIC and PwC, having regard to the enormous investigatory task to be undertaken. Indeed, professional advocacy rules may require counsel or solicitors to advise their clients to obtain expert assistance before commencing proceedings: see, for example, New South Wales Barristers' Rules, rules 35-37. The extent of PwC's involvement (and in particular, the involvement of Mr Carter) is relevant because of the later retainer of Mr Carter to provide expert evidence.
5.3 Ms Redfern's e-mail of 19 October 2001 70 On 19 October, Ms Redfern sent an e-mail to members of the ASIC investigation team informing them that Mr Carter had been retained to assist in the investigation, and directing that he be briefed with various documents. She continued: "We may need to retain an accounting expert to actually give evidence and in my view this should not be PwC as they will have been part of the investigative process and will be compromised." 71 In the same e-mail Ms Redfern reiterated her concern to ensure that expert witnesses should not become involved in the investigative process, by saying that the proposed expert witness on the responsibilities of company directors should be given "a clean brief of documents", having regard to the "practice note about experts" (presumably the Expert Witness Code of Conduct, Schedule K to the Supreme Court Rules). 72 In cross-examination Ms Redfern said she thought that "ideally you should separate the two" (T 2889.35). She explained her concern, saying that "it just becomes a sometimes messy exercise to ascertain what they had regard to when they prepared the report, as opposed to part of the investigative process" (T 2890.8-10). 73 Another matter raised by Ms Redfern in the e-mail of 19 October was whether a notice should be issued to PwC in respect of some instructions they had received from One.Tel about billing problems, before the company's collapse. That question had also been raised in the Consolidation Report (noted below), which Mr Carter received on about 19 October. He gave evidence that he read the suggestion in that report that PwC be examined to determine their understanding of the extent of the billing problems. He said that while he understood that one of the things he would have to examine in its work for ASIC was the true extent of the billing problems, this did not cause him grave concern and he did not believe it gave rise to conflict of interest (T 2305.21-2306.25). Subsequently Mr Carter was given access to reports prepared by Mr Hockings of PwC on One.Tel's billing system (T 2306.47-2307.20, T 800.24).
5.4 The period from 18 October to 5 November 2001 74 On about 19 October, at least six folders of documents were made available to Mr Carter for review (T 2288.39). He was provided with a copy of the Consolidation Report dated 3 October 2001, a document that I described in my judgment on the search warrant issues. As my description of the document in that judgment made clear, it was a report summarising the results of the investigation to that time, containing many expressions of opinion, statements of "concern" and commentaries on evidence by Mr Connor and Mr Hogan, the ASIC officers who were its authors. The document had substantial attachments, which Mr Carter was also given, including s 19 examination transcripts of Mr Packer, Mr Kleeman, Mr Rich and Mr Keeling, and also drafts statements of several former finance staff of One.Tel including Mr Holmes, Ms Randall, Ms Thomas, Ms Nassif and Ms Ashley. Also attached were some reports on One.Tel prepared by Mr Kleeman and a report by Ms Croft, an ASIC accountant. Mr Carter gave evidence that he had no recollection of receiving the Consolidation Report, although he did not deny receiving it (T 2302.7). At some stage Mr Carter received a copy of the Croft report, prepared by an ASIC accounting officer, and he was eventually asked to comment on it in his 21 November report. 75 It was originally intended that Mr Carter would produce a report on PwC's forensic accounting investigations by 12 November 2001. During the remainder of October and until 21 November, Mr Carter and his staff (Ms Reynolds, Mr Hall and Ms Rock) were substantially treated as an integral part of the ASIC investigation team. They had a room allocated to them at ASIC's offices, and were frequently at ASIC's premises. They met daily. They were permitted to select the documents they thought might be relevant for the purposes of their work, from all the electronic and hardcopy documents that ASIC had (T 2312.1) and they had unrestrained access (including electronic access with a search facility) to the documents stored on ASIC's LSS computer system which related to One.Tel (T 2259.9, T 2309.9, T 2311.43). The LSS system included copies of documents obtained from One.Tel's I:drive directories, which had been printed and scanned (T 1097.8, T 2311.37-2312.9). One of PwC's tasks was to review documents received from Publishing and Broadcasting Ltd and News Ltd. They also had access to at least some of the transcripts of other s 19 examinations that had been conducted by ASIC up to that point in time (T 2309.20, 2310.28, 2577.25) and they saw witness statements and draft witness statements prepared by ASIC (T 2577.31, T 2761.26). 76 It seems to follow from the evidence of general access to ASIC's documents that Mr Carter and his team had access to material obtained from the residences of Mr Rich, Mr Silbermann and others as result of the execution of search warrants there on 1 June 2001. The evidence does not establish that Mr Carter and his assistants in fact accessed or relied upon the home search warrant material of Mr Rich and Mr Silbermann at any time during the period from October 2001 to May 2002. Mr Carter said he did not know whether he had done so but it was possible (T 2285.28-36). 77 Mr Carter attended a number of conferences with ASIC's solicitors and counsel (T 2321.28, T 2576.45) and was provided with advices of counsel, which he read (T 2321.32-2322.3). He participated with ASIC officers (including Ms Redfern and Ms Rees) and counsel in discussions about what the relevant issues were in bringing proceedings and about the type of approach that might be taken in civil penalty proceedings against directors (T 2966.43, T 2544.46-2545.39). 78 On 24 October 2001 Mr Carter took part in an important meeting with Mr Pembroke SC, Ms Redfern, Ms Rees, Mr Connor and Ms Croft. As explained in my judgment on the search warrant issues, Ms Redfern had by that time formed the view that ASIC had a reasonable case for a civil penalty proceeding against some, at least, of the directors. There was discussion at the meeting about the nature of the case ASIC would pursue, the bringing of civil penalty proceedings against directors and how such a case might be put, and the work to be undertaken by PwC to assist ASIC in bringing such proceedings. Mr Carter made a detailed note of the meeting, the substance of which he conveyed to Ms Reynolds. According to the note, there was discussion of two schools of thought as to the approach to the legal issues: one approach, favoured by Ms Redfern, was based upon the knowledge of the defendants ("who knew what and lied about it"); the other approach, said to be favoured by Mr Carter as well as Ms Pembroke and Ms Rees, was based upon the adequacy of One.Tel's reporting system. Mr Carter noted that PwC had been asked to consider what announcements were made by One.Tel, when and by whom; who had actual knowledge and who used that knowledge to deceive ('who knew what when')"; and why 30% of debtors were written off as bad debts. Mr Carter agreed in cross-examination that, following the meeting, his view was that PwC had been engaged to assist ASIC in its deliberations whether or not to proceed with civil penalty proceedings (T 2555.18-31). 79 There was a meeting of the PwC and ASIC teams on 29 October, at which PwC was given a number of tasks, including to identify issues for the s 19 examinations and "to update knowledge", presumably the knowledge of directors of the true financial position of One.Tel. Mr Carter and Ms Reynolds prepared a checklist of issues, which began with the statements: "The key forensic accounting issues relating to the One.Tel investigation are set out below. We wish to gather as much evidence as possible in relation to these and especially Messrs Rich and Keeling's knowledge and the timing of that knowledge. Such evidence may come from interviews, e-mails and documents." Mr Carter confirmed in cross-examination that these statements accurately reflected what PwC was doing at that time (T 2570.9-17). 80 In an e-mail to Ms Redfern dated 30 October 2001, Ms Rees noted that another ASIC investigator was to put in writing a list of questions for PwC to answer in their report, following a conference with Mr Pembroke on that day. She said there would be a further meeting with counsel on the following day, attended by Mr Carter and Ms Reynolds, to ensure that they were "on track" with what ASIC needed them to do. That meeting was duly held. A letter setting out questions to be addressed by PwC, misleadingly headed "Expert Report", was sent to Mr Carter on 1 November 2001. 81 Mr Pembroke SC provided written advice dated 31 October 2001, which Mr Carter read about that time. The advice describes causes of action under s 180 of the Corporations Law and the accounting and corporate governance evidence that should be gathered by PwC. Mr Carter said in cross-examination that Mr Pembroke's opinion may have assisted him in his approach to the collection of evidence on the matters upon which he had been asked to express opinions (T 2572.13-2573.1).
5.5 The period from 5 to 21 November 2001 82 A draft of Mr Carter's investigation report was prepared and circulated to ASIC on 5 November 2001, and on that day Mr Carter gave a PowerPoint presentation to ASIC officers and counsel. At or following the meeting, Mr Pembroke asked Mr Carter to investigate and identify "warning bells" that were available to non-executive directors, and whether there was some obvious connection between any negligence of the directors and the consequences that may flow to the company, and what happened to debtors (T 2573.39-2574.43). 83 Mr Carter made another PowerPoint presentation on 15 November 2001, to provide a further updating before the Commission briefing on 21 November. Ms Reynolds was in attendance, together with Mr Pembroke SC and Mr Stack of counsel, Ms Rees and members of the ASIC investigation team. 84 Members of the PwC team, including at times Mr Carter personally, were involved in planning sessions with ASIC as to who would be the subject of s 19 examinations, and Mr Carter and Ms Reynolds helped formulate questions to be put in those examinations (T 2309.28-36). Ms Reynolds attended the s 19 examinations of Mr Keeling on 5 November, Mr Rich on 7 November, Mr Kleeman on 9 November, Mr Green on 12 November and Mr Greaves on 29 November. Mr Carter attended the s 19 examinations of Mr Miller on 15 and 22 November. 85 Additionally, Mr Carter interviewed Mr Basman, a former employee of One.Tel, on 20 November, and he agreed in cross-examination that during the interview he was very active in asking questions (T 2578.5), including questions about the collection profile summary documents to which I shall return, because those documents were at least in some respects not self-explanatory (T 2534.33), although there was a lot about the document that he could understand without talking to Mr Basman (T 2527.21). It is worth noting that the topics covered in the interview with Mr Basman included credit checks and credit limits of customers, the process by which One.Tel checked adherence to credit limits, the percentage of collections of debts more than 90 days old and Mr Basman's belief as to the percentage of debtors that was collectable. 86 Ms Rock, one of the PwC team, interviewed another former One.Tel employee, Ms Joukhadar, on 15 November. Members of the PwC team spoke in less formal settings with other former employees of One.Tel, including (in the case of Ms Reynolds) Mr Holmes (T 2320.3, T 1133.37). During this period, as one would expect, Mr Carter and his staff discussed with each other what had happened at the s 19 examinations and the interviews that they had attended (T 2310.23, T 2320.10, T 2320.22, T 736.19, T 860.26, T 962.29). 87 I have set out these matters in some detail because they show the substantial degree to which Mr Carter and his assistants were involved in the ASIC investigation during the period up to completion of the 21 November investigation report. The evidence also shows how there was an interplay, during that period, between examining documents and obtaining explanations from former One.Tel staff about the meaning of documents, their context and their internal use at One.Tel, either in interviews or s 19 examinations. On the other hand, I have no reason to doubt the evidence of Mr Carter and Ms Reynolds, given on a number of occasions, that their interest was to ascertain the true financial position, rather than to search for documents which supported a pre-ordained ASIC case, while excluding documents that may have undermined it.
5.6 The presentation of the 21 November 2001 report 88 By 21 November 2001, Mr Carter and his staff had been occupied for just over a month in an extensive review of the information that had been made available to them by ASIC. It is evident from PwC's billing records that hundreds of hours had been spent on this assignment. Mr Carter personally had recorded 125.5 hours during the period from 18 October to 21 November, and Ms Reynolds 240.5 hours. In her e-mail to the Chairman of ASIC and others dated 21 November 2001, Ms Redfern said that ASIC had "extensively used PwC to assist with the investigation", including assistance with examinations, and that "PwC will continue in this role". 89 The culmination of this phase of PwC's work was the presentation of Mr Carter's report to ASIC of 21 November 2001. The report was prepared by Mr Carter, with assistance from Ms Reynolds, Ms Rock and possibly also Mr Hall (T 2326.3, T 961.32). 90 Mr Carter presented the report, with PowerPoint slides, to a meeting of ASIC's National Enforcement Co-ordination Committee ("NECC") on that day. The meeting was attended by the ASIC Commissioners, Ms Reynolds, Mr Pembroke SC, Ms Rees and senior members of the ASIC investigation team. Presentations were also made by Ms Redfern and Mr Pembroke. The advice of counsel on available enforcement options was considered was discussed, and there was a discussion, to which Mr Carter was privy, about the question which directors should be joined as defendants in the contemplated civil penalty proceeding (T 2756.40-2757.13). The NECC deferred its decision on commencement of proceedings and sought further advice from Mr Pembroke SC. 91 At various stages in the report (particularised below), references were made to information that is not in evidence, and not intended to be adduced by ASIC in this proceeding, including transcripts of various s 19 examinations. In its concluding remarks, the report said that it reflected work done up to 20 November 2001 and that investigations were continuing. One area of ongoing investigation was said to be "refining findings in the light of further information arising from additional section 19 interviews with relevant parties". In his accompanying PowerPoint presentation of 21 November, Mr Carter noted that "a number of key One.Tel personnel have not been fully interviewed and may provide further relevant information". 92 The evidence concerning presentation of the report confirms the deep degree of involvement Mr Carter had in the ASIC investigation, and his access to information about ASIC's evolving ideas, formed with the assistance of counsel, as well as his access to the documents, interviews and examinations relevant to the investigation. References to and reliance on the s 19 transcripts are specially significant, because (as considered more fully at 6.7) s 68(3) of the ASIC Act provides that statements made in a s 19 examination under claim to privilege are inadmissible in a proceeding against the person making the statement for the imposition of a penalty, where the conditions stated s 68(2) have been satisfied.
5.7 A comparison of the 21 November report and the Carter Report 93 The 21 November report was prepared to state the results of the forensic accounting work that PwC had been retained to perform, in circumstances where (to Mr Carter's knowledge) the report would be likely to be used by ASIC in making its decisions about whether to commence proceedings, the nature of any proceedings, and the identity of the defendants. It is a 90 page document, which set out to address from accounting perspective the "utility and adequacy" of information provided to the board, and the specific issues raised in the Croft report, and also the knowledge of each director regarding One.Tel's financial position from time to time, particularly with respect to the timing and content of market announcements. 94 The report concluded that a major cause of One.Tel's financial failure was its inability to bill and subsequently collect its accounts receivable balances (para 12); that the executive directors appeared to have failed to provide essential information on such matters as cash balances and information as to the aging of accounts receivable and payable (para 14); and that certain information provided by the executive directors to the board was materially inaccurate, and the executive directors knew or should have known that this was so (para 15). Information not given to the board (which was of "great importance in the apparent failure of directors to foresee the imminent, potentially terminal, cash flow difficulties of One.Tel") included information relating to debtor composition and ageing, and the accumulation of unpaid aged creditors (at para 117). The board did not consider information as to the working capital balance, which was "of crucial importance" (at 130). 95 The later Carter Report was prepared as an expert witness report for the purposes of the proceeding, but the subject matter is substantially the same as the 21 November report over a fairly wide field (excluding matters going to the actual knowledge of the directors and the quantification of damages). This can be seen by considering specific criticisms of the adequacy of information provided to the board, made in the 21 November report, having regard to the contents of the Carter Report. The 21 November report asserts that the information was inadequate in the following specific ways: (a) the provision for doubtful debts was "demonstrably insufficient" (para 18); (b) cash balances were reported on a group basis and without disclosure of $8 million in pledges (para 16); (c) monthly cash balances had been artificially "managed" in a way that was not readily apparent to the non-executive directors, by delaying payment of creditors (especially carriers) for payment at the beginning of the ensuring month, producing what was described in the PowerPoint presentation accompanying the 21 November report as a "Volcano" effect (paras 16, 19, 42-57); (d) reporting to the board of EBITDA, revenue and gross margins, in flash reports and board papers, was based on estimates which were materially at odds with management account figures (para 20); and (e) there was a failure to report on internal control weaknesses, including problems associated with the billing system which caused extensive billing delays and consequent collection problems (para 112, which refers in some detail to Mr Holmes' draft undated statement). 96 These matters are also an important part of the substance of the views expressed in the Carter Report. Overall, there is a high degree of similarity in the approach, analysis and views expressed in the two documents. This is acknowledged in ASIC's general submission (AS 39), where it is said (at [25]-[26]): "What Mr Carter is doing in providing expert evidence to the court is little different in principle to the role he performed in late 2001 in providing independent advice and assistance to the statutory regulator. ... he was (and is now) seeking to ascertain and report as to the true position concerning accounting issues which arose out of One.Tel's collapse. …" 97 Two general differences in content that should be noted are: · the Carter Report does not deal with the knowledge of particular directors, but proceeds on an assumption that the only information the directors had during 2001 was the information contained in board papers, board minutes and flash reports (supplemented, in the case of Mr Packer, by daily e-mails): see Carter Report, para 41; · the Carter Report lays less emphasis than the 21 November report on billing issues as the root cause of the company's financial difficulties. 98 The significance of the first difference is considered below. As to the second difference, billing problems remain an important issue in the case. In the 21 November report Mr Carter's overall conclusion, stated in paragraph 12, was that a major cause of One.Tel's financial failure was its inability to bill and subsequently collect its accounts receivable balances. As the defendants pointed out in their submission in reply (DS 39), the Defences claim that the difference between actual group cash and forecast group cash during 2001 (a difference commented on in the Carter Report at paras 58, 63, 67 and 70), is primarily referable to timing differences in the receipt of expected billings as a result of disruption to the billing systems of the Australian operations, and resultant disruptions to the timing of the collection of trade debtors. 99 There are also important structural differences, apart from the fact that the specific questions that the reports answered were different. First, there is no equivalent to Appendix B in the 21 November report, although there is a section of the report dealing with sources of information. Secondly, the 21 November report makes reference to substantial quantities of material not to be adduced in evidence in the proceeding, including some transcripts of s 19 examinations which could not be adduced in evidence because of s 68(3) of the ASIC Act. 100 In their principal written submission, the defendants drew attention to material referred to in the 21 November report and not in evidence for general purposes in the proceeding. ASIC produced a shorter list in Attachment A to AS 39. In the result, combining the two submissions, the following matters have been identified: (a) in a paragraph headed "Sources of information", reports prepared by the staff of ASIC, including the Croft report and the Connor report, transcripts of interviews under s 19 and numerous discussions with ASIC staff and legal advices (para 8); (b) Mr Rich's s 19 transcripts (paras 55, 63, 93, 95, 99, 110, 113, 114); (c) Mr Keeling's s 19 transcript of 5 November 2001 (paras 63, 93, 99, 110); (d) Mr Pryke's statement dated 12 October 2001 (paras 63, 97, 99, 113); (e) Mr Green's s 19 transcript of 12 November 2001 (paras 63, 99, 110, 113, 120 (footnote 8)); (f) Mr Miller's s 19 transcript of 15 November 2001 (Appendix A, entries for 8 May, 18 May and 27 May 2001); (g) information from Mark Basman (paras 74, 89, 93, 193 (b), and 77-82 relating to Mr Basman's methodology for assessing collectability of debts); (h) Mr Holmes' draft, undated statement (para 112(b)); (i) information from Mr Kleeman (paras 110, 121, 195); (j) information from Mr Miller (paras 120 (footnote 8), 121); (k) information apparently sourced from various s 19 examinations (para 132(b)); (l) Mr Kleeman's report of January 2001 (para 168(b)); (m) Ms Cutting's examination of 15 November 2001 (Appendix A, entries for 6 April and 10 May 2001); (n) the Croft report (paras 152-3); (o) reference at [37] to a request of the directors to receive daily advice on cash balances, and reference at [53] to Mr Silbermann being responsible for the deferred payments listing, admitted by ASIC (Attachment A to AS 39) to be based on material excluded from consideration in the later Carter Report. 101 Taking into account all the matters contained in the list, and exercising judgment as best I can about the reasoning process in the report, my view is that a substantial component of the factual basis for the opinions expressed in the 21 November report was information later excluded from the Carter Report. 102 ASIC submitted, in its detailed response to the defendants' submissions as to the contents of the 21 November report, which was marked AS 44, and in AS 41, that: · the matters addressed in paragraphs [55], [63], [93], [99], [110], [120 fn8], [121], [132(b)], [168(b)], [193 (b)], [195], Appendix A entries for 8 May and 18 May 2001, of the 21 November report, which rely on "extraneous" materials, relate to the question of knowledge of One.Tel's directors, a matter handled in the Carter Report by the assumption stated in paragraph [41]; · the matters considered at [113] and [114] of the 21 November report, where examples are given of incomplete explanations or matters not reported to the board based, relying on "extraneous" materials, and also the reference to Mr Rich's s 19 examination at paragraph [95], do not appear in that form in the Carter Report; · as to the entry for 27 May 2001 in Appendix A to the 21 November report, the Carter Report does not, in terms, address the issue of PBL/CPH's determination that One.Tel's cash requirements were much greater than $132 million, although the Report notes at various points that the One.Tel group's overdue liabilities were $132 million based upon creditors' ledgers; and · Mr Carter's methodology for the bad debt analysis in the Carter Report does not use Mr Basman's information, identified in various paragraphs of the 21 November report. 103 ASIC submitted that the remaining "extraneous" material relied on in the 21 November report was peripheral and not fundamental to the views expressed by Mr Carter in the 21 November report, as regards issues that were also dealt with in the Carter Report. I do not accept that the "extraneous" material was only of peripheral significance. Although the question of the knowledge of individual directors was not addressed in the Carter Report, it seems to me that the extraneous material relied upon by Mr Carter in the 21 November report was likely to have been important to the development of his general understanding of the financial position of One.Tel and the information flows within the company, as well as the significance of particular documents. The fact that he did not specifically refer to "extraneous" material for a particular opinion in the 21 November report does not mean that the material had no influence in the formation of his views. The principal significance of the list of "extraneous material" set out above, is to show that Mr Carter and his assistants carefully considered and took into account the "extraneous" materials in developing the opinions there expressed.
5.8 The period from 22 November 2001 to 3 December 2001 104 As I explained in my judgment on the search warrant issues, the NECC decided in principle to commence the present proceeding on 3 December 2001, after obtaining further advice from Mr Pembroke SC on available enforcement options. 105 PwC's billing records show that the firm's personnel spent a total of 177.5 hours on the One.Tel investigation in the period from 22 November to 3 December. Work was done on the quantification of value for the purpose of assessment of damages (T 1193.6, T 1201.44, T 2652.27). Mr Carter had discussions with Mr Pembroke SC on 22, 26 and 28 November, accompanied by Ms Reynolds on at least the last two occasions. Ms Rock, one of Mr Carter's team, sent him an e-mail on 27 November providing a draft memorandum about quantification of loss, noting that Mr Pembroke wanted a copy. It is evident from a task list dated 27 November that Mr Carter's team were undertaking many tasks closely related to the preparation of ASIC's case. 106 Mr Carter and Ms Reynolds attended the NECC meeting on 3 December, which was also attended by Mr Pembroke SC and Ms Redfern. By that time Mr Carter expected that ASIC would take action against some of the directors of One.Tel (T 2760.24-28). He expressed opinions at that meeting (and also at the meeting on 21 November) on financial matters which (he agreed in cross-examination) were substantially the same subject matter as was ultimately addressed in the Carter Report, although by 31 May 2002 they were in some cases formed on different premises (T 2759.7-46, 2760.37-2761.10). He made a PowerPoint presentation entitled "Analysis of Damages", in which he made calculations based on an assumption that the non-executive directors had been misled (T 2762.7-10). There was further discussion as to who should be joined as defendants, and the NECC made its decision. In cross-examination Mr Carter accepted that ASIC had commenced the proceeding in reliance upon his opinions as to the financial position of One.Tel during 2001 (T 2643.35).
5.9 The period from 4 to 12 December 2001 107 In the period from 4 to 12 December 2001 Mr Carter and his team assisted in the preparation of the statement of claim for the proceeding, in the sense that information arising from their work was used in the drafting of the pleading (T 2637.20). Mr Carter did not accept, in evidence, that he was closely involved in the development of the structure ASIC's case (T 2762.4). He explained that financial information he provided was used in the statement of claim (T 2687.26). It seems to me more likely than not that Mr Carter's role was confined to financial input, as he said, but that input was nonetheless fundamentally important to the framing of the statement of claim. 108 Mr Carter participated in conferences with ASIC's counsel on 4, 5, 6, 7, 11 and 12 December in which he was asked for and provided his input into financial matters that were to be the subject of the statement of claim, and he provided advice to ASIC about how the financial parts of the pleading could be expressed (T 2477.37-46). He received drafts of the statement of claim and provided comments. 109 Mr Carter and Ms Reynolds attended meetings with ASIC's One.Tel team on 4 and 5 December at which some areas of "further inquiry" were considered, centering on "locating additional documents/information to strengthen some areas of PwC's final report" (according to an e-mail from Mr Ryan to Ms Redfern dated 4 December 2001). At that stage a further report by Mr Carter may have been envisaged (a possibility not denied by Mr Carter: T 2644.44-47).
5.10 The period from 13 December 2001 to 1 February 2002 110 Mr Carter said in cross-examination that, after the proceeding commenced on 12 December 2001, he continued to see his role as reviewing documents and providing opinions to ASIC (T 2646.21) - in other words, as I understand him, there was no significant change in his role upon or by virtue of the commencement of the proceeding. He continued to assist ASIC in circumstances where his work contributed to the preparation of ASIC's case (T 2646.25). He and Ms Reynolds continued to use the office which ASIC provided for them, until late December (T 1131.38-47). There was no restriction in the flow of information between Ms Reynolds and Mr Carter (T 1285.24). 111 The work done by PwC during this period is set out in a work plan attached to an e-mail from Ms Reynolds to Mr Carter dated 18 December 2001. The work is listed in detail under headings such as "cash", "debtors" and "claims on suppliers". It included reviewing documentation, gathering further evidence (including interviewing various witnesses) and cross-referencing all of the s 19 examinations. During this period, Ms Reynolds had some discussions with Mr Holmes about different accounts within the management accounts (T 1133.37) and she spoke with him again on 25 January 2002 (T 1137.47-1138.14). 112 The evidence would not support a contention that PwC's activities in this period, or in the period from 1 February to 31 May 2002, demonstrated any general bias, in the sense of ignoring or suppressing material that would support the defendants' case. Both Mr Carter and Ms Reynolds emphasised that their interest was in information relevant to the issues, rather than information supporting ASIC's case as such (e.g. T 2255.19-22, T 1289.37). The evidence does show, however, that they continued to have unrestricted access to, and used, information available to ASIC, and assisted ASIC to gather additional information. 113 By 1 February 2002, PwC personnel had spent a total of approximately 1713 hours assisting ASIC in its investigation. Accounts rendered by PwC on a monthly basis from 9 August 2001 to 15 February 2002 were for a total amount of $598,125 (including GST), the bulk of it invoiced in November, December, January and February in respect of work beginning in October, stated as being for professional services other than computer forensic services. I infer that the invoices for the work from October to January were for forensic accounting services relating to the ASIC investigation, including the 21 November report and assistance in connection with the civil penalty proceeding.
5.11 Retainer of Mr Carter as an expert witness 114 On 16 January 2002 Ms Redfern had a discussion with Ms Rees, in which they considered whether to retain Mr Carter as an expert witness. Ms Rees made a note of the discussion, which indicates that there was continuing concern (as previously disclosed the Ms Redfern's e-mail of 19 October 2001) about whether it would be appropriate for Mr Carter to be an expert witness in view of his involvement in the ASIC investigation. Amongst the points noted were "Is Paul independent?" and "Is there a problem on disclosure of documents?". Mr Carter gave evidence to the effect that he originally thought that someone else would be appointed because of his involvement in the investigation, and that, before his appointment, he queried whether counsel had considered the matter (T 2648.37, T 2650.47-2651.4, T 2790.27). 115 Ms Redfern said in evidence that counsel's advice was obtained by Ms Rees as to whether Mr Carter could be used as an independent expert. Counsel was not identified. In evidence given only in relation to her state of mind, Ms Redfern said she was informed that according to counsel's advice, in the circumstances of the case there would not be a problem (T 3035.27). No written advice or written instructions were produced, and in the circumstances I infer (as ASIC encouraged me to do) that counsel's advice was not given in writing. There is no other evidence as to the content of the advice or of the instructions given to counsel. Ms Rees was not called to give evidence, notwithstanding service of a notice under Part 4.6 Div 1 of the Evidence Act. 116 Mr Carter's engagement letter is dated 1 February 2002. The work program is described as "preparation of a report providing independent expert opinions in relation to various matters relating to the activities and financial position of One.Tel, and the actions of certain of its directors", and presentation of expert evidence to the court in relation to those matters. Mr Carter gave evidence that he considered at the time that he was in a position to give independent expert evidence, but he said in cross-examination that: · he did not give specific consideration to the fact that ASIC had commenced the proceeding in reliance on his opinions (T 2643.41-2644.2), but he added that had he changed his views, while it would have been awkward, he would have had to bear such difficulty (T 2644.8-10); · he did not think it would be necessary for him to disclose the past association he had had with ASIC (T 2651.15); · he did not consider whether he satisfied the criterion of "independence in appearance", which was probably part of the professional standards for forensic accountants in February 2002 (T 2290-2295.2). 117 The defendants were critical of ASIC's decision to retain Mr Carter as an expert witness, given that both Ms Redfern and Ms Rees had concerns about whether it was appropriate to do so and Mr Carter raised the question whether counsel had been consulted. I was asked to infer that ASIC's decision was taken for "reasons of expediency … oblivious to principle and sound practice", influenced by the fact that by that time PwC had rendered accounts for an amount approaching $500,000 and ASIC knew that Mr Carter held opinions favourable to their case. In my opinion that inference is not supported by the evidence before me. The concerns that were identified at the time were concerns of a legal nature, ASIC took the advice of counsel, and there is nothing in the evidence to suggest that it acted contrary to or in disregard of that advice. In my view, ASIC's decision to retain Mr Carter was mistaken, for reasons I shall explain, but it was not taken in bad faith or for collateral purposes. 118 The authors of the chapter on forensic accounting (M Bryant, V Bradbury and B Halligan) in the looseleaf edition of Expert Evidence (by I Freckelton and H Selby) identify (at [1203.420]) three separate roles for a forensic accountants in connection with litigation, namely to act as an independent expert giving opinion evidence to the court, to act as a consultant assisting in the preparation of the case, and to act in a supporting administrative role in managing documentary information. They continue: "It is only in the first role that the forensic accountant is acting as a forensic expert. When the accountant acts as a consultant, he or she is assisting in the advocacy of the client's case, which is a role that is inconsistent with the forensic expert's need for independence. Accordingly, the accountant should generally avoid accepting instructions that would require the accountant to act both as an independent expert and as a partisan consultant." 119 These observations, written by accountants rather than lawyers, are presented as prudential advice to forensic accountants rather than as legal requirements. The present case demonstrates that the advice is sound. The court is not in a position to say whether Mr Carter was justified into departing from it, because the content of counsel's advice, upon which he evidently relied, is not in evidence. 120 After issues were raised by the defendants concerning Mr Carter's alleged lack of independence, an affidavit by him, dated 2 November 2004, was filed and read. In that affidavit Mr Carter said he had considered himself independent of ASIC at all times, and had acted accordingly. He said that he expressed the opinions in his 21 November report from an independent standpoint. He said that when ASIC asked him to act as an independent expert to give evidence in court, he gave specific consideration as to whether he considered himself to be independent from ASIC before accepting that role. He said he concluded that he was independent, for several reasons, including his view that he had remained independent from the beginning of his work on One.Tel, and that he had done nothing inconsistent with the role of an independent expert. He said he was aware that the employees of PwC, led by Ms Reynolds, were asked by ASIC to work on assignments related to One.Tel but separate from his reports. He said that he did not know the details of the work Ms Reynolds and any of her assistants had performed, and Ms Reynolds did not tell him the details or results of the work she was doing, although she told him she was generally involved in interviews and reviews of documents. 121 On the question whether he considered his position might be compromised by having had access to information that he was instructed to disregard for the purposes of his expert's report, Mr Carter said he did not have a concern because he had "considerable prior experience in preparing both expert reports and investigation reports", where information of which he was aware had to be disregarded for legitimate reason. 122 Two weaknesses in Mr Carter's affidavit of 2 November 2004 were exposed in cross-examination. One is that he said in the affidavit, more than once, that he had complied with the Expert Witness Code of Conduct from the project's inception. But when it was pointed out to him that certain requirements of the Code were not satisfied by the 21 November report, he revised that evidence, saying in effect that he complied with the Code when it applied but that he did not consider it necessary to do so until February 2002 (T 2270.26-29). 123 Secondly, Mr Carter said in his affidavit that he had at all times complied with the relevant pronouncements of the Instituted Chartered Accountants in Australia, and in answer to a notice seeking those relevant pronouncements, he produced the Joint Guidance Note on Forensic Accounting. But in cross-examination he qualified the statement in his affidavit, saying that he had complied with the Joint Guidance Note only "in relation to those matters for which it was important to turn my attention and give consideration" (T 2254.6). In his affidavit, Mr Carter had spoken only about his subjective view of his independence, and had not addressed the appearance of independence that may be created or destroyed by conduct, a matter to which the Joint Guidance Note draws attention. Mr Carter said at various stages that he did not give specific consideration to the question of appearance of bias (T 2293.43, 2294.6, 2294.29, 2295.14). But later he said that he had considered what the professional standard required "within" his consideration of independence generally (T 2299.3) and even that he had considered the issue of perception of bias "extensively" (T 2299.5, 2299.12). I gained the impression from his evidence that there was some confusion in his mind as to the concept of independence and perhaps a failure to appreciate the importance under the Joint Guidance Note, and in other contexts, of the perception of bias. But I did not regard this evidence as affecting his credibility or reliability as a witness.
5.12 Preparation of the Carter Report, and concurrent work for ASIC, up to the draft of 9 April 2002 124 After 1 February, Mr Carter's role was confined to preparation of his expert's report with help from his assistants. 125 The evidence indicates that the involvement of Ms Reynolds, and to a lesser extent Ms Rock and Ms Walford, in the drafting of the Carter Report was extensive. Mr Carter gave evidence that "a lot of" the sentences in the Carter Report were drafted by PwC personnel other than himself, in particular Ms Reynolds, Ms Rock and Ms Walford (T 2395.26-33). It seems to me probable that the vast bulk of the initial drafting was done by PwC staff other than Mr Carter but in consultation with him, with Mr Carter then reviewing, amending and settling their drafts. I say this because the billing records indicate that in the period between 2 February and 9 April Mr Carter recorded 35 hours on the matter while his assistants recorded a total of approximately 1200 hours. Their work was not confined to the drafting of the report, as I shall explain, but Mr Carter's recorded time indicates that his was a consulting and reviewing role rather than a primary drafting role. I note in passing that Ms Rock's assistance was given at a time when she was on secondment to ASIC. 126 I regard it as likely that the 21 November report was a significant influence on Ms Reynolds and the others in their preparation of the initial draft, for the following reasons. They had done a great deal of the work in preparation for the 21 November report and the investigation surrounding it. The 21 November report encapsulated the PwC team's views on a substantial range of matters that were also to be addressed in the Carter Report. It is plausible that they would have had regard to what was said in the 21 November report, and how it was said, in preparing the first draft of the new report. While Mr Carter did not agree that the 21 November report was used as the "starting point" for the Carter Report (T 2457.11-36), and Ms Reynolds said it was easy to put the 21 November report out of her mind for the purpose of preparing the Carter Report (T 1289.40-46), some paragraphs of the 9 April draft, and indeed of the Carter Report itself, appear to be substantially identical with the corresponding sections of the 21 November report. In cross-examination, seven paragraphs were specifically put to Mr Carter, and he agreed that it appeared, in each case, that the paragraph in the Carter Report was derived from the paragraph in the 21 November report (T 2458.9, T 2469.41, T 2471.14, T 2472.5). Therefore it is clear from the evidence that seven paragraphs were expressly derived from the 21 November report. There may have been other express derivations, although Mr Carter said he did not believe they were substantial (T 2458.24). But at the very least, the opinions and reasoning processes contained in the 21 November report must have been at the forefront of the minds of those who prepared those parts of the initial draft that were dealing with substantially the same subject matter as the equivalent parts of the 21 November report, which the drafters had themselves assisted to prepare. 127 Those who assisted Mr Carter to draft his Report were contemporaneously working for ASIC on other assignments. Ms Reynolds, and also Ms Rock, Ms Walford and some other PwC personnel, assisted ASIC in various ways (some of which are noted below) in the preparation of the case, although another partner of PwC, Mr McClintock, replaced Mr Carter as Ms Reynolds' supervising partner. According to Mr Carter's affidavit of 2 November 2004 (para 11), ASIC instructed him not to be involved in what Ms Reynolds was doing for ASIC on other assignments, and he did not receive information from her pertaining to what she was doing for ASIC (T 2432.15). Ms Reynolds said in her affidavit that on 22 February 2002 she was instructed by ASIC to keep her role separate from Mr Carter, and not to discuss details of the work she was doing for ASIC with him, although Mr Carter's evidence (T 2385.4-2386.1) was that a mutual constraint to that effect commenced to operate from the beginning of February. 128 When he was asked whether he expected his staff to bring to his attention any relevant information about the matters that were going to be the subject of the Report, he said (T 2512.3-8): "From 1 February 2002 Ms Reynolds was engaged in work apart from assisting me. To the extent information was gained in that work, I do not believe it had any impact on the contents of my report and I am unaware of that information." 129 Ms Reynolds' assistance to ASIC in the preparation of the case was extensive. The scope of that can be seen from a document headed "Civil proceedings matter of One.Tel Ltd (in liquidation) - Action List - 18 Mar 02". For example, she provided comments on a Ferrier Hodgson critique of the statement of claim and assisted with the amended statement of claim (T 884.46). She interviewed a number of former One.Tel finance staff (T 785.28), including Mr Holmes (T 1003.29), Mr Werner and Ms Randall (T 972.6). 130 Ms Reynolds participated in a conference with Mr Holmes and counsel on 21 February 2002, and subsequently obtained information from Mr Holmes, which was eventually used in the preparation of the Carter Report (T 1004.7-24). She called Mr Holmes on occasions, in order to asking questions when she came across an issue she did not understand (T 1001.35-39), and spoke with him to obtain background information, such as general ledger information, and to discuss accounting issues in relation to the digital and fixed-wire business (T 1002.7-.20). She met him twice at ASIC's premises early in 2002. Early in 2002 she read a file note prepared by Mr Holmes, which she found useful to her understanding of the documents she was examining (T 1014.21-46). She said, however, that she could not remember anything from the discussions with Mr Holmes that related to 2001 and was of use in relation to One.Tel's financial position that was relevant to the Report (T 1139.20); and that, as the Report was based on documentation, there was nothing Mr Holmes told her that was of use (T 1139.36-1140.22). 131 Ms Reynolds also reviewed and commented upon draft affidavits of Mr Holmes, Ms Randall and Ms Ashley (T 705.28) and of several major overseas creditors of One.Tel (T 707.43). She reviewed United Kingdom documents and identified documents to be provided in a draft tender bundle in respect of the quantification of damages. She prepared a table identifying what information each director had and what the significance of that information was. She reviewed the documents available to ASIC for relevance to the proceeding (T 785.30). 132 Ms Reynolds gave evidence of a number of matters that she did not discuss with Mr Carter during this period. Generally, she said she regarded it as important for Mr Carter to have access to relevant information for the purposes of his Report, only to the extent that it was provided by ASIC (T 1284.4-7). She said she did not discuss with him at that time any of documents she saw at Mr Elliott's chambers, other than documents that became available to him through ASIC (T 768.20-40). She said she did not discuss with him a draft she had seen of Ms Ashley's affidavit (T 888.45-889.6). She said she spoke to Ms Ashley about her analysis, but did not convey the results of further discussion with Ms Ashley to Mr Carter (T 996.44- 997.4). She said that she made a decision not to communicate to Mr Carter information obtained through discussions with various witnesses or former employees of One.Tel (T 1055.9-16). 133 Mr Carter's evidence about receiving information from Ms Reynolds was to the following effect. He said that it was not possible for him to say whether Ms Reynolds kept information or documents from him (T 2384.39), and that he believed she would have followed ASIC's instructions as to what she could provide to him (T 2512.31-33). It was put to him that if he was discussing with her documents such as the deferred payments listing, for the purposes of his Report, Ms Reynolds would not hold back from him information relevant to that document. His answer (T 2512.40-43) was as follows: "Certainly to the extent that she may have been aware of something that contradicted an opinion I was about to express, I would hope that she would ensure that somehow was drawn to my attention, but otherwise, I can't comment." 134 That is a telling comment. Accepting all of the evidence of Ms Reynolds and Mr Carter about ASIC's instructions, it seems to me unlikely that matters in the emerging drafts of the Report would have been allowed by Ms Reynolds to remain inconsistent with information she obtained in the course of her other assignments for ASIC. Indeed, if Mr Carter were party to arrangements that might prevent him from having access to facts which, were they known to him, would cause him to change his opinions, he might arguably be in breach of his duty: see Schedule K to the Supreme Court Rules, para 8. 135 The documentary evidence does not shed much light on the question of communication of information to Mr Carter from his assistants in this period. Some of the drafts of the Report had been destroyed, as PwC had a policy of destroying drafts of completed documents. The working papers prepared in respect of One.Tel are extensive in volume and have been kept without differentiation between work for the preparation of the Report and work undertaken for other purposes. Further, no minutes were taken of the meetings between Mr Carter and his assistants, and the timesheets that were kept by PwC personnel do not record details of the actual work performed, and it is not even possible to discern from PwC's billing records whether particular recorded time related to the drafting of the Report or other ASIC assignments. The court is left with the oral evidence of Mr Carter and Ms Reynolds, which is not convincing on this point, especially because Mr Carter's recollection was poor in relevant respects (see, for example, at T 2351). 136 In the circumstances, I regard as significant the evidence before me as to how Mr Carter and his assistants carried out their respective tasks, and as to the degree of contact and interaction between them. 137 The arrangements made by ASIC and within PwC to separate the role of Mr Carter in preparation of his Report from the roles of his assistants in performing assignments to assist ASIC to prepare its case were limited, ad hoc arrangements falling well short of the "Chinese wall" arrangements adopted by investment banks, accounting firms and firms of solicitors, and even those strict arrangements are not always effective: see Prince Jefri Bolkiah v KPMG [1999] 2 AC 222, at 239 per Lord Millett. Both Mr Carter and his assistants continued to use the office that had been allocated to PwC at ASIC's premises during this time (T 2666.13), although Mr Carter also worked from his own office and at home (T 2666.20). Mr Carter had meetings with his staff who were assisting him to prepare the Report, including Ms Reynolds, Ms Rock and Ms Walford, although they were working on other assignments for ASIC as well (T 2656.12). Ms Reynolds gave evidence that she discussed with Mr Carter information contained in draft affidavits by some of One.Tel's overseas creditors and Ms Ashley (T 1286.17-36). Mr Carter was aware that Ms Reynolds was meeting with Mr Holmes (T 2668.30) and was interviewing Mr Werner (T 2668.38). He gave evidence that he reviewed particular documents that he relied on for the purposes of his Report with Ms Reynolds or other PwC personnel, although he could not remember what they told him about the documents (T 2350.31-2351.13). He accepted that his assistants may have given him explanations of those documents that may have helped him, but he added the qualification that he did not know that the explanations went beyond the face of the documents themselves (T 2351.20-24). 138 There are 43 volumes of working papers retained by PwC in relation to One.Tel. But the working papers prepared by PwC personnel in the course of their assignments for ASIC are not separated in those files from papers prepared in the course of drafting Mr Carter's Report. Mr Carter said that he had access to the vast majority of the working papers prepared by his assistants in relation to One.Tel (affidavit dated 10 August 2004, para 4). This suggests that, during the period of preparation of the Report, he had access to at least some of the material that Ms Reynolds and other members of the team had obtained in the course of their assignments for ASIC. It is not clear whether he actually took advantage of that access to obtain information relating to those assignments (T 2607.10-2609.33). 139 It seems to me correct to infer from the evidence, summarised above, of the continuing close relationship between Mr Carter and his assistants, notwithstanding the evidence of Mr Carter and Ms Reynolds about the separation of their functions, that it is more likely than not that the information obtained by Ms Reynolds and other PwC personnel in carrying out their continuing assignments for ASIC influenced the drafts that they prepared of Mr Carter's Report, and that their discussions with him are likely to have influenced the formation of his opinions for the purposes of the Report without any communication of information contrary to ASIC's instructions. Even if that were not so, the evidence would least establish a significant risk that information gained by his assistants contemporaneously with the preparation of his Report influenced the formation of the opinions expressed in the Report. 140 In reaching these conclusions, I have not relied on the evidence that Mr Carter read and annotated the action list dated 18 March 2002 (T 2657.17). I accept his evidence that his review of such a document, relating to his staff's work for ASIC, was a one-off lapse not indicative of a wider practice (T 2660.35). 141 I have taken into account the evidence of Ms Reynolds as to the way discussions with former One.Tel staff assisted her to understand some of the documents. For example, she said that Mr Boaden "gave us his explanation for certain issues, but we still had to try and substantiate those issues back to the records, the underlying records of One.Tel, and often we were not able to do that" (T 826.25). Mr Carter said that when what a witness said could not be "substantiated" by reference to the records, the information was not used (T 2348.39-2349.24). But it seems to me that such evidence illustrates the problem, rather than answering it. The explanations given by One.Tel staff would, in all probability, have provided the framework of knowledge within which the "substantiation" took place. Ms Reynolds may have found it "quite easy" to put specific pieces of information gained from potential witnesses out of her mind (T 1289.30-38, 1290.25), but her evidence did not convince me that she identified and excluded the explanatory foundations for documents that it appears she obtained from witnesses. 142 ASIC drew an analogy between the process of receiving explanations of documents from witnesses, and the case of a lawyer trying to understand a long and complex High Court judgment. The lawyer might discuss the judgment with someone more familiar with it, or might point to particular parts as keys to an understanding of it. Once those parts are examined and the judgment as a whole is read and understood, the oral information that was provided loses all significance. It seems to me, however, that this analogy is a false one. The text of a judgment is, though it may be long and complex, presumably capable of being read, absorbed and understood by the lawyer without assistance. The discussion he has with someone else merely shortens the process. In the case of the multitude of financial documents of One.Tel, on the other hand, the problem seems to be (as explained more fully below) that some of the documents do not speak for themselves, and so the explanation is not simply a shortening of the process of gaining an understanding of the documents, but an irreplaceable component of it.
5.13 The draft report of 9 April 2002 143 By 5 April 2002 the drafting of the Carter report was well advanced. On that day a draft numbering 141 pages and dated 4 April 2002 was sent to Mr Carter at home, so that he could spend some time reviewing it over the weekend (T 2589-2590). Like the final Report, the draft contained four sections and appendices. Mr Carter revised the draft, recording 18 hours of work in the period from 7-9 April, and a new draft dated 9 April 2002 was then produced. On 10 April the first three sections of the draft report were sent to ASIC and its legal advisers for review. The fourth section was sent to ASIC about 22 April. 144 For the purposes of preparation of the draft, Mr Carter and his team had access to ASIC's electronic and documentary material without restriction, except as to certain material relevant to a criminal investigation of Mr Silberman in respect of a specific matter, which continued until the first half of 2002 before being terminated without charges being laid. 145 The 9 April draft was obviously a well-advanced draft, but it was incomplete. For example, the footnoting was incomplete and Appendix B (sources of information) was "to be completed". As the defendants pointed out in their principal submission, it is therefore impossible to know to what extent sources of information other than those which ultimately came to be listed in Appendix B of the final Report were actually used in the preparation of the draft. 146 ASIC submitted that the comparison of the 9 April draft and final Carter Report shows that there was little reliance in the draft document on information not sourced from documents ultimately listed in Appendix B of the final Report. ASIC produced a note on express and implied references to "excluded materials" in the 9 April draft, which was marked AS 33, identifying only nine such occasions. In DS 37, paras 156 and 157, the defendants listed 33 cases of what they claimed were express or implied references to such excluded materials. ASIC responded to the defendants' claims in a supplementary submission marked AS 43. 147 I have reviewed these submissions, and I have reached the conclusion that the following are examples of use, in the 9 April draft, of materials subsequently excluded from consideration: (a) in the chronology of events in paragraph 23, the entry for 21 March 2001 records a statement by Mr Rich in his s 19 interview that he sent an e-mail to Mr Murdoch on that day; (b) the entry for 20 April 2001 identifies when Mr Miller and Mr Green began their review of One.Tel for PBL/CPH; (c) one of the entries for 23 April 2001 relies on a statement from Mr Rich's s 19 interview; (d) one of the entries for 26 April 2001 refers to a meeting between Mr Rich and Dr Clark; (e) one of the entries for 8 May 2001 refers to a statement by Mr Packer; (f) the entry for 18 May 2001 refers to PBL/CPH analysts commencing due diligence; (g) paragraph 29(a) refers to a matter "according to Mr Chris Werner"; (h) paragraph 54 gives an account of the circumstances in which $26 million was transferred from United Kingdom operations two the Australian operations, apparently based on accounts given are expected to be given by Mr Werner and Mr Weston; (i) paragraph 70 attributes various adverse consequences in the UK operations to the $26 million transfer; (j) paragraph 90 records some information "according to Ms Randall"; (k) paragraph 114 says that the deferred payment lists were maintained by Ms Randall and reviewed by Mr Hodson Mr Silberman, suggesting that Ms Randall was the source of the information; (l) then various statements are made in paragraph one 114-118 regarding the March 2001 deferred payments listing, suggesting the source was Ms Randall; (m) paragraph 119 explains One.Tel's system of recording forecasts of daily cash receipts and payments, without attributing a source, in circumstances where the source was probably Ms Randall; (n) paragraph 120 refers to the document 20.02.xls as being Ms Randall's March 2001 forecast; (o) paragraph 126 refers to Mr Pryke's statement of 12 October 2001; (p) paragraph 146 refers to Mr Basman statement of 20 November 2001; (q) paragraph 200 refers to an exhaustive summary of possible sources of revenue prepared by Ms Ashley on 28 March 2001, and says that approximately $28 million was identified by Ms Ashley "as the total possible amount that could be billed"; (r) paragraph 221 refers to Ernst & Young's notes of a discussion with Mr Silbermann, according to which Lucent has agreed that $12 million owed to it by One.Tel was not payable until after 30 June 2001; (s) the footnote to paragraph 298(b) refers to evidence given by Mr Miller of PBL; (t) paragraph 305(i) says that information should have been disclosed concerning management's strategy to improve credit controls relating to credit checks on customers, adherence to credit limits and call restrictions on discontinuation for late paying customers, matters that appear to have been sourced in witness statements rather than documents; (u) paragraph 315 says that the EBITDA loss reported in the management accounts for digital and fixed wire was adjusted by total $10.6 million, "refer Tim Homes' affidavit"; (v) paragraph 319, which notes that the flash reports did not include earnings in relation to the international GWUK business unit, says "need to check with Tim Homes as to why"; (w) paragraph 357, which gives an examples of explanations to the board that were incomplete, refers to board papers of 30 March 2001 and identifies as an issue "per Mr Pryke in his statement dated 12 October 2001"; (x) draft Appendix B gave a generic description of the "sources of information" that were ultimately to be listed, including "transcripts of interviews conducted pursuant to section 19"; (y) draft Appendix XX ("Key People and Description of their Roles" - corresponding with Appendix D in the final Report) listed various people including Ms Ashley and Mr Basman; (z) paragraph 16 of Appendix XXX, under the heading "Leased assets and liabilities", says that "according to Mr Holmes" the Australian operations accounting for leases since December 2001 were not properly performed, and therefore Mr Carter says he has not relied on various trial balances in relation to leased assets and liabilities. 148 So far as it relates to the paragraphs of Section 4 of the 9 April draft, the above analysis assumes that the draft as submitted to ASIC was not significantly different from the 4 April draft sent to Mr Carter for review, which is in evidence before me. Where something was listed in DS 37 but is not mentioned in the above list, I have excluded it for the reasons given by ASIC in AS 43. 149 There are two other matters in the defendants' list where it is not possible, on the evidence before me, to say whether the 9 April draft relied on excluded materials: (i) paragraph 21 footnote (1) says that "available evidence" indicates that board papers were likely sent out less than two days in advance; there is some partial evidence for this in the documents, as ASIC has pointed out, but it is not clear to me that this evidence was relied upon in the draft, or would be sufficient to support the assertion; (ii) in the chronology of events in paragraph 23, the entry for 20 February 2001 says that Ms Randall prepared the March cash flow budget; the documentary source relied upon by ASIC is the properties page for the I:drive which shows that the document was last saved by Ms Randall, but not necessarily that she was the author. 150 ASIC submitted that Mr Carter's reliance on excluded materials in the 9 April draft was inconsequential, and therefore the foundation for Mr Carter's draft opinions was the documentary evidence rather than the statements and transcripts. ASIC drew attention to Mr Carter's evidence, and to information provided by Ms Randall, that to the extent that such information continued to be used, it was because it was able to be used without relying on anything from her (T 2515.37). I agree that the sourcing of a few of the statements in the 9 April draft in excluded materials is of no significance, because a better source for those statements was found in the final Report. An example is the statement in paragraph 125-6 of the draft that, in exchange for Lucent agreeing to postpone One.Tel's payment of outstanding non-financed payments until after 30 June 2001, One.Tel agreed to purchase additional equipment from Lucent. In the 9 April draft, the source of One.Tel's agreement was said to be Mr Pryke's statement of 12 October 2001. The final Report referred (at [149]-[150]) to the terms of the letter agreement itself, in fact a better source for the same information. 151 More often, however, a close review of the evidence leaves one with the impression that the excluded materials created an opinion about the significance of documents going beyond what could legitimately be inferred from the documents themselves. The best examples of this emerge from the defendants' exploration, in cross-examination, of the true sources of certain parts of the final Report. I shall consider these later. Three other examples arise directly from the list of matters in the 9 April draft sourced in excluded materials, especially when considered in the light of ASIC's submissions. 152 First, paragraph 29 of the 9 April draft records Mr Carter's view that certain adjustments are appropriate to the cash balances reported to the board, in order to calculate the available cash balance for the purposes of his report. The adjustment made in paragraph 29(a) was to reduce the international operations and the Group's bank balance by $8.28 million to reflect bank guarantees or cash pledged to secure international lease liabilities "which, according to Mr Chris Werner … was therefore not cash which was available for payment of other obligations". ASIC's comment on this, in AS 43, was that the $8.28 million bank guarantees were sourced in the final Report to both the European cash flow forecast and the Ernst & Young report, rather than to Mr Werner's evidence. But the reply misses the point that the evolution of the final Report provides a basis for inference that Mr Carter developed his view as to the need to reduce the cash balance by reference to the "pledged" amount by recourse to Mr Werner, whose reasoning process is not set out. 153 Secondly, the assertion in paragraph 70 to the effect that the $26 million transfer caused the UK operations to experience difficulties in paying creditors and consequently WorldCom withdrew its supply of carrier and network services, appears (though the inference is not clear) to have been based, if one reads paragraphs 54-70 together, on the evidence of Mr Weston and Mr Werner. ASIC's comment in AS 43 is that in the final Report, where substantially the same "cause and effect" conclusion is expressed at [94]-[95], the conclusion relies on documents, listed at some length. But again, there seems to be a basis for inference that formation of Mr Carter's view was influenced by the evidence which Mr Carter was later told to disregard. It is not by any means manifest that the documentation invoked in the final Report demonstrates, of itself, the validity of the conclusion that the transfer caused the later difficulties (for example, the documentation shows that the UK operations owed over $54 million to carriers, of which about $40 million was overdue, a week after the transfer, matters that would suggest, in the absence of explanation, that the financial difficulties were probably caused by other, earlier events). 154 Thirdly, paragraph 119 of the 9 April draft explains how One.Tel's system of recording forecasts of cash receipts and payments operated. ASIC's comment in AS 43 is that the relevant documents themselves show that it was Ms Randall who prepared the cash flow spreadsheets. But this misses the point that paragraph 119 does not assert who prepared the spreadsheets, but purports to explain them, by giving an explanation which would not seem to emerge organically from a perusal of the documents themselves. The same point can be made about the explanation of deferred payment lists at paragraphs 114-118. 155 There are three grounds for concern that significantly more of the 9 April draft than the 26 examples identified above, might have come from sources other than Appendix B in its final form. First, it is plain from the draft chronology, the draft list of sources of information, and the draft list of "key people", that excluded materials were a significant part of the pool of information upon which the drafters of the 9 April document drew as sources for the draft opinions, regardless of whether particular opinions were specifically sourced in them. It is clear from a reading of the 9 April draft, as it is from a reading of the final Report, that the drafters did not set out to provide specific footnoted sources for every proposition, being content from time to time to rely on the general assertion that the Report was based on the documents in Appendix B. In the 9 April draft, those general sources were to be wider. 156 Secondly, Mr Carter gave evidence that in April 2002 he believed that he was permitted to look at witness statements for the purpose of preparing the Report, but he said he was "nervous about it, given the delineation between Ms Reynolds' work and my work" (T 2596 .7-9), and was "keen to minimise" references to witness statements in the draft (T 2596.26-29). This creates a ground for reasonable apprehension that the PwC staff who prepared the initial draft might have been, or have felt, discouraged from referring to witness statements as the source of propositions in the draft, even though they were in fact the sources. 157 Thirdly, the history of PwC's involvement in ASIC's investigation, and the fact that the draft of 9 April was prepared at a time when there was no restriction on PwC's ability to rely on information, make it probable that a wide range of information, including information not listed in the final Appendix B, was influential in the drafting process. Specifically, I refer to my findings, above, as to the influence that the 21 November Report, and the work of PwC personnel on other assignments after 1 February 2002, had on the drafting of the 9 April draft. 158 This is not just a matter of the influence of particular documents such as s 19 transcripts or draft witness statements, which can be (at least theoretically) identified and put to one side. By April 2002 Mr Carter and his staff (especially the latter) had received considerable assistance from former One.Tel employees including Ms Randall, Ms Ashley, Mr Basman and Mr Holmes. It seems likely that (and if that were putting it too highly, there would at least be a substantial risk that) their assistance contributed to the PwC team's understanding of how the One.Tel business and its accounting systems worked, who were the people referred to in relevant documents and what were the positions they held, what documents were significant for the purpose of the forensic issues under investigation, what particular documents (such as complex electronic spreadsheets) meant and how they were used internally at One.Tel, and what methodologies were used for the financial analyses reflected in documents.
5.14 The revision of the 9 April draft 159 After the draft of 9 April had been prepared, PwC were told by ASIC that they were not to rely, for the purposes of the Report, on the contents of s 19 examinations or information in affidavits, witness statements and drafts of them (T 2348.42-2349.5). It appears that this instruction, of which there are no written records (T 2318.32), was given after the 9 April draft was delivered to ASIC. 160 Ms Reynolds gave evidence that two sets of instructions were received. Initially PwC were told not to rely on information contained in the s 19 transcripts, and then later, towards mid-May 2002, there was another instruction that they were not to rely on any material contained in affidavits or statements, and that the Report was to be substantiated by documentation and not through evidence or oral evidence (T 1009.34-38, T 1013.1-14, T 1012.23-26). She said the instructions were oral and given to Mr Carter, who passed them on to her, and she was unaware who gave them to Mr Carter (T 1009.40-1010.2). Mr Carter gave evidence that the instruction was received by him from ASIC's counsel (T 2317.3). He said he could only remember one specific occasion, in mid-April 2002, but that there were probably reminders as well (T 2318.17-20). Ms Reynolds' evidence of two instructions seems to be the stronger recollection and I prefer it. 161 By the time those instructions were received, Mr Carter had formed preliminary opinions for the purposes of the Report, that he was in the process of finalising (T 2317.39), and had done so without seeking to exclude the information he had then been instructed to disregard (T 2596.31-37). As I have noted, the 9 April draft made various references to the subsequently excluded material. 162 Thereafter the draft was revised to remove references to any such information. Thus, for example, the chronology in the draft was altered to remove to references to Mr Rich's s 19 examinations, which had been described in the draft as "significant events", and to remove references to matters attributed to Mr Miller, Mr Green and Mr Packer. The appendices of the draft were amended to remove a reference to the analysis of unbilled revenue prepared by Ms Ashley. Many other examples are given in the defendants' principal submission (DS 37, para 177). Additional information obtained by Ms Reynolds after the instructions were received was not used in the revision process (T 1009.9-38). Mr Carter said that the process of revision required, in one case, removal of a portion of his report because it was no longer possible for him to express the relevant opinion (T 2346.47-2347.19). 163 Although the draft was extensively reviewed in this manner, the opinions expressed in it did not substantially change.
5.15 The "re-forming" of Mr Carter's opinions 164 Mr Carter conceded in cross-examination that until after 9 April 2001, he believed he was free to use all the information that was available to him and his assistants regarding One.Tel (T 2387.20-38), and he said that at the time, he would have wanted to read everything that was relevant (T 2388.3-7, T 2389.1-5). 165 He said in cross-examination that none of the information he had been told to disregard formed the basis of any of his opinions in the final Report (eg, as to a particular document, T 2514.21-28; see also T 2259.19-44, 2260.13-25, 2344.34-2345.8, 2346.31, 2349.12). He said (T 2352.47): "I accept that it was impossible for me to forget everything deliberately but I do believe it was entirely possible for me to form my opinions without regard to the material previously available to me". Ms Reynolds gave evidence generally to the same effect (T 965.45-966.9, T 1139.20-1140.22). However, Mr Carter could not say that he had completely forgotten what he had previously done, while insisting that it was possible to form opinions without regard to that material (T 2352.47-2352.3, T 2457.42-47); or that his assistants were able to put their work on other matters completely out of their minds (T 2457.38). 166 Mr Carter gave evidence explaining how he had carried out the process of review after receiving ASIC's instructions. It amounted to saying that he put to one side the information he had obtained from s 19 examinations and witness statements and focused his attention solely on information contained in the documents which were eventually listed in Appendix B. Having done that, he "revisited" his opinions to see if they still stood (T 2352.40-42). He said (at T 2346.33-37): "I believe that I may have formed opinions as to the substance of things based on the pool of documents available to me where I was required to form the opinions again based on other documents, given that I could not rely on documents that had previously been provided." 167 When it was put to him that his understanding of the documents contained in Appendix B had been informed by interviews and examinations that he was then required to disregard, he said (at T 2349.12-18): "To the extent that it was, I do not believe that reliance was placed on any additional information, apart from what we were able to glean from the books and records themselves." He said his belief was that, to the extent that a document was not self-explanatory, he and his assistants did not use it (T 2349.23). 168 In their submissions, the defendants described Mr Carter in cross-examination on the voir dire as a witness who stubbornly resisted any suggestion of the possibility of error on his part, and they contended that this was demonstrated in his unwillingness to make concessions which were fairly required by the facts. They said that, time and time again during his cross-examination on the voir dire, Mr Carter sought to give evidence that he did not believe there was or could be an error, when the possibility of error was put to him, without any actual recollection or direct knowledge of the matter under consideration. They gave as an example the evidence Mr Carter gave at T 2679-2691, regarding his response to the possibility that there may have been an undisclosed assumption about non-payment of debts hidden in the statement in paragraph 141 of the Report that the majority of deferred payments were not paid prior to the Group being placed in administration. 169 It would be unfair for me to make findings adverse to Mr Carter's credit at this stage, when his evidence has been taken only on the voir dire and is incomplete (although it may not now continue). But it is appropriate for me to respond to these submissions, with respect to Mr Carter's evidence on the voir dire. 170 On the basis of his evidence, considered as a whole, and my observation of him in the witness box, I disagree with the defendants' characterisation of Mr Carter's evidence. He seemed to me to do his best to assess and respond to what was put to him by senior counsel for the defendants, without any "stubborn" preconceptions, though naturally enough in the belief that he had acted properly and professionally in accordance with his instructions. It is not surprising that his recollection was sometimes not complete when, through no fault of his, it had been some four months since he had done the bulk of his preparation (T 2774.17-23). Some of the matters upon which he was cross-examined in detail were raised without any prior opportunity to consider them. In the specific example stated by the defendants in their submissions, relating to paragraph 141 of the Report, there were aspects of Mr Carter's evidence that I found unpersuasive, as noted below in my consideration of the deferred payments listings, but not because of any concern about his general credit. I think his evidence about paragraph 141 has to be assessed in light of the fact that he was asked to deal with the matter without advance notice and without the opportunity to refer to the explanation he had already given in his affidavit of 23 July 2004. 171 ASIC submitted that when an expert is retained to give opinion evidence, "all manner of matters about the case" may have been communicated to him or her, either deliberately or accidentally, in the course of or prior to the engagement; but the expert must, and is able to, exclude those matters from consideration for the purpose of expressing opinions. One hopes that those instructing an expert are careful to avoid or minimise such communications. But I accept that accidents may happen, and it is generally true that the communication of such information does not justify exclusion of the expert evidence. As Sperling J observed in Elliott v Ivey [1998] NSWSC 116, at p 7: "The capacity of a professional person to give an opinion based on an exclusionary set of assumptions is implicit in the [the process of varying prior opinions or the assumptions on which they are based]. The implication is reasonable because professional men and women are accustomed to forming opinions on assumed facts in the course of their ordinary professional work. It is part of their stock in trade, developed by training and by experience in the practice of their profession." 172 However, ASIC's submission misapprehends the dimensions of the problem that I have found to exist in the present case. This is not a case of occasional inadvertent disclosure of matters which the expert must then disregard. It is a case of an expert working in another capacity, having unrestrained access to a vast array of information and forming opinions on the basis of it, and then being told that a substantial part of the information, including information going to the understanding of the documentary remainder, must be excluded. 173 I accept that Mr Carter genuinely believed, when giving this evidence, that he had not relied on information other than information in Appendix B, in forming the opinions stated in the Carter Report. I have no reason to question his competence or expertise as a forensic accountant. I make no adverse finding as to his credit. However, I have come to the conclusion that his belief was wrong. I have done so on the basis of my findings of fact set out above, and for the following reasons: (a) it is implausible that the substantial volume of information Mr Carter and his assistants had obtained from witnesses and in connection with s 19 examinations had no influence on the opinions formed by Mr Carter after he had read that information; (b) it is also implausible that documents were "self-explanatory" in cases where Mr Carter or his assistants had spent time in interviews with former One.Tel staff asking questions about the meaning and significance of those documents; (c) the implausibility of these matters is increased by the following facts: · part of information to be disregarded was obtained by Mr Carter or Ms Reynolds personally through interviews and attendance at s 19 examinations; · part of the information to be disregarded had been directed to assisting Mr Carter and his team in understanding the meaning of documents, the methodology underpinning them and the use made of them internally at One.Tel; · by the time Mr Carter was told to disregard the information, he had already formed the opinions in the draft of 9 April partly in reliance on it; · Mr Carter's opinions were initially formed on the basis of a "pool of documents", according to his evidence, and it is now not possible to say with certainty which documents in the pool were or were not influential; · the opinions in the final Report were substantially the same as the opinions in the 21 November report on many matters, and the 21 November report relied on matters excluded from the Carter Report; · the PwC staff who prepared the initial drafts of the Carter Report were concurrently assisting ASIC in the preparation of its case so that, during the drafting process, they had close involvement with the material they were later told to exclude; (d) in the absence of contemporaneous records, there is no satisfactory way to test or corroborate Mr Carter's evidence that he was able to exclude some of the information in the pool of documents upon which he originally relied and still reach the same views; (e) however, the evidence produced when counsel explored the basis for Mr Carter's belief about selected documents relied on in the Carter Report (considered below) showed that at least on those occasions, the documents were not explanatory and Mr Carter must have relied on additional information not disclosed in Appendix B. 174 My conclusion is not meant to imply that Mr Carter relied on all of the affidavits, witness statements, draft statements, and s 19 transcripts, but only that he must have relied on some such information. ASIC submitted that there was no basis for concluding that Mr Carter in any way relied on information given by Mr Rich in his s 19 examinations. That is probably correct. The defendants did not identify any particular reliance on information given by Mr Rich. 175 The defendants submitted that what in fact occurred was a process of "backing and filling" opinions already reached, in the sense that, having identified opinions that had been formed partly on the basis of information which was to be excluded, Mr Carter and his assistants tried to find the same information in other, permissible sources in order to justify maintaining the opinion originally reached, and where an explanation for a document could not be found in a permissible source, they claimed that the document itself was self-explanatory. In my opinion, the evidence does not support a conclusion in those terms, because such a conclusion would imply bad faith or a deliberate intention to mislead, matters not established by the evidence. It is more likely than not, in my view, that Mr Carter made a genuine effort in good faith to exclude the material he was instructed to exclude, to revisit his opinions and to re-form them without any reliance on or influence from those materials; but, for the reasons I have set out, it is more likely than not that his attempt to do so was unsuccessful, and he used and relied on excluded information for the purpose of expressing his opinions in the Report without consciously recognising that he was doing so. If that is wrong, then at least there is ground for reasonable apprehension that Mr Carter relied on or was influenced by materials he was required to exclude in the presentation of his opinions in the Carter Report.
5.16 Finalisation of the Carter Report 176 The Carter Report was completed after very substantial work by Mr Carter and his assistants over the period from October 2001 to May 2002 (T 2430.38-2431.6). From at least 15 May there were daily team meetings (T 862.32) and in the period from 15 to 31 May Ms Reynolds was involved in the finalisation of the Report (T 1277.1). A total of 2661 hours was recorded in PwC's billing records for the period from 2 February to 31 May 2002. 177 Ms Reynolds, and probably also Mr Carter, reviewed all the files on the finance directory of the I:drive, and had access to the LSS computer system and hard copy documents at ASIC's premises (T 773.25-774.26). Mr Carter discussed particular documents with his staff, and accepted in cross-examination that he may have been provided with explanations by them about the meaning of documents, but he did not concede that any such explanations went beyond the face of the documents themselves (T 2351.20-23). 178 The list of the documents that ultimately became Appendix B was not finalised, or even collated, until very shortly before the Report was signed on 31 May 2002 (T 2610.42; T 2624.21).
5.17 Specific problems with the Report 179 ASIC submitted that according to the evidence, the defendants have had access to financial records of One.Tel and the relevant s 19 transcripts and transcripts of other interviews, and witness statements obtained by lawyers acting for PBL, since 2002, and the documents provided by the liquidators since 2003. And yet, it was said, the defendants were not able to put to Mr Carter or Ms Reynolds any documents which were favourable to them that had been excluded from treatment in Mr Carter's Report. The only documents put to Mr Carter that he had not dealt with (certain aged debtors' reports) were the subject of unchallenged evidence by Mr Carter that he had not seen them before (T 2737.29, 2737.9-26, 2743.16-40). This, said ASIC, should give the court confidence in the thoroughness and quality of the Carter Report. 180 The defendants' attack on the Report did not squarely challenge these assertions. Instead, within the limited scope of their voir dire cross-examination of Mr Carter, the defendants sought to test, by examples, Mr Carter's evidence that he had fully set out in the Report the factual bases for his opinions and the reasoning processes by which he formed them. They did so by examining in detail four specific assertions in the Report, on the basis that their investigation of these matters was meant to be illustrative rather than exhaustive. They endeavoured to show by means of the selected examples that Mr Carter inevitably had regard to matters going beyond the documents listed in Appendix B in forming the opinions expressed in the Report. 181 In final oral argument the defendants referred to two additional matters regarding calculation of available cash (T 3206ff). I am not confident that the submissions were fully developed or that ASIC was given time to respond (T 3286ff). I have decided not to base my conclusions on those two matters. 182 ASIC has made an application to read another affidavit of Mr Carter, dated 29 November 2004, explaining some of the matters raised in cross-examination. In view of the prolonged voir dire cross-examination of Mr Carter and the prospect that, if another affidavit were read, there would be another bout of cross-examination which might eventually be shown to have been unnecessary, I decided to defer the application to read Mr Carter's new affidavit until after I heard and decided the questions of admissibility that had been raised. ASIC submitted that, as these matters had been raised with Mr Carter in cross-examination without any substantial notice, he was entitled to be given the time and opportunity to make a considered response, as part of ASIC's case in chief and Mr Carter's evidence in chief. 183 Having now had the opportunity to study the evidence with assistance from the submissions of the parties, I have decided not to grant ASIC's application to read Mr Carter's additional evidence. It seems to me that the defendants' case for rejection of the Carter Report on Makita principles and in the exercise of the court's discretion would be made out even without the four examples which were explored in evidence. My reasoning for that conclusion is set out elsewhere. Therefore to receive supplementary evidence about the four examples would be a waste of time. Nevertheless the four examples still need to be considered because they exhibit some features of the Report of general significance. I recognise, in doing so, that it would be unfair to Mr Carter to make adverse factual findings on matters that he had wished to address in the continuation of his evidence in chief. But there are still some useful factual findings that can be made. It is appropriate to make findings (for the purposes of the present decisions) as to whether Mr Carter must have taken into account excluded materials or must have used undisclosed reasoning processes in May 2002, though not (in the absence of hearing further evidence from Mr Carter) to make findings as to the source of the extraneous materials. 184 ASIC submitted, in respect of some of the four examples, that the defendants' complaints "ring hollow" given that no objection was made on the same grounds in the defendants' written objections to the Carter Report (Exhibit P2) and there was no other notification to ASIC or Mr Carter, prior to his cross-examination on the voir dire, that the points would be taken. In my opinion this submission by ASIC does not lead anywhere. The fact is that the defendants were not prevented from raising their complaints about the five selected areas in cross-examination, and so those matters are now before the court. Their points are either right or wrong, whether or not they were thought of at an earlier stage. 185 In dealing with each of the four areas, it will not be necessary for me set out the effect of the quite lengthy cross-examination in close detail. I shall endeavour to give an account of the overall shape and content of the cross-examination and draw some conclusions from it. I do not regard the cross-examination as showing any form of irrational determination on the part of Mr Carter to demonstrate that the opinions stated in his Report were sourced in Appendix B, much less an exercise in "sophistry and evasion". In my opinion, he attempted conscientiously and in good faith to assist the court in respect of matters of which he had not received advance notification, although he genuinely believed that his opinions were based solely on the documents in Appendix B. It is nevertheless open to the court to find that Mr Carter's genuine belief was mistaken. 186 It is important, in applying the Makita principles in detailed areas such as the four example areas, to take a pragmatic approach. Logically every expression of expert opinion employs unarticulated assumptions at a basic level: depending upon the expertise in question, basic assumptions about such things as human nature, human anatomy, atmospheric conditions on earth, the workings of the market economy and so on. It would be absurd to suggest that background facts of these kinds must be stated in the expert's report, and the reasoning processes surrounding their application must be explained. 187 Thus, it would be impossible for an accounting and financial expert, reviewing masses of documents, to articulate in his or her report every single presumption, inference and reasoning process surrounding the expressions of opinion. For example, if an electronic document lists figures for March and April without stating a year, but its properties page indicates that it was created in 2001, it will not normally be necessary for the expert to articulate as an assumption that the figures are 2001 figures, or to set out in the report a reasoning process which draws upon the properties page. If pressed, the expert can explain why he or she was persuaded to treat the figures as 2001 figures. The explanation may have been recorded (and was recorded, one hopes) in a working paper, and if so, it can be left at that level. But where the reasoning process is less obvious, and especially where, additionally, the document is a significant one, a full explanation will be called for in the report. Similarly, when an expert is reviewing thousands of financial and business documents of a large company, there will presumably be fairly frequent occasions when it will be necessary to decide whether several documents are versions of one another or separate documents, and if they are versions of one another, which version is to be used. While, again, it would be appropriate for the reasoning process to be recorded in working papers, it would not normally be necessary, in each such case, for the report itself to set out the reasoning process by which one version of a document is preferred to another, or even to note that several versions of the document have been found. Again, judgment has to be exercised as to whether the reasoning process for selecting one version rather than another is straightforward, and whether the document is of significance. 188 I have tried to assess the defendants' criticisms of the Carter Report with such pragmatic considerations in mind. On the whole, however, I agree with the defendants that the documents relevant to the four areas selected for examination are documents of some significance, and so one would expect to find disclosure of sources and reasoning processes with respect to those areas in the Carter Report in order to satisfy the Makita standard.
5.18 (1) Dates upon which management accounts were "finalised" 189 In paragraph 388(b) of his Report, Mr Carter says: "The management accounts for digital and fixed wire business unit [sic] were not produced on a timely basis. For example, the February management accounts were not finalised until early April 2001, March management accounts were not finalised until mid-May 2001 and April management accounts were not finalised until after the Group was placed into administration." 190 These facts are contentious. The defendants plead in their Defences that the management accounts in question were "drafts" which were not "finalised": eg para S46A(e) of Mr Rich's defence. ASIC made a curious submission which only served to demonstrate the contentious nature of the matter, saying that if the accounts were only "drafts", the final accounts (if prepared at all) must have been even more untimely. 191 I agree with the defendants' submission that the facts concerning the alleged untimeliness of the management accounts are an important part of Mr Carter's reasoning process, because they contribute to his opinion that the board was not provided with timely, accurate and reliable information on earnings (Carter Report, paras 25-27), and his subsidiary opinions criticising the adequacy of the flash reports provided to the board and the earnings information reported to the board on 30 March 2001 (paras 318, 319, 337, 391, 392). ASIC submitted that the dates of finalisation of management accounts were one of many matters mentioned by Mr Carter in connection with the adequacy of One.Tel's reporting systems (paras 349-402). It is true that they were only one aspect of Mr Carter's reasoning, but the statements in paragraph 388(b) were presented as a matter of significance to Mr Carter's opinions. 192 Paragraph 388(b) does not itself articulate the source for the assertions that it makes. Evidently doing the best he could in the witness box, Mr Carter said he was unable to identify the source of the information from Appendix B without recourse to his documents (T 2389.42), and made some suggestions as to the source of information. 193 What happened, in summary, was that Mr Carter suggested that the information came from the "properties boxes" produced by the computer in respect of the documents identified as management accounts (T 2389.42-2390.25). But when this was explored in cross-examination, it appeared, for various reasons, that the properties boxes were not the sources of information in respect of any of the three months in question (T 2425-6). Mr Carter suggested that a "cross-referenced version" of his Report, prepared by one of his staff in June 2002, might assist, but that, and other cross-referenced versions that were then found and brought to the court, did not identify the source of the statement either (T 2418.21). Mr Carter also suggested that the dates may have been obtained from the properties boxes for other documents including, perhaps, a trial balance document (T 2424.23, T 2398.41, T 2426.37). But after it was explored in cross-examination, that suggestion appeared to be unhelpful (T 2427). Nor did anything helpful emerge from Mr Carter's response to a request that he produce any working papers in relation to paragraph 388(b) (T 2692). 194 The defendants submitted that the contentious and important statements in paragraph 388(b) could only have been based on some expert knowledge in relation to the properties boxes obtained by Mr Carter from someone else, or on some undisclosed process of inferential reasoning. They urged the court to infer that the information in fact came from someone else, rather than by a process of inference from the documents. They submitted that support for such an inference could be found in Mr Carter's evidence that in December 2001 he had read statements and file notes of former One.Tel employees (T 2389.1), which probably included the file notes of Mr Holmes (T 2389.21), and in evidence that it was likely that the time of preparation of the management accounts was something Mr Carter had discussed with his assistants (T 2394.4, T 2424.4), and that those assistants had discussions with employees of One.Tel (T 2424.13). 195 I have previously described evidence that shows that Ms Reynolds had some contact with Mr Holmes prior to finalisation of the Carter Report, including evidence that she had two meetings with him early in 2002 and called him to ask questions about matters she did not understand. Ms Reynolds gave evidence that early in 2002 she read Mr Holmes' file note on financial reporting and found it useful to her understanding of the documents she was examining at that time (T 1014.21). The defendants drew attention to a folder of documents produced on subpoena by PwC, labelled "Tim Holmes docs". The folder included a file note, probably prepared by Mr Holmes (T 2697.30), annotated in Ms Reynolds' hand (T 2700.33) and partly highlighted in yellow highlighter. The highlighted parts of Mr Holmes' note refer to completion of the February and March management accounts in early April and mid-May respectively, and to the fact that the April management accounts were not completed by the time of appointment of the One.Tel administrators. 196 Mr Carter rejected the suggestion that Mr Holmes' file note was the source of the statement in paragraph 388(b) (T 2698-2700). But the defendants submitted that the court should infer that it is more likely than not that the source of information in paragraph 388(b) was Mr Holmes' file note. They said that on no sensible view could the information have been obtained from any of the sources hypothesised by Mr Carter. I am prepared to say, on the evidence that is before me now, that the inference is made out, in the absence of further explanation by Mr Carter. The Report, as it stands without further supplementation, is defective because it does not identify the factual basis for paragraph 388(b) or the reasoning process by which a documentary source is provided for the statements in that paragraph. And it is significant, in terms of the exercise of discretion under s 135, that the defendants, in an effort to get to the bottom of what appeared to be a single, unexceptional statement of fact in the Report, engaged in a process of lengthy and detailed cross-examination over more than a day, and found it necessary to put before the court information (Mr Holmes' file note) which would not otherwise be evidence in the proceeding.
5.19 (2) Comparison.xls 197 The Carter Report identified a progressive deterioration in the financial position of One.Tel in the period from January to May 2001. In paragraph 18 of the Report, Mr Carter gave as one of the three reasons for that state of affairs "decreases in gross margin arising from revenue and gross margin percentage shortfalls against budget and against the results of the previous six months". 198 This is more fully explained in section 3.3 of the Report, paragraphs 242-249. There, Mr Carter expresses the opinion that lower than budgeted revenue for the digital and fixed wire business during 2001 resulted from "a significantly lower than budgeted ARPU [Average Revenue Per User] per month" (para 242), and that a major cause of the deterioration in the gross margin percentage for the digital and fixed wire business "was the change in sales composition for the digital and fixed wire business where a greater proportion of revenue was derived from low margin, even negative margin, sales such as local calls, compared to higher margin products such as long distance and international calls (para 247). 199 As the defendants pointed out in their submissions, these are matters of some importance, because they are an integral part of the reasoning process for explaining why One.Tel did not perform in 2001 according to its business plan. The Report sources these statements to page 4 0056 of the exhibits to the Report. As ASIC pointed out, the issues posed by the defence are whether this was a "major cause" of the deterioration in gross margins for the digital and fixed wire business, and when the problem was detected, rather than whether there was any change in sales composition and whether any such change was causally related to the shortfall in expected gross margins. That means that the issues between the parties are limited in scope, but in my opinion they are nevertheless of considerable significance. 200 In fact page 4 0056 appears to be, on its face, one page of a two-page document. The document is undated, its author is not expressly identified as such on the page, and it has no heading or title. It came to be referred to at the hearing as "comparison.xls", because that is the name of the document sub-file in the finance section of the I:drive, and the name also appears on page footers of 4 0055 and 4 0056. 201 The document is divided into vertical columns which refer to months, although years are not stated. One set of columns has a heading allocating it to "Bgt" and another set of columns is allocated to "Liz". Some of the figures are percentages while others are dollar numbers. The horizontal lines identify a range of matters including ARPU and Gross Margin % Switch. Some of the columns containing blanks, suggesting that the document is incomplete. Several of the line descriptions are not self-explanatory. Some figures have no line item description and for some line items there appear to be two alternative figures without any explanation. It is a deeply mysterious document to the uninitiated. 202 In the 9 April draft (paras 229, 232, 234 and footnote 24) the authorship of the document was attributed to Ms Liz Ashley, described as a One.Tel billing analyst, and express reference was made, in a footnote, to Ms Ashley's affidavit. In fact Ms Ashley's affidavit sets out a description of the document, and an explanation for how it was prepared and how it was used at One.Tel. Of course, at the time of preparation of the 9 April draft, Mr Carter and his team believed that they were at liberty to refer to such material as Ms Ashley's affidavit. 203 After Mr Carter received instructions not to rely on any affidavit material, he or his staff revised the draft Report and removed the references to Ms Ashley and her affidavit. But the substance of the assertions about comparison.xls was retained in paragraphs 242-249 of the final Report. It was only the supporting references that were removed. 204 The defendants submitted that, in making the assertions contained in the Report in reliance on comparison.xls, Mr Carter must have assumed the following: (a) notwithstanding its appearance, comparison.xls was a final document on which it was appropriate to place reliance, rather than incomplete draft; (b) the figures in the document relate to the digital and fixed wire business unit; (c) the column "May" is May 2000 and the columns "Jan and "Feb" are January and February 2001; (d) the figures under the heading "Liz" are actual figures for January and February 2001; (e) the correct figures for actual ARPU for January and February 2001 are those appearing under the column "Liz" on page 4 0056 rather than the different figures appearing under the same column heading on page 4 0055; and (f) other figures in the document are irrelevant for the purposes of the opinions he has expressed. 205 The Report does not articulate any of these matters as assumptions, and does not offer any explanation or justification for relying on comparison.xls without having addressed these matters. The defendants submitted that the court should infer that these assumptions were made in reliance on Ms Ashley's affidavit and/or information supplied by Mr Holmes. They said that this inference was appropriate because: · the matters identified by them as assumptions were not self-evident on the face of comparison.xls; · the information is of a kind that could have been supplied by Ms Ashley and/or Mr Holmes, and is partly found in Ms Ashley's affidavit; · Ms Ashley's affidavit was expressly relied upon for the equivalent statements in the 9 April draft; · Ms Reynolds drafted this section of the Report (T 2350.19), and she interviewed Ms Ashley and commented on her draft affidavit (T 658.19, 705.28, 705.35-706.4, 855.45-856.3); · Mr Carter gave evidence that he went through the document with Ms Reynolds in the course of reviewing drafts of the Report (T 2350.31), and that, generally speaking, he may have been assisted in his understanding by explanations of such documents given to him by Ms Reynolds and others who assisted him (T 2351.20), though he could not recall what information about the document he had been given in his discussions with Ms Reynolds (T 2351.4). 206 Mr Carter denied that he relied on any excluded material, and asserted that the opinions expressed in the Report were based only on the documentation (T 2352.28, T 2355.21, T 2453.32, T 2454-2455). But in my view, he was not able to give a satisfactory account in cross-examination of the source of the matters listed in (a), (b) and (d) above, if it was not information supplied by Ms Ashley or Mr Holmes. It is not necessary for me to give a blow-by-blow account of the lengthy cross-examination on these matters, but I was left with the view (subject to any further evidence Mr Carter might have given if the application to do so had been allowed) that: · Mr Carter had not been able to explain why comparison.xls should be regarded, on its face, as a final and authoritative document; and · it was not clear from the document itself that it was correct to describe it, as the Report does at para 242, as "an analysis of the digital and fixed wire business unit's earnings" (indeed, it emerged in cross-examination that this description was inaccurate at least in one respect, namely that it did not deal with the digital part of the business (T 2446.35). Explanations of the significance of comparison.xls may be found in Ms Ashley's affidavit and Mr Holmes' file note on financial reporting. 207 Mr Carter was challenged to point to any aspect of comparison.xls that supported his belief that it had been prepared by Ms Ashley (T 2349.43). Without going through the evidence in detail (see, especially, T 2404-2405), I simply record my opinion that the outcome of this line of cross-examination was inconclusive - there were some ambiguous indications in the document that Ms Ashley was the author, but the author identified in the properties box was Mr Holmes. A conclusion as to authorship based on the document itself would have had a foundation, but there would be a degree of guesswork. On the other hand, both Ms Ashley's affidavit and Mr Holmes' file note on financial reporting give indications that the author of the document was Ms Ashley, with assistance from Mr Holmes and another One.Tel employee. In my view, it is not inconceivable that a reader of the document who knew that Ms Ashley was the only potentially relevant person who might be called "Liz" might have inferred from the document itself that she was its author. 208 No convincing explanation was given by Mr Carter in cross-examination as to why the ARPU figures in comparison.xls were treated as final figures rather than budget or business plan proposals (see T 2443-2444). That the figures are actual figures emerges, however, from a reading of Ms Ashley's affidavit. As to why the Report chose to rely on the lower ARPU figures on page 4 0056 rather than the higher figures on page 4 0055, Mr Carter gave evidence (T 2722.22) that part of the basis for using the lower figures was, as disclosed in a note in PwC's working papers, that the page containing the lower figures contained "more detailed analysis". The defendants claimed that this was merely an ex post facto rationalisation, but it appears to me to be an acceptable, though perhaps not a compelling, explanation. 209 When Mr Carter said that there might be working papers in his files which explained the reasoning process by which he came to rely on comparison.xls for the opinions in the Report to which I have referred, a call was made for the working papers and documents were produced. The evidence about working papers is quite complex. They contained documents including comparison.xls which were annotated. The annotations were not Mr Carter's (T 2705.47). Some of them were probably made by Ms Reynolds (T 2711.41). Mr Carter could not say whether they formed any part of his actual reasoning process at the time of the Report (T 2703.28). There are some indications that the working papers or some of them may have been created after the date of the Report (summarised in DS 37 at [281]-[293]). 210 A part of the working papers seems to show an attempt, apparently by Ms Reynolds, to recalculate the change in sales mix and gross margin percentage from source documents, and queries about the source of figures in comparison.xls (T 2712-2717). Ms Reynolds gave evidence that she attempted to carry out this task but was not able to do so because there was raw data to which she did not have access (T 996.39). She also said this was "probably" something she would have discussed with Ms Ashley (T 996.44). 211 It seems to me appropriate to conclude, from an examination of the evidence and the document itself, without further supplementation, that Mr Carter's reliance on its propositions stated in the Report involved the conscious or unconscious acceptance by Mr Carter of facts about the nature and status of the document, and perhaps its authorship, not self-evident in the document itself. It is more likely than not, subject to any further evidence that Mr Carter might have given if he had been permitted to do so, that the source of these unstated facts was the evidence of Ms Ashley or Mr Holmes, or Ms Reynolds' discussions with one or both of them. Once again, it is noteworthy that the process leading to these conclusions has been a very lengthy one, which has involved the defendants running the forensic risk of putting before the court on the voir dire affidavit material from Ms Ashley which would otherwise be evidence in the proceeding.
5.20 (3) Ms Randall's "deferred payments lists" 212 In section 2 of this judgment I explained that according to ASIC's case, Ms Randall adopted the practice of preparing "deferred payments listings" after conversations with Mr Silbermann. In these documents she recorded the company's debts to creditors she had been instructed to exclude from her cashflow forecasts. 213 Mr Carter expressed the opinion in his Report that there was within One.Tel "a systematic process of managing cash and creditors" (para 127), which resulted in an "end of month [cash] balance that [had] been artificially maintained by deferring payments to creditors" (para 130). He saw Ms Randall's deferred payments listings as an "indicator" of this process (paras 140 and 141). 214 The importance of the deferred payments listings is evident from ASIC's opening, summarised in section 2. Mr Carter agreed in cross-examination that the opinion he expressed in reliance on those documents was "a significant point" on a "serious matter" (T 2513.20-42). 215 The 9 April draft of the Report expressly referred to Ms Randall and her draft affidavit. The draft report referred to the deferred payments listings and said "these lists were maintained by Ms Randall, and reviewed by Messrs Hodgson and Silbermann in the process of selecting which payments would be made on any given day" (para 114). The 9 April draft, and also the final Report, contain other information found in Ms Randall's affidavit, including some statements about the nature of One.Tel's "daily cash flow spreadsheets" which were also referred to in ASIC's opening (see section 2 above). 216 Mr Carter accepted that he had used Ms Randall's draft affidavit in preparing the 9 April draft of his Report (T 2505.40). He also accepted that the opinions he expressed in the final Report in relation to the deferred payments lists were the same or similar to those he had earlier expressed at the time when the affidavit was available to him and his assistants (T 2507.8). However, he said he believed that he had not relied on Ms Randall's evidence in forming the views expressed in his final Report (T 2507.13, T 2514.21), and he did not accept that one needed background information about the documents in order to understand what they were (T 2508.37). When it was put to him that he must have assumed that the amounts recorded in the deferred payments listings were due for payment, a matter not appearing on the face of the documents, he said he was "sure that a lot of work had been done to assess, for example, the deferred payments listings by reference to other business records of One.Tel" (T 2517.27, 2518.40), although nothing was said about any such reasoning process in the Report (T 2519.12). 217 The defendants submitted that in using the deferred payments listings to support his point about artificially maintaining the cash balance by deferring payments to creditors, Mr Carter had implicitly assumed that: (a) the deferred payments listings related to March and April 2001; (b) the documents are not drafts; (c) they record historical facts, as distinct from something someone was thinking about doing; (d) they record payments that were actually "due and payable", as distinct from payments which had been budgeted but had not fallen due, and invoices that were the subject of dispute; and (e) they were prepared by someone who knew the facts, and was therefore likely to be reliable. 218 The defendants submitted that when one examines the deferred payments listings as documents, they do not provide a basis for such assumptions. The foundation for the assumptions is provided by Ms Randall's affidavit, which Mr Carter was told to exclude the purposes of his final Report. According to the defendants, the court should infer that what Mr Carter said he was able to deduce solely from the documents was in fact a conclusion based upon information he obtained from Ms Randall's draft affidavit, and perhaps also from discussions between his staff (especially Ms Reynolds) and Ms Randall. 219 The defendants drew attention to evidence that Ms Reynolds had participated in interviews with Ms Randall (T 658.19) and was involved in asking her some questions (T 705.37), and one of her tasks in early 2002 was to assist ASIC in the preparation of Ms Randall's affidavit (T 850.1). That led to Ms Reynolds obtaining copies of documents that might be included in the affidavit (T 850.36) and attending conferences with Ms Randall, ASIC and ASIC's counsel, at least one of which was before completion of the Carter Report (T 854.38). Ms Reynolds had a draft statement of Ms Randall before the Report was completed (T 972.1). 220 ASIC responded by submitting that Mr Carter had not made the assumptions alleged against him by the defendants. As to (a), it pointed out that the provenance evidence shows that the deferred payments listing for March is to be found in a file with a file path that identifies it as a March 2001 document, while the deferred payments listing for April has the word "April" in its title. I agree with ASIC on this point. I also agree with ASIC as to (b), that the deferred payments listings were sourced in the finance directory of the I:drive and may be treated as business records, in the absence of anything to indicate that they were drafts. However, it seems to me that there were assumptions, in the way that the documents were used in the Report, along the lines of (c), (d) and (e). ASIC said that the documents supported the inferences as to management of creditors drawn in the Report, regardless of whether they reflected an intent to defer or a record of deferral. That seems to me to be wrong. In the Report Mr Carter used the deferred payments listings as a source for his view that there was a systematic process in fact in place for artificially maintaining cash by deferring payments to creditors. I do not agree with ASIC that the word "deferred" was itself an adequate basis for inferring that the debts in question were all due and payable and not subject to a dispute. 221 As in the case of other specific challenges to the Report, Mr Carter suggested in cross-examination that there might be working papers that would support and explain the way the documents had been used (T 2522.11-2523.10). He also said there was other work done that "gave me comfort as to the use was making of the document, but the document itself was, in my view, a sufficient reference to explain the basis upon which I'd formed my opinion" (T 2523.5-10). His evidence seemed to be a combination of two limbs that were not entirely consistent with one another: namely, that he had not relied on anything other than the documents, but (as he said he will at T 2524.10), behind the documents "there will working papers and other procedures that we carried out to assess the reasonableness of having relied on those documents". The latter evidence implies, of course, that there was a reasoning process not disclosed in the Report. 222 I have reached conclusions much the same as the conclusions I have expressed concerning the dates of management accounts and comparison.xls. Mr Carter's reliance on its propositions stated in the Report (absence further supplementation)` involved apparently unconscious acceptance by him of facts, as enumerated in paragraphs (c) to (e) above, not self-evident in the document itself. It is more likely than not, subject to any further evidence that Mr Carter might have given if he had been permitted to do so, that the source of these unstated facts was the evidence of Ms Randall or Ms Reynolds' discussions with her. Once again, it is noteworthy that the process leading to these conclusions has been a very lengthy one, although in this case it does not seem to have involved the defendants taking a forensic risk by putting before the court evidence it would not otherwise have adduced. 223 The defendants have raised an additional problem in this area. Paragraph 141 of the final Report asserts that the "majority" of the "deferred" payments were not paid prior to the Group being placed in administration. No source is given for that statement. As mentioned above, in his evidence Mr Carter disclosed the existence of cross-referenced versions of the Report. A cross-referenced version of the Report dealt with this statement by saying: "Difficult to prove. Can't link amts of payments made [therefore] assume not paid - 3 cheques paid. 6 cheques not paid. 9 cheques cannot show categorically whether paid or not." 224 What seemed to emerge after the production of working papers and through cross-examination was that, out of 19 "deferred payments" referred to in paragraph 141, it had been possible to establish that only 6 of them had not been paid at the time of commencement of voluntary administration. There were another 9 payments where the evidence did not permit one to say whether the debts had been paid or remained unpaid. The defendants submitted, but Mr Carter denied, that the appropriate inference was that someone in the Carter team had decided simply to assume that the 9 payments had not been paid. 225 The lack of a source for the statement was in fact raised in the defendants' written objections to the Carter Report (Exhibit P2). Mr Carter prepared an affidavit, made on 23 July 2004, Appendix C to which makes comments in relation to those written objections. Adjacent to paragraph 141, Mr Carter says that he reviewed "the daily cash flow spreadsheet entitled 2905.xls and did not identify withdrawals for the amounts listed on the deferred payment schedule". In other words, work was done, evidently before 31 May 2002, which supported the statement in paragraph 141. Unfortunately the cross-examination appeared to overlook Mr Carter's supplementary evidence on this point, and it was not drawn to his attention. Nor did he recall it of his own accord, but that is understandable, given the period of time that elapsed between his July affidavit and his cross-examination. 226 The result is that the statement in paragraph 141 was not completely lacking in foundation, as the defendants submitted. On the other hand, a review of the daily cash flow spreadsheet was not a complete verification of the statement, and the reasoning process underlying the statement was not evident from the text of the Carter Report. Thus, there is a reason to criticise the Carter Report on this ground, but the criticism must be more moderate than implied from the defendants' submissions.
5.21 (4) "Profile summaries" and "collection profile summaries" 227 In his Report, Mr Carter found that there was inadequate provisioning made for doubtful debts during 2000-2001, leading to an under-provision of $51 million for doubtful debts as at 30 April 2001, and of $57 million as at the end of May 2001, and consequently EBITDA was overstated (paras 177 and 204). The under-provisioning for doubtful debts also meant that the information reported to the board in relation to debtors was materially incorrect (para 25(b)). It had the consequence that the company's loan covenants in relation to its borrowing of $50 million from the Toronto-Dominion Bank were breached (paras 224-232). 228 It is evident from ASIC's opening, outlined in section 2 above, that Mr Carter's reasoning about the under-provisioning for doubtful debts is an important component contributing to the conclusions in his Report. 229 The documentary basis for Mr Carter's view of the inadequacy of the provision for doubtful debts was a series is documents at pages 8 0003 to 8 00015 of the exhibits to the Report (T 2533.11). Some of the documents are called "Profile Summaries" and some are called "Collection Profile Summaries". They are given as at various base dates in 2000-2001. They appear ex facie to be analyses which classify unpaid debts according to how overdue that are (eg 30 days, 150 days, 300 days), and according to other matters such as whether a final demand has been made, whether there is a payment plan or promise of payments, whether the debtor is a slow player, whether a judgment has been entered, and so on (although the categories are not uniform). 230 Mr Carter's evidence was that his understanding of the documents was assisted by an interview he had with Mr Basman on 20 November 2001 (T 2533.19), during which he spent a considerable amount of time with Mr Basman trying to understand what the documents were (T 2534.26). However, Mr Carter said that he did not use that understanding in his Report (T 2538.12, T 2539.31). 231 The defendants submitted that Mr Carter had made the following assumptions about the documents, which were not disclosed in the Report: (a) that the summaries recorded the totality of the Australian trade debtors of One.Tel at the relevant dates; and (b) that documents entitled "profile summaries" were prepared on the same basis as, and were directly comparable to, documents entitled "collection profile summaries". 232 As to assumption (a), the defendants pointed out that the total debtors figure in the profile summary as at 30 June 2000 was markedly different from the figure for debtors in the auditors' reports for 30 June 2000 and 31 December 2000 (T 2772.26, and T 2773.26, referring respectively to MFI 66 and MFI 67). 233 As to assumption (b), it appeared that there were at least three versions of the summary as at 30 June 2000, each of which had different figures for "total" debtors; and some of the summaries were described on their face as "drilldown reports" and others as "360 day reports". Mr Carter gave evidence that he was unaware of these matters and he was not able to provide explanations in the witness box (T 2732-2736, T 2740-2742). 234 The defendants attacked Mr Carter for his response in the witness box when confronted with two, and then three different profile summaries for 30 June 2000. The criticism was along the lines that Mr Carter tried to minimise the differences between the documents, and then to assert, without any obvious foundation, that he believed he had used the right document for the purposes of his Report. I agree that some of Mr Carter's answers during this line of cross-examination (T 2734-2738) were unsatisfactory. For example, he said that the documents against which he would have checked the version of the profile summary that he used were the company's balance sheet and trial balance (T 2736.14-19); but what emerged when he was confronted with the balance sheets and audit reports for 30 June 2000 and 31 December 2001, was that they both showed total trade debtors as at 30 June 2000 in the sum of $86.1 million, whereas Mr Carter had used a figure of $69.6 million based on a profile summary (T 2771-2773). But Mr Carter was endeavouring to respond to questions of a detailed and complex kind put to him without notice, and he frankly acknowledged that he had not previously seen the competing versions of the profile summary that were put before him in cross-examination (T 2735.18, 2739.9). It appears to me from his answers that he genuinely believed that his staff had in some way verified the figure he had used for total trade debtors, but he was not able to say, in the witness box, how that had occurred. I would not draw adverse inferences as to his credit from his answers to this line of questioning. 235 Mr Carter was asked whether he would insert an explanation in his report if he had discovered more than one version of a profile summary and was required to select from the competing versions. He answered (T 2739.24-32) that he would not have sought to explain his reasoning process in his report, provided that his analysis had shown that the correct version was "clearly indicated". The defendants said this showed that Mr Carter saw himself, wrongly, as qualified and entitled to make findings of fact as to which version of the document to prefer, without exposing his reasoning process to the court for consideration. In my opinion Mr Carter's answer does not necessarily show any mistake of principle, on the pragmatic approach to the Makita principles that is required, in my view, when they are applied to an accounting and financial expert's report ranging over many thousands of documents. The question would be whether the document for which there were several versions was sufficiently significant that it would be prudent to set out, in the body of the report, the reasoning process for selecting one of several competing versions. 236 Although these criticisms of Mr Carter's evidence were, in my view, unsuccessful, I agree with the defendants that Mr Carter seems to have made the assumptions mentioned (a) and (b), in dealing with the profile summary and collection profile summary documents. That information could not be inferred, in my view, from the body of the documents alone. Subject to any further evidence that Mr Carter might have given if permitted to do so, this was information that Mr Carter probably obtained in his discussions with Mr Basman, on which he has unconsciously relied in the course of forming the opinions expressed in the Report. Again, the process of cross-examination which has led to this conclusion has been a lengthy one. 237 The defendants were critical of a particular assertion, at para 251 of the Report. There Mr Carter says that one of the "primary causes" of what he asserts to be a "deteriorating position with respect to debtors" was "the failure to enforce call restrictions for defaulting customers". Footnote 130 of the Report identifies as the source of the statement the document at 8 00013 of the exhibits to the Report. But it is difficult to see how that document could be regarded as a source of the statement, as Mr Carter acknowledged at T 2749. True it is that footnote 130 refers only to the current month's balance, whereas the total accumulated balance for "uncollectable" debtors was $11 million and for "agencies" $34 million, out of total debtors of $151.7 million, as Mr Carter explained (T 2750.14-18). But still, the document identified at footnote 130 cannot be the source for the more general statement in the text of the Report. 238 Mr Carter accepted that there may have been other things on his mind, but he had no recollection of what they were. The cross-referenced versions of the Report were shown to be of no assistance (T 2750-2751). The defendants submitted that the "other things" in Mr Carter's mind might have been things told to him by Mr Basman, for Mr Carter agreed (T 2751.11) that it was likely that one of the topics he had discussed with Mr Basman during his interview on 20 November 2001 related to call restrictions for defaulting customers. That is a plausible inference to draw, in the absence of further evidence from Mr Carter.
5.22 Allegations of lack of full and frank disclosure 239 The defendants were highly critical of Mr Carter because of what they alleged was his failure to make full and frank disclosure in the Report of his prior involvement in assisting ASIC's investigation. They attacked his affidavit made on 2 November 2004, dealing with the question of independence, as "transparently self-serving". The defendants' submissions on these matters were directed to challenging Mr Carter's credit. They also submitted that the absence of proper disclosure "exacerbated" the suspicion that Mr Carter's opinions had been tainted by his earlier exposure to a much wider range of information during the course of ASIC's investigation. 240 Paragraph 6 of the Carter Report says: "I note that I have, or my firm has, previously provided professional services to ASIC, including computer forensic services, and opinions on accounting matters." The Report also disclosed PwC's involvement, before the appointment of the voluntary administrators, in advising with respect to One.Tel's billing systems (para 7). 241 The defendants submitted that this partial disclosure of prior involvement, coupled with the account in the Report of Mr Carter's retainer on 1 February 2002 to provide forensic accounting services, created the misleading impression that Mr Carter had been approached for the first time in February 2002, and then, in the usual way, provided with certain information and asked for his views. According to the defendants, that impression was reinforced by paragraphs 9 and 11 of the Report, which (as indicated in section 3 above) disclosed that Mr Carter had been provided with access to, and had relied upon, the information and documentation in Appendix B and the exhibits to the Report, and that he had not audited, and expressed no opinion on the reliability and completeness of, the information supplied to him. Paragraph 11 also said that Mr Carter reserved his right to review and amend his opinions in various circumstances, including "if additional sources of information not referred to in Appendix B of this report are provided to me". 242 In my opinion the Report, judged objectively, created the misleading impression that PwC had had no other involvement with ASIC or One.Tel, other than as disclosed in the Report, and in particular, no access to documents other than as identified at paragraph 9, except the limited kind of involvement that it would be usual for an expert witness to undertake before preparing his or her report. Looking back at the Carter Report now, with the benefit of hindsight, it seems to me regrettable that neither Mr Carter nor ASIC nor any of their advisers initiated an amendment to the draft Report to reverse the misleading impression, in combination, of the various provisions to which I have referred. I hope this case will provide a lesson for forensic accountants generally, to make sure that such a misleading impression is not created again. 243 However, I do not regard the conduct of Mr Carter or ASIC with respect to the drafting of the Report as intentionally misleading. As ASIC pointed out in submissions, it is commonplace for an expert to express his or her views prior to the preparation of a formal report for use in court. One would not expect that kind of limited involvement to be disclosed in the expert's report. There does not seem to be any practice of disclosing, in an expert's report, that the expert has had access to documents that he or she has then been told to disregard for the purposes of the report (T 2455.9). Moreover, as demonstrated below, the preponderance of case law in Australia is to the effect that a lack of independence on the part of an expert does not render the expert's opinion evidence inadmissible or deprive the expert of testimonial capacity. It would be understandable if Mr Carter and ASIC and their legal advisers, extrapolating from these principles, had reached the incorrect conclusion that no disclosure of prior involvement and access to documents was needed. It would perhaps be understandable if they had not even considered the issue. The mistake, in either case, would be a failure to notice or appreciate the significance of just how far beyond the realm of commonplace, limited prior involvement Mr Carter had gone in this case, and just how extensive and longstanding his access to a wider range of documents had been. Realisation of the full extent of the problem in this case may have been inhibited because it appears that the question of excluding material for the purposes of the Report was not addressed until some months after advice was given as to whether there was an obstacle to the retainer of Mr Carter as an expert witness. 244 It does not appear to have occurred to Ms Redfern or Mr Carter in 2002 that the text of the Report should refer to Mr Carter's role in the investigatory phase. Ms Redfern's evidence, noted above, was to the effect that she raised the issue whether Mr Carter was "compromised" by his prior involvement, arranged for counsel's advice to be obtained, and was later informed that according to counsel, in the circumstances of the case there would not be a problem. Mr Carter said his "personal view" was, at the time he gave evidence, that he would like the court to be aware that he had previously had access to materials other than those listed in Appendix B (T 2454.41), but there was nothing in his evidence to suggest that he consciously adverted to the issue in 2002. His evidence, which I have accepted, was that he believed at the time, and continued to believe when he gave evidence, that he had set out his reasoning process in the Report and there was no other influence or matter that needed to be referred to (T 2454.31). 245 I do not accept that the evidence shows any intention, on the part of Mr Carter or ASIC, to conceal his prior involvement in the investigation. The defendants submitted that the court should be concerned that Mr Carter's previous involvement was not disclosed to the court otherwise than through the defendants' efforts in administering subpoenas and then a further round of discovery, just before the commencement of the trial. There is concern, on my part, that important matters concerning Mr Carter's role in the investigative phase did not come to light earlier through the processes of discovery and disclosure in the Report itself. But in my view, the case law has not been particularly clear with respect to the problems that have emerged in the present circumstances. As explained below, counsel have been able to identify only three cases in which the question whether an expert's access to substantial documentation during a prior relationship with the client, which the expert was then required to disregard, should lead to the exclusion of the expert's opinion evidence. In contrast, there is a very substantial body of case law to the effect that an expert may give evidence though lacking independence. That lack of clarity may be the explanation for what has occurred in the present case. Of course, proper disclosure will be needed if a similar case occurs in future, now that the problems have been exposed.
5.23 Lack of records 246 The defendants complained about the lack of records kept by PwC on relevant matters. There was no written record of the instruction received by Mr Carter from ASIC's counsel to disregard certain material for the purposes of the Report (T 2316.16). There was no written record of ASIC's instruction to Ms Reynolds as to what information she was or was not to share with Mr Carter (T 2385.27). There were no detailed time records of the activities of the PwC staff who simultaneously assisted Mr Carter to prepare his Report and ASIC to prepare the case, such as to make it possible to reconstruct what they were doing and how much time and contact they had with Mr Carter (T 2431.12). Mr Carter did not keep written records of the material that he considered for the purpose of preparing his Report, but did not rely on (T 2248.37), notwithstanding that para 37 of the Joint Guidance Notes - GN 2 - Forensic Accounting says that "independent accounting experts should record in their file notes or reports all documents and other sources of information relied upon and those considered but not relied upon in preparing their reports". Further, many of the drafts of the Report were destroyed, and there is no record of what sections were written by which assistants (T 2387.14). 247 The defendants submitted that the absence of records affected the ability of the court to be satisfied that Mr Carter was able to state with certainty that he relied on no information from any source other than the documents listed in Appendix B. They said that the lack of records was also relevant to the unfair prejudice that would be suffered if Mr Carter's evidence were permitted to be adduced, because it would restrict the defendants' ability to test that assertion. 248 I do not propose to offer opinions or criticisms, at large, as to PwC's record-keeping procedures. I agree with the defendants that the absence of external records on certain matters makes it more difficult than it might otherwise be for the court to assess Mr Carter's evidence that he has been able to disregard documents and information other than as set out in Appendix B. But the absence of records works both ways - in the absence of records, there is neither a basis for challenging Mr Carter's evidence nor a basis for externally reinforcing it, from any such source. Where, on a given point, the court has nothing other than Mr Carter's evidence and evidence of external circumstances pointing to the inherent unlikelihood that what he says is true, there is unlikely to be any obstacle in PwC's records to the court deciding not to accept his evidence and to give weight to the external evidence that causes the inherent unlikelihood to arise. 6. Some principles of admissibility of expert opinion evidence 249 Subsection 56(1) says that except as otherwise provided by the Act, evidence that is relevant in a proceeding is admissible in the proceeding. Subsection 56(2) says that evidence that is not relevant in a proceeding is not admissible. "Relevant evidence" is defined in s 55(1), which says that "the evidence that is relevant in a proceeding is evidence that, if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of the facts in issue in the proceeding". 250 The opinions expressed in the Carter Report are, as a general matter, relevant to ASIC's case in the way that I have described. Relevance is not an issue here, except perhaps in the special sense, considered below, that if an expert's report fails to disclose the assumed facts and reasoning process adequately, the expert's opinions may be held to be irrelevant for that reason. 251 One of the exclusionary rules which can operate to render relevant evidence inadmissible is the "opinion rule". The "opinion rule", for the purposes of Evidence Act, is that "evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed": s 76. Section 79 states: "If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge." 252 Part 36 rule 13C of the Supreme Court Rules sets out some procedures to be satisfied upon the engagement of an expert witness in a proceeding. The person engaging the expert must provide the expert with a copy of the Expert Witness Code of Conduct (Schedule K to the Rules), and the expert witness must acknowledge in writing that he or she has read the Code and agrees to be bound by it. There is no suggestion of any failure to supply this acknowledgement and agreement in the present case. 253 The Expert Witness Code of Conduct, like similar codes adopted in the rules of other courts, appears to be intended as a code of conduct for experts ("expressions of the ideal manner in which expert witnesses should go about their tasks", according to Ormiston JA in FGT Custodians Pty Ltd v Fagenblat [2003] VSCA 33, at [15]), prescribed in order to enhance the quality of their work, rather than to add to the rules of admissibility (Collins Thomson Pty Ltd (in liq) v Clayton [2002] NSWSC 366, at [23]). Indeed, it was presumably because the rules for admissibility of expert evidence were thought not to go far enough towards having only unbiased opinions put before the court, that Part 36 rule 13 C and Schedule K were inserted into the Supreme Court Rules in January 2000: Kirch Communications Pty Ltd v Gene Engineering Pty Ltd [2002] NSWSC 485, at [14] per Campbell J. 254 The Code appears to have been strongly influenced by some observations of Cresswell J in National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The 'Ikarian Reefer') [1993] 2 Lloyd's Rep 68, at 81-2, which are in part moral exhortations rather than legal requirements, and when taken together, they reinforce the need for the trier of facts to be fully informed of the expert's reasoning process: Makita, at [79] per Heydon JA. 255 The Code imposes on an expert witness an overriding duty to assist the court impartially on matters relevant to his or her area of expertise: para 2. It stipulates that the expert's report must specify, inter alia, "the facts, matters and assumptions on which the opinions in the report are based", "reasons for each opinion expressed", and "any … materials utilised in support of the opinions": para 5(b), (c) and (e). In the particular context of joint conferences and joint reports, the Code speaks of an expert witness exercising "independent, professional judgment": para 11. 256 Although the law is not fully settled, it appears that the Act and the case law surrounding it, read in conjunction with the Code, give rise to the following considerations going to the admissibility or discretionary exclusion of expert evidence, pertinently to the present case: (1) that the evidence, if not admissible as evidence of fact, must be evidence expressing the expert's opinion; (2) that the person put forward as an expert must possess specialised knowledge based on training, study or experience; (3) that the expert's opinion must be wholly or substantially based on his or her specialised knowledge; (4) that the expert's report must distinguish between the opinions and the facts on which they are based; (5) that the expert must set out his or her reasoning for each opinion expressed; (6) that, where it is pertinent to do so, the expert's report must set out the reasoning by which certain information was considered and rejected or discounted for the purposes of the report; (7) that the expert's opinion must not be wholly or substantially based on facts that can be proved only by inadmissible evidence; (8) that the expert's opinion and reasoning must be his or her own, and not simply the adoption of the work of someone else; and (9) that, although the expert need not be independent of the litigants, he or she must be in a position to exclude from consideration everything except the matters identified as the facts upon which his or her opinions are based. 257 It is appropriate, first, to analyse the law on each of these matters, and then to assess the Carter Report by reference to the legal principles. 258 Although some of the issues to be addressed relate to the form of an expert's report, it should not be assumed that they are therefore of limited importance. In HG v The Queen (1999) 197 CLR 414, at [39], Gleeson CJ pointed out that compliance with s 79 entails attention to the requirements of form, since "by directing attention to whether an opinion is wholly or substantially based on specialised knowledge based on training, study or experience, the section requires that the opinion is presented in a form which makes it possible to answer that question". 259 On the other hand, there is a risk that in laying emphasis on formal matters, the court might concentrate on technical formal compliance without proper regard to the purpose of the formal rules. The fundamental question to be addressed is whether the trier of fact (the court, where there is no jury) has been supplied with criteria enabling it to evaluate the validity of the expert's opinions: Makita at [59] per Heydon JA.
6.1 Opinions, facts and assumptions 260 In this context, "assumptions" or "assumed facts" are matters of fact that may or may not be true (judged from the viewpoint of the expert at the time of writing his or her report), which the expert takes to be true for the purpose of expressing his or her opinion. There is a distinction between assumed facts, in this sense, and "accepted facts", which are background facts that the expert believes to be true. Assumed facts and accepted facts have this in common: if the expert's opinion depends on them, they must be proven or admitted (with a sufficient degree of correspondence, as noted below) before the expert's opinion can be given weight. But in the case of accepted facts, the expert may be in a position to give direct evidence of the fact, for example evidence by lay or expert observation (as noted below). 261 An "opinion" has been defined, relevantly, as an inference drawn from facts: Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 5) (1996) 64 FCR 73, at 75 per Lindgren J; Quick v Stoland (1998) 87 FCR 371, at 373 per Branson J; Harrington-Smith v State of Western Australia (No 7) (2003) 130 FCR 424. The idea that inference is at the centre of the concept of opinion is elaborated in the Oxford English Dictionary definition, cited with approval by Cox J in R v Perry (No 4) (1981) 28 SASR 119, at 124: "… judgment resting on grounds insufficient for complete demonstration; belief of something as probable, or as seeming to one's own mind to be true, though not certain or established …". Another definition is "a conclusion, usually judgmental or debatable, reasoned from facts": RW Miller & Co Pty Ltd v Krupp (Australia) Pty Ltd (1991) 34 NSWLR 129, at 130 per Giles J. Although the latter definition uses the word "conclusion", it appears to me that the concept does not exclude intermediate conclusions, reached as part of a chain of reasoning which eventually leads to the expert's final conclusions. 262 I have explained that the Carter Report contains many intermediate propositions, which are steps along the path of reasoning from the disclosed documents which are identified in the Report as the assumed facts, to the ultimate conclusions in answer to ASIC's questions. There is an issue whether to categorise these intermediate propositions as assumed facts, or representations of fact, or statements of opinion. If they are representations of fact, in most cases they will be inadmissible to prove the facts so represented, by virtue of the hearsay rule as stated in s 59. If they are representations in the nature of assumptions, they may be admissible under s 60, even though hearsay, but subject to an order under s 136 limiting their use to establishing the factual basis upon which the expert holds his or her opinions, and not for the purpose of proving the facts that are assumed: Quick v Stoland, at 377 per Branson J; Harrington-Smith v Western Australia, at 431-2 per Lindgren J; BP Australia Pty Ltd v Nyran Pty Ltd [2002] FCA 679, at [25] per RD Nicholson J. If they are opinions, they will be admissible under s 79 (assuming the section is otherwise satisfied) as evidence to prove the existence of the facts about the existence of which the opinions have been expressed. 263 The question of proper categorisation of propositions in an accountant's report arose before Branson J in Quick v Stoland (the reasoning of the other two members of the Full Federal Court was such that the issue did not arise for them). Branson J held (at 375) that a statement of a qualified accountant and insolvency practitioner, made on the basis of an examination of financial accounts and other company records, that a particular company is or is not insolvent, is an expression of opinion rather than a statement of fact (disagreeing with an observation by Tadgell J in Re Action Waste Collections Pty Ltd (in liq); Crawford v O'Brien [1981] VR 691, at 703). 264 This leads to the question, must the expert expressly categorise statements as opinions, for them to qualify for admissibility under s 79? 265 In Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 123, Einstein J quoted extensively and with approval from an extra-curial commentary written by Heydon J, then a judge of the Court of Appeal of New South Wales. In his commentary, Heydon J summarised the requirements for admissibility in seven propositions, one of which was that "the opinion proffered must be substantially based on the expertise of the witness and the witness must identify it". But later, when he summarised the principles in the well-known passage of his judgment in Makita (at [85]), his Honour did not explicitly require that the expert's opinions must be expressly identified as opinions. It seems to me that, while his Honour would obviously require that the opinions of the expert must be presented in such a fashion that the court can readily identify them as opinions, his observations do not require the expert expressly to classify his opinions by introducing them with some such language as "in my opinion". 266 In Evans Deakin Pty Ltd v Sebel Furniture Ltd [2003] FCA 171, at [670]-[671], Allsop J said that a clear identification of the opinions that the expert seeks to present is "central to the orderly and admissible presentation of any expert evidence". His Honour saw that requirement as a corollary to the statutory requirement that the expert's opinions be based on his or her specialised knowledge. He said it was necessary for the court to understand, with precision, the content of the expert opinions, so as to permit it to identify whether and to what extent the expert was drawing on particular training, study or experience. His Honour's remarks developed an observation by Gleeson CJ in HG v The Queen, at 427, that "an expert whose opinion is sought to be tendered should differentiate between the assumed facts upon which the opinion is based, and the opinion in question". 267 It would be wrong, in my view, to treat Allsop J's remarks as laying down a requirement of admissibility, to the effect that the propositions in an expert's report must be expressly labelled as statements of opinion, accepted fact or assumed fact, as the case may be. That would be artificial and, I suspect, distracting. Rather, his Honour's point is that the report must be presented in such a way that the court can readily assess whether the requisite correlation between opinions and specialised knowledge is present. 268 Proper categorisation of an intermediate proposition depends on reaching an understanding as to the role of that proposition in the reasoning process, its derivation and its relationship with the assumed or accepted facts. In my opinion, it is sufficient under s 79 for the report to make it plain, in substance and on a fair reading, that a particular proposition has been deduced by a process of inference from the assumed or accepted facts, and that the process of inference involves the application of the expert's specialised knowledge. If, as a matter of substance rather than form, a proposition is an inference from the assumed or accepted facts, drawn by the expert with the aid of his or her specialised knowledge, it is potentially admissible under s 79 whether it is introduced by some such words as "in my opinion" or is presented as an assertion of fact. But if, in substance, a proposition cannot fairly be regarded, directly or indirectly, as an inference from the assumed or accepted facts drawn with the aid of the expert's specialised knowledge (because, for example, the expert's reasoning process leading to the proposition has been inadequately disclosed or is non-existent), the proposition is not admissible under s 79 even if it is expressed to be an opinion. Allsop J's remarks were addressed to that kind of case. 269 There is another category of intermediate propositions in expert reasoning, apart from assumed facts, accepted facts, opinions and expert statements of general application - namely, statements by which the expert gives evidence of facts. In the course of his or her investigations for the preparation of a report, the expert may make a lay observation which is then recorded in the report, or may observe and record something by bringing to bear his or her expertise. Observations of the latter kind have been described as "scientific facts": Phipson on Evidence (15th ed, 2003 by MN Howard and others, p 922-3, para [37-10]). 270 Consider, for example, the evidence of a valuer recording his or her observation of the presentation of the property being valued, the locality in which it is situated and the attributes of possibly comparable properties; or the evidence of a doctor recording his or her observation of a patient during a clinical examination. Sometimes such evidence does not in any way depend upon the expert's specialised knowledge, and is admissible simply as evidence of a directly observed fact. At other times, the witness's expertise is relevant to the making of the observation, but still, the evidence is admissible as evidence of an observed fact. As the learned editors of in Phipson on Evidence (15th ed, 2003 by MN Howard and others) say (at p 922-3, para 37-10): "Expert witnesses have the advantage of a particular skill or training. This not only enables them to form opinions and to draw inferences from observed facts, but also to identify facts which may be obscure or invisible to a lay witness. … A microbiologist who looks through a microscope and identifies a microbe is perceiving a fact no less than the bank-clerk who sees an armed robbery committed. The only difference is that the former can use a particular instrument and can ascribe objective significance to the data he perceives. The question of subjective assessment and interpretation which is the essence of opinion evidence hardly enters into the matter at all." 271 Such evidence is different from the assumed and accepted facts upon which the expert relies for the purposes of expressing his or her opinion, because this evidence is of the expert's own making. It not hearsay because it is evidence of the expert's own work and observation, and it is relevant in a "secondary sense", because it forms part of the expert's reasoning process: see Aktieselskabet de Danske Sukkerfabrikker v Bajamar Compania Naviera SA ("The Torenia") [1983] 2 Lloyd's LR 210, at 233 per Hobhouse J. 272 It seems to me that some of the work of a forensic accountant is to be treated as admissible in the same fashion as scientific facts. Suppose the report of a forensic accountant contains a complex financial calculation. The result of the calculation is not an opinion because, if the calculation is done correctly and the financial records from which it has been derived are proven, it is true as an analytic mathematical proposition without reliance on any inferences or questions of judgment. The expert's work is mathematical and analytical rather than based on scientific observation, but in both cases there is a factual conclusion, admissible as evidence of fact, derived from the application of specialised knowledge.
6.2 Specialised knowledge 273 It is important, in cases about the admissibility of expert opinion evidence, for the court to be clear about the scope of the "specialised knowledge" upon which the expert purports to rely in stating his or her opinions. As Einstein J warned in the Idoport case, at [153], too narrow an approach to the categorisation of specialised knowledge may lead to injustice. 274 Section 79 refers to specialised knowledge that may be based on training study or experience, thereby acknowledging that expertise derived from experience may be taken into account, but the section does not in terms articulate a "field of expertise test": see Australian Law Reform Commission, Evidence, Report No 26, vol 1 (AGPS, Canberra, 1985), para 743. 275 The test at common law, which has been adopted and applied under s 79, is whether "the subject-matter of inquiry is such that inexperienced persons are unlikely to prove capable of forming a correct judgment upon it without [the assistance provided by the opinion of a witness possessing peculiar skill], in other words, when it so far partakes of the nature of a science as to require a course of previous habit, or study, in order to the attainment of a knowledge of it": Clark v Ryan (1960) 103 CLR 486, at 491 per Dixon CJ, citing some notes by JW Smith to Carter v Boehm, 1 Smith LC, 7th ed, 1876, p 577; see also Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504, at 636 per Giles JA; Quick v Stoland Pty Ltd, at 375 per Branson J; Australian Securities and Investments Commission v Vines (2003) 48 ACSR 291, at 295. In HG v The Queen, at [58], Gaudron J applied that test to the statutory provision, saying that the expert's field must be "sufficiently organised or recognised to be accepted as a reliable body of knowledge or experience". 276 In his commentary on expert evidence which was extracted by Einstein J in the Idoport case, Heydon J said that an expert witness must identify his or her expertise in a field of specialised knowledge or experience. This can be done in the body of the expert's report or in an appendix to the report. 277 Obviously accountancy and auditing are fields of expertise (cf S Adrogue and A Ratcliff, "Kicking the Tires after Kumho: The Bottom Line on Admitting Financial Expert Testimony" (2000) 37 Houston Law Rev 431, at 477), but there is also, in my opinion, a field of expertise that extends further into the interpretation and analysis of complex financial information, going beyond the preparation and auditing of financial statements. It is a broader field of expertise, relating to the assessment of the financial health of a business enterprise. Thus, in Quick v Stoland, Branson J recognised that a qualified accountant who is also an insolvency practitioner may have a field of specialised knowledge which goes beyond accountancy. She said (at 375): "Corporate accounts, and corporate accounting practices, have become increasingly complex. I consider that it is generally recognised that persons with training, study and experience of the kinds enjoyed by Mr Madden possess peculiar skills in an area in which 'inexperienced persons are unlikely to prove capable of forming a correct judgment upon it without such assistance' [citing JW Smith's notes to Carter v Boehm ]." 278 This broader field of expertise, generally relating to understanding the financial health of a business enterprise, is the realm of forensic accountants. It has been said that "their role is really to assist the court to understand the financial information, using their skills to organise, display and communicate financial information" (J Gibson, "Forensic Accountants Getting the Scent" (1993) 28 Australian Lawyer 40, at 41), or to "help explain complex financial and accounting issues raised in criminal and civil proceedings" (D van Homrigh and M Garnett, "Forensics' New Bloodless Hounds" (2001) 21 Proctor 16, at 17). Thus, in modern litigation forensic accounting evidence is admitted to assist, not only in determining the state of insolvency of the company at the particular time as in Quick v Stoland, but in a variety of other broadly similar financial tasks, exemplified from Australian cases decided in the recent past as follows: · calculation of present or future economic loss (eg Rigney v Browne [2004] QSC 265, Dallas v P & M Denton Building and Constructions Pty Ltd [2003] NSWSC 833); · quantification of loss of earning capacity (eg Fail v Hutton [2004] QCA 61); · quantifying profit or calculating loss of profit (eg Fidgeon v Westpac Banking Corporation [2002] VSC 85, Hartglen Pty Ltd v Geoff Mitchell & Associates Pty Ltd [2004] QSC 67); · business valuation or the calculation of a partnership share (South Australian River Fishery Association v South Australia (2003) 84 SASR 507, Fagenblat v FGT Custodians Pty Ltd [2004] VSC 196); and · a variety of other financial work such as calculating an amount owing (Magill v National Australia Bank Ltd [2001] NSWCA 221), or quantifying amounts allegedly stolen (Idea Technology Services Pty Ltd v Nguyen [2002] QSC 432), or quantifying unexplained income (R v Donovan Kimball Christie [2003] QCA 413).
6.3 Opinions based on specialised knowledge 279 Under s 79, the court must be satisfied, on the balance of probabilities (s 142), that the opinions which are sought to be adduced in evidence are based wholly or substantially on the expert's specialised knowledge. According to Allsop J in the Evans Deakin case (at [679]), the court will "look with rigour upon expert evidence in order to ensure that only relevant opinions, based on relevant expertise and on coherent and ordered assumptions, are put on the court record". 280 Several principles flow from this, of which two are pertinent here: (i) If the expert's reasoning is not, on analysis, dependent on his or her specialised knowledge, and is a process that could have been undertaken by the court without the expert's assistance, it is not admissible as expert opinion evidence: R v Turner [1975] QB 834, at 841 per Lawton LJ. In HG v The Queen , at [44], Gleeson CJ observed that experts who " venture 'opinions' (sometimes merely their own inference of fact) outside their field of specialised knowledge may invest those opinions with a spurious appearance of authority, and legitimate processes of fact-finding may be subverted". In the case of accounting evidence, for example, specialised knowledge is not normally required for a judge to read a company's published financial statements: Quick v Stoland , 87 FCR at 379 per Emmett J; Switz Pty Ltd v Glowbind Pty Ltd [1999] NSWSC 1296 at [35]. (ii) Opinion evidence that is merely argument in support of a litigant's case is not admissible under s 79. Opinion evidence by an expert cannot be put forward merely "to argue the plaintiff's case and present it more vividly and cogently": Clark v Ryan (1960) 103 CLR 486, at 491 per Dixon CJ. The defendants submitted that accountants are especially prone to transgress this limit, and that they seem unable to perceive where their specialised expertise finishes and ordinary processes of reasoning and commonsense begin. But I am not persuaded that, in the universe of forensic experts, accountants are especially afflicted by this frailty. 281 The first principle is illustrated by Quick v Stoland. There both Emmett and Finkelstein JJ expressed doubt (finding it unnecessary to decide the point) as to whether the report by Mr Madden, an accountant and insolvency practitioner, as to the solvency of a proprietary building company was admissible as expert opinion evidence under s 79. Finkelstein J made brief observations (at 383), doubting whether Mr Madden had given the evidence of an expert, because much of what he said would have been apparent to the trial judge from his own examination of the books of account. 282 Emmett J gave a fuller analysis. He observed (at 379) that an accounting expert "could bring his or her specialised knowledge to bear on the analysis of accounting records, expected cashflows, liquid and realisable assets such as debtors and the like". However, Mr Madden's reasons for reaching the conclusion that the company was insolvent at a relevant date were not based on any specialised knowledge, but were, instead, based on figures derived from the company's balance sheets and other specific material relating to the company. He had made inferences from that material, but they were not based on his training, study or experience. 283 Branson J took a different approach, not as to principle but to the application of principle to Mr Madden's report. She agreed with Emmett J that Mr Madden's opinions concerning the company's insolvency were heavily based on matters of fact and, in some cases, arguably unsubstantiated factual inferences (at 373). Then she said: "However, it seems to me that Mr Madden's specialised knowledge does qualify him to form views and make judgments as to solvency based on financial statements and other material of the kind to which he refers in his report", and she concluded that Mr Madden's opinions were based on his specialised knowledge for the purposes of s 79. 284 In Switz Pty Ltd v Glowbind Pty Ltd [1999] NSWSC 1296, at [35], I drew from Quick v Stoland the proposition that if there is evidence in the form of financial statements which the court can read for itself, the opinion of an accountant based solely on those statements is not based on specialised knowledge for the purposes of s 79; but if the accountant's report contains some financial analysis based on financial statements or accounting records, the accountant's opinion is to that extent admissible as expert opinion evidence. 285 The Evans Deakin case involved the second principle. Allsop J was dealing with two reports by an accountant, prepared in response to a report by the other side's accounting expert. He rejected many paragraphs of the first report, and the whole of the second report. The rejected parts contained "in substance assertions, not apparently based on accounting expertise", and not clearly based on the identified facts or assumptions (at [674]). He said of the first report (at [675]): "The report is largely a discursive body of views of someone who understands enough of litigation to put forward an argumentative case for how Sebel could defend these proceedings. There are precious few accounting opinions displayed, and such as there may be are buried." 286 Dean-Willcocks v Commonwealth Bank of Australia (2003) 45 ACSR 564 was a case where both problems were present. I was persuaded that a report, also (as it happened) by Mr Carter, offered interpretations of the evidence which would have been proper matters for submissions by counsel but were not proper matters for expert opinion evidence by a forensic accountant. The report was essentially an argument or submission in favour of an interpretation of the evidence, of a kind that did not involve the use of specialised knowledge. I said (at 570) that such statements should be treated as assertions in the nature of assumptions, if the report were to be admitted into evidence at all (though for this and other reasons I decided to reject the report). 287 It is sometimes said that the expert must not "usurp the function of the trier of fact": see, for example, Makita, at [87] per Heydon JA citing Davie v Lord Provost, Magistrates and Councillors of the City of Edinburgh 1953 SC 34, at 40 per Lord President Cooper. I doubt that this proposition introduces any new principle, beyond the two that I have just identified. The proposition was used by Heydon JA as part of a list of questions about the expert's report, which were presented as alternative ways of approaching the application of the principles which he had set out fully in his analysis of the case law, and it did not appear in his summary of the law at [85]. It appeared in Lord President Cooper's observations as part of the reasoning to establish that the court retains a discretion to reject an expert's report even if the expert has not been challenged in evidence, rather than as a separate principle of admissibility. 288 An expert is in no position unilaterally to usurp the court's function, since the court has a discretion to reject expert opinion evidence even if the evidence has not been challenged at the hearing. Moreover, it is no objection to the admissibility of the expert's evidence that it goes to the ultimate issues, having regard to s 80: ASIC v Vines (2003) 48 ACSR 291 at [27]. Thus, an accounting expert giving evidence in an insolvent trading case may give an opinion as to whether the company was insolvent at a particular date, even though insolvency is one of the statutory ingredients for liability. The proposition about usurping the function of the trier of fact seems to be directed to the nature of the expert's reasoning and its presentation in the report, rather than to any process of usurping as such. 289 The problem identified by the proposition seems to arise where an expert purports to make "findings" of fact, on the basis of the material supplied to him or her. In some cases this will be objectionable within the first principle, because in doing so, the expert has strayed beyond the relevant field of specialised knowledge. In other cases the "findings" might attract the second principle, because the reasoning process is nothing other than an argumentative case to support the litigant who has retained the expert. Where neither of these two principles is attracted, it is necessary to examine the so-called "findings" of fact so as to ascertain their function as a step in the expert's reasoning process. 290 If the expert purports to determine a matter of fact separately from the process of reasoning that supports the expert's opinions, doing so may simply be irrelevant to the expert's opinion and the statement may therefore be inadmissible for that reason. On the other hand, if the "finding" of fact is the conclusion to which the expert's report is directed (e.g., that the relevant company was insolvent on a specified date), it will ordinarily be in the nature of an opinion, however it is expressed, and therefore admissible if the ingredients of s 79 are satisfied. Likewise, if the "finding" of fact appears in the report as part of the chain of reasoning by which the expert moves from the assumed or accepted facts to his or her ultimate opinions, it might appear, upon analysis, itself to be an expression of opinion, adopted as an intermediate premise in the reasoning process, however it is expressed. 291 In both of these last two cases, the fact that the opinion is reached by the expert preferring one strand of evidence to another contradictory strand will not render it inadmissible, provided the reasoning process is properly explained and is shown to depend upon the expert's specialised knowledge. For example, an accounting and financial expert whose task is to express an opinion on the solvency of a company might explain, when confronted with two inconsistent lists of bad debtors which disclose, ex facie, their respective methods of compilation, that one list is more likely to be accurate than the other because the method of compilation is more robust for stated reasons. The element of specialised knowledge is the expert's view as to which method of compilation is to be preferred. Contrast this with a case where the expert is confronted with inconsistent statements about the bad debt position made by the managing director and the finance director, and accepts for the purposes of his or her report the finance director's statement on the ground that the managing director is an unreliable witness. The description, "usurping the function of the trier of fact", readily springs to mind, but this is so because the expert has moved outside his or her field of specialised knowledge (and may also have crossed the line between expert and advocate).
6.4 Disclosure by expert of factual basis of opinions 292 The starting point is that an expert's opinion will necessarily be given on some factual basis, because an "opinion" is an inference drawn from facts: Quick v Stoland, 87 FCR at 373 per Branson J. That leads to two questions about the admissibility of expert evidence, which should be distinguished from one another: whether it is necessary, for admissibility, for the expert to state the factual basis of the opinions he or she expresses; and whether it is necessary, for admissibility, for the facts upon which the opinions are based to be proven. The first question is addressed under the present heading, and the second question is addressed at 6.7. 293 At common law, there was a rule of evidence that, at least in complex cases, the opinion of an expert was admissible only where the facts upon which the opinion was based were expressly stated: Trade Practices Commission v Arnotts Ltd (No 5) (1990) 21 FCR 324, at 330 per Beaumont J (on appeal: Arnotts Ltd v Trade Practices Commission (1990) 24 FCR 313, at 347-353); R v Turner [1975] QB 834, at 840 per Lawton LJ; Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370, at 375 per Ipp J; Makita, at [64] per Heydon JA; ASIC v Vines (2003) 48 ACSR 291, at [39]. But that requirement is not expressly articulated in s 79. 294 In Quick v Stoland Pty Ltd, 87 FCR at 374, Branson J expressed the opinion that the omission of the common law requirement was not accidental, and she referred to the view of the Australian Law Reform Commission (Report No 26, vol 1 para 750), which (as interpreted by her Honour) considered that no such precondition should be imposed, and that the general discretion of the court now found in s 135 would be sufficient to deal with problems that might arise in respect of expert opinions the basis of which was not disclosed. She added (at 375) that s 79 "is not concerned with the factual basis of an expert's opinion, but rather with the view, estimation or judgment inherent in the inference drawn by the expert from that factual basis", saying that it is the expert's inference which s 79 requires to be wholly or substantially based on his or her specialised knowledge. 295 With respect, it seems to me that the Law Reform Commission's recommendation at para 750 was not directed to the requirement that the factual basis of the opinions be expressed, but rather to the "basis rule", said to require that the facts upon which the opinion was based be proven by the expert or otherwise by admissible evidence. I shall return to the basis rule at 6.7, but it does not seem to have any relevance to the present issue. 296 In Makita, Heydon JA meticulously reviewed the common law authorities, placing particular emphasis on the judgments of Beaumont J and the Full Federal Court in the Arnotts case (at [74]-[78]), before turning (at [83]) to consider the effect of the Evidence Act. He quoted extensively (at [84]) from HG v The Queen, and did not cite Quick v Stoland. Perhaps he regarded Branson J's view as superseded by the High Court's judgment. His summary of the law (at [85]) included the proposition that the facts, "observed", "assumed" or "accepted", upon which the expert's opinions are based must be identified and "made explicit", a matter going "strictly speaking" to admissibility (as well as to weight, if the report has been received into evidence without objection). That proposition is inconsistent with Branson J's view as to the effect of s 79, which she repeated after Makita (Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd (2002) 55 IPR 354, at [10]), as noted by Allsop J in the Evans Deakin case (at [670]). But, as Allsop J then pointed out, the difference may not be of much practical significance in the light of s 135 and "its likely application to disembodied and unsubstantiated expressions of opinion". 297 Thus, if the expert fails to identify and articulate the assumed, accepted and observed facts upon which he or she proceeded, the court may well be unable to identify those facts, with consequences of several kinds. First, if the court is uncertain about the factual basis used by the expert, it may be unable to comprehend the opinion so as to decide how much weight or probative value to give it. Secondly, if the factual basis is not articulated, the court may be unable to determine whether the facts assumed or accepted by the expert correspond to the facts proved or admitted at the hearing: Harrington-Smith v State of Western Australia, 130 FCR at 428 per Lindgren J; Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd, 55 IPR at [14], per Branson J. This difficulty goes to the weight or value of the evidence, on any view, and may go to strict admissibility, if the "basis rule" discussed at 6.7 is correct. Thirdly, in extreme cases the consequence of failure to articulate the factual basis may even be inadmissibility for irrelevancy. In Quick v Stoland, Branson J remarked that a bare expression of opinion which does not disclose its factual basis will be incapable of affecting the assessment of the probability of the existence of any fact in issue in the proceeding, and will therefore be irrelevant under s 56(2). 298 In New South Wales, failure to set out the factual basis on which the opinion is based will amount to non-compliance with paragraph 5(b) of the Expert Witness Code of Conduct. That, too, may go to weight, and may be relevant to the exercise of discretion under s 135, where one of the grounds stipulated in the section is satisfied. 299 Given these various consequences of failure to identify the facts upon which the expert's opinions are based, and therefore the likelihood that the court will exclude the evidence under s 135, it will seldom be necessary to choose between Heydon JA's view in Makita and Branson J's view in Quick v Stoland, as a matter of strict admissibility. However, the present case is one where it has been contended that the expert's report is strictly inadmissible because of its failure to set out comprehensively the true facts upon which the opinions were based, and that the matter is not merely one going to discretion. I have received extensive submissions on the scope of the Makita reasoning and I was invited to distinguish the case or treat it as limited in scope. I must therefore address the discrepancy between Heydon JA's reasoning and the reasoning of Branson J. 300 ASIC pointed out, correctly, that Heydon JA's statement of the general requirements for expert evidence, at [85], was obiter. The narrow basis for the decision of all three members of the Court of Appeal was that the trial judge erred in accepting the expert's opinion. Nevertheless, it is plain from reading of Heydon JA's judgment as a whole, that his Honour set out to clarify and restate the general requirements for the admissibility of expert evidence, in light of what he saw as some serious flaws in the expert evidence that had been given. The principal point of such a clarifying statement, given in the Court of Appeal, is to provide guidance to trial judges of the Court, who should therefore accept and follow it notwithstanding its strictly obiter status. 301 In Makita, Priestley and Powell JJA indicated that they had read Heydon JA's judgment in draft, and they agreed with the orders he proposed, but they reached their conclusions without having to address the general requirements for admissibility of expert opinion evidence. For a judge sitting at first instance in New South Wales, it is significant that, although the legal analysis was made by only one of the three members of the Court of Appeal, the others did not criticise it. 302 The correct course, in my opinion, is to follow and apply Heydon JA's judgment. That conclusion is reinforced by noting that, in Quick v Stoland, the other two members of the Full Federal Court, while not expressly commenting on Branson J's view as to the impact of s 79 on the common law, doubted that Mr Madden's report was admissible. It is also reinforced by the comments of Giles JA in Adler v ASIC (2003) 179 FLR 1, at [631]-[632], where Heydon JA's observations were applied and explained. 303 In my opinion, what is dictated by stare decisis for a judge sitting at first instance in this court, is supported by other considerations. First, as Heydon JA pointed out in Makita at [85] the reason for requiring the expert to articulate the factual basis for the opinions is that unless this is done, "it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge". This reasoning is not answered in Quick v Stoland or the Sydneywide Distributors case. It is supported by Lindgren J the Harrington-Smith case (at 429), and by Gleeson CJ's more general observation in HG v The Queen, 197 CLR at [39], that by directing attention to whether an opinion is wholly or substantially based on training, study or experience, the section requires that the opinion be presented in a form that makes it possible to answer that question. 304 Secondly, it would be unfair to allow into evidence a lengthy and complex report by an expert, that does not clearly identify the factual basis for the expert's opinion, because this would "give the party against whom the evidence is tendered the task of teasing out in cross-examination all the circumstances that the witness had in mind": ASIC v Vines (2003) 48 ACSR 291, at [39]. That party would have to choose between cross-examining "in the dark, with all the perils which usually face journeys into darkness", or not to cross-examine, and run the risk of the court attaching weight to an opinion, "ill-substantiated though it may be on its face": Makita, at [62], per Heydon JA. In my opinion, this consideration is sufficiently important that it supports the conclusion that the requirement to state the factual basis of the opinions should be treated as going to admissibility rather than merely discretion. 305 Relying on a line of cases beginning with Potts v Miller (1940) 64 CLR 282, ASIC submitted that the requirements set out by Heydon JA in Makita at [85] should not be applied, or should not be applied with full rigour, where an accountant gives expert opinion evidence as a result of examining the records of a company. I shall deal with the submission at 6.5, after considering the requirement, closely allied to the requirement that the expert must state the factual basis for the opinions, that the expert must also disclose the reasoning process leading to the opinions.
6.5 Disclosure by expert of his or her reasoning process 306 Disclosure of the reasoning which leads to the expert's opinions has been held to be necessary under s 79. In Makita (at [85]), Heydon JA said "it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached …". He observed (at [67]) that the court "cannot weigh and determine the probabilities for themselves if the expert does not fully expose the reasoning relied on". This requirement is also covered, in New South Wales, by the Expert Witness Code of Conduct, paragraph 5(c). 307 In Makita, at [59] and [86], Heydon JA applied the view of Lord President Cooper in Davie's case, 1953 SC at 39-40, that the "bare ipse dixit" or "oracular pronouncement" of an expert witness can carry little weight, and he observed (at [59]) that if an expert's report is to be "useful", it is necessary for it to comply with "a prime duty of experts in giving opinion evidence: to furnish the trier of fact with criteria enabling evaluation of the validity of the expert's conclusions". Lord President Cooper's observation seems directed to weight rather than admissibility, and it may be that the observations of Heydon JA on this point are also directed to weight, given that the expert's report in the case before him had been received in evidence without objection. But is clear from the tenor of his Honour's remarks that in an appropriate case, s 135 would be available to exclude a "bare ipse dixit" or even an inadequately reasoned report, at least on the ground that receiving it could result in undue waste of time. 308 ASIC relied on a line of cases dealing specifically with the admissibility of accountants' reports. These cases establish, according to ASIC, that the report of an accountant which is "the product of an expert examination of the financial records" of a company, is admissible in evidence. ASIC submitted that Heydon JA's statement of the law in Makita should not be treated as overriding or qualifying that line of cases. I disagree with ASIC's submission. 309 ASIC's cases begin with Potts v Miller (1940) 64 CLR 282, where Dixon J said (at 303) that when "books are allowed in evidence or their production is not insisted upon, an accountant's statement of the result of his examination is receivable as the evidence of a person of skill". What the accountant is permitted to do, according to Street CJ in Lakeman v Finlay (1959) 59 SR(NSW) 5, at 7, is to "summarise and give his opinion as to the trading results or financial results disclosed by the figures contained in the books which are in evidence". In R v Hally [1962] Qd R 214, at 228, Gibbs J said the accountant who has examined "books and accounts" could give evidence of "the effect of their contents". In Re Montecatini's Patent (1973) 47 ALJR 161, at 169, he said that when the books are produced, the accountant may "state their general effect". 310 These observations seem to envisage a straightforward summary of the financial evidence, rather than an elaborate analysis. Thus, Young J, writing extra-curially, referred to an "expert summary of books and financial records" [emphasis supplied]: "Practical Evidence - Affidavits - Part II" (1982) 66 ALJ 298. In Spassked Pty Ltd v Federal Commissioner of Taxation (No 2) (2002) 49 ATR 642, at [13]-[14] Lindgren J referred to Potts v Miller as permitting the accountant who has inspected financial records to "summarise their effect" in evidence. So far as one can tell from the law reports, the evidence to which the older cases was directed was not the kind of elaborate analytical report that is under consideration the present case. 311 One can understand that where the accountant's evidence is understood to be merely a summary of books and records which have been produced or identified, elaborate reasoning will be unnecessary and there will be no practical issue as to the identification of the assumed facts, because it books and records will be identified. It is therefore not surprising that the older cases assert, without qualification, that the accountant's summary of the books and records is admissible. That is not to say that accountants' reports are exempt from the general principles as to admissible expert opinion evidence. Rather, the point is that compliance with the general principles will be obvious or can be readily established. As Giles JA said in Adler v ASIC (2003) 179 FLR 1, at [631], what is required by way of the explanation of which Heydon JA in Makita will depend on the circumstances. Thus (at [632]): "A solicitor shown to have specialised knowledge of conveyancing practice can give opinion evidence of general conveyancing practice without spelling out links between his training, study and experience and his opinion. The links are apparent from the nature of the specialised knowledge." Similarly an accountant can give evidence summarising books and records of a business enterprise without having to spell out the link between his or her opinions and specialised knowledge. 312 The question of compliance with the general Makita requirements will come to prominence where the accountant's evidence is more than a mere summary, and where the subject matter extends beyond a contained set of books and records. In such cases compliance with the general requirements will involve "questions of degree, requiring the exercise of judgment" (Makita, at [87] per Heydon JA), remembering that the question under s 79 is whether the opinion is substantially based on the specialised knowledge and "absolute certainty … is not required" (Adler, at [632] per Giles JA). But there is no suggestion in the more modern cases dealing with forensic accounting evidence, such as Quick v Stoland, Instant Colour Pty Ltd v Canon Australia Pty Ltd [1995] FCA 870, Switz Pty Ltd v Glowbind Pty Ltd [1999] NSWSC 1296, Hancock Prospecting Pty Ltd v Porteous (unreported, Supreme Court of Western Australia, Anderson J, 15 February 1999), and Cadwallader v Bajco Pty Ltd (2001) 189 ALR 370, at 402-6, that the general law of admissibility of expert opinion evidence is to be qualified when it comes to accounting evidence. Nor is there any ground for saying that in these more complex cases, there is anything about the nature of the expertise or the process of preparing the report that would make compliance with the general requirements set out by Heydon JA impracticable or unrealistic.
6.6 Must the report refer to information considered and rejected or discounted? 313 There is a question whether the common law rules as to the admissibility of expert opinion evidence required the expert to disclose not only the assumed or accepted facts upon which his or her opinions are based, but also information that the expert has considered and disregarded or discounted, and the reasons for doing so; and if that was a requirement at common law, whether it now exists under s 79. 314 In Clough v Tameside Health Authority [1998] 2 All ER 971, at 976-7, Bracewell J expressed the view that the information supplied to the expert should be disclosed, "in order to ascertain whether all appropriate information was supplied and how the expert dealt with it". These observations were quoted with approval by Heydon JA in Makita at [79]. In Temwell Pty Ltd v DKGR Holdings Pty Ltd [2003] FCA 948, at [12], Ryan J observed that information disregarded or discounted by the expert may be useful in evaluating his or her opinion. Similarly in Rozmus v Illawarra Area Health Service (unreported, Supreme Court of New South Wales, 23 December 1996), Hidden J observed that the process by which an expert rules out alternative hypotheses in the course of arriving at his or her preferred hypothesis is part of the expert's opinion. Consistently with these observations, the Joint Guidance Notes of The Institute of Chartered Accountants in Australia and CPA Australia (GN-2, Forensic Accounting, paragraph 37) states that: "Independent accounting experts should record in their file notes or reports all documents and other sources of information relied upon and those considered but not relied upon in preparing their reports." 315 It is not obvious to me that such a requirement should be read into the language of s 79, whatever the position might be at common law. A requirement to disclose all information to which the expert was given access, and then to explain comprehensively why information that has not formed the basis of the expert opinions was disregarded or discounted, could create great difficulty in cases where the total quantity of information is large. In the absence of governing authority, I would not hold that s 79 requires such disclosure to be made, on any general basis. 316 However, there will be cases where failure to disclose that certain information or information of a certain kind was considered but disregarded or discounted will amount to failure to make full disclosure of the reasoning process by which the expert reached a certain opinion, and hence inadmissibility of the opinion evidence on that ground. For example, in the financial context, it may be pertinent for the expert's reasons to refer to some piece of financial information which runs against the expert's analysis and conclusions and might appear to the uninitiated to be significant, if the expert has considered that information and has reached the conclusion, for good reasons, that its apparent significance is illusory. Failure to do so may also provide a discretionary reason for excluding the expert's evidence - most obviously, on the ground that the evidence would be misleading or confusing, but perhaps also on the other grounds stated in s 135. 317 In summary, I do not see the cases in this area as articulating a separate requirement implied by s 79, but rather as explaining that the disclosure of the reasoning process may well involve dealing with why material that might appear relevant was thought not to be so, or was given little weight.
6.7 Opinions based on inadmissible evidence 318 Suppose that the expert's report complies with the requirement to disclose the factual basis for the opinions expressed, but the factual basis that it identifies is inadmissible as evidence. Is the report inadmissible for that reason? What if part of the factual basis for the opinions is inadmissible, but the remainder is amenable to proof? 319 In the present case, for example, Mr Rich was examined under s 19 of the ASIC Act 1989 (Cth). According to s 68(3) of that Act, statements made in an examination conducted under s 19 are not admissible against the person making them in a proceeding for the imposition of a penalty (with certain exceptions not presently relevant), if privilege is claimed before the statement is made and the circumstances set out in s 68(2) are otherwise present. It appears to follow from Rich v ASIC (2004) 50 ACSR 242 that the present proceeding is to be regarded as a proceeding for the imposition of a penalty for the purposes of s 68(3), because disqualification orders are sought against the defendants. ASIC has not submitted otherwise. It follows that the statements made by Mr Rich in his s 19 examination are not admissible against him in this proceeding. If it were the case that Mr Carter relied, in expressing opinions in the Carter Report, on statements made by Mr Rich in his s 19 examination (a matter considered below), would his evidence of those opinions the inadmissible? What if he relied on such statements and also on other matters for the expression of opinions? 320 In its Interim Report No 26 (1985), Evidence (vol 1, para 161), the Australian Law Reform Commission described the status, at common law, of opinion evidence based on material that has not been admitted into evidence as "a matter of some controversy". On one view of the common law, evidence of an expert's opinions is inadmissible unless the assumed or accepted facts on which the opinions are based are proven, or at least are sufficiently like the proven or admitted facts (without precise correspondence) to make the opinions relevant and probative: Paric v John Holland Constructions Pty Ltd (1985) 59 ALJR 844, at 846 per Mason CJ, Wilson, Brennan, Deane and Dawson JJ. Another view is that proof of the assumed or accepted facts, or facts sufficiently like them, is not a prerequisite to admissibility but goes only to weight: Ramsay v Watson (1961) 108 CLR 642, at 649; see also Milirrpum v Nabalco Pty Ltd (1971) 17 FLR 141. The Commission described the former alternative as "the basis rule". 321 The Commission concluded that the better view was that the basis rule does not exist, and the fact, if it be so, that the expert's opinions do not have their basis in admitted evidence, goes to weight rather than admissibility: Report 26, vol 1, para 760. The focus of the Commission's attention seems to have been the problem that if there is a basis rule, expert opinion evidence will be impossible where the basis of the opinion is the views and assistance given by other experts in the field: see Report 26, paras 362-3, 750. In other words, the problem upon which the Commission concentrated was the case where the basis for the expert's opinion is hearsay. The Commission decided not to include a basis rule in its draft legislation, because such a rule would be too inflexible to take into account "the normal means by which experts generally form their opinion - by means of reports of technicians and assistants, consultation with colleagues and reliance on a host of extrinsic material and information that it would be an endless and unfruitful task with which to burden the courts". The Commission decided to leave it to the courts to exercise a "relevance discretion" to control the admissibility of expert opinion evidence based on hearsay material. 322 In Makita, however, Heydon JA accepted the basis rule as part of the common law of evidence, saying (at [64]) that "the expert must either prove by admissible means the facts on which the opinion is based, or state explicitly the assumptions as to facts on which the opinion is based", so that other admissible evidence can establish matters "sufficiently like" the assumed facts. He clearly saw the requirement of proving the assumed or admitted facts (or proving facts sufficiently like them) as a matter going to admissibility. I respectfully believe that has been some subsequent confusion about Heydon JA's statement of the law on this point. His Honour did not require that the expert's assumptions be proven prior to the court ruling on the admissibility of the expert's opinions: cf Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd, 55 IPR at [7] per Branson J, and [87] per Weinberg and Dowsett JJ. That would create great inconvenience for the administration of the trial, as he pointed out in Rhoden v Wingate [2002] NSWCA 165, at [60]. In normal circumstances, the court will make a ruling on admissibility on the basis of the case that the party tendering the expert opinion intends to prove, but has not yet proven at the time of the ruling. 323 Speaking of the law reflected in s 79 of the Evidence Act, Heydon JA said (Makita, at [85]) that "so far as the opinion is based on facts 'observed' by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on 'assumed' or 'accepted' facts, they must be identified and proved in some other way". Thus, the basis rule has been transposed from the common law into the Evidence Act, notwithstanding the Law Reform Commission's contrary intention. His Honour's reason for reaching this conclusion was that "if all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge". 324 There is a line of cases in the Federal Court which takes the view that the basis rule has not been transposed into s 79's federal equivalent: Quick v Stoland (per Branson J); Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd, Guide Dog Owners' & Friends' Association Inc v Guide Dog Association of New South Wales (1998) 154 ALR 527; Neowarra v Western Australia (2003) 205 ALR 145. Heydon JA's reasoning was criticised by Sundberg J in Neowarra as follows: "While that may be so with respect to other requirements, the expert's exposure of the facts upon which the opinion is based is sufficient to enable the relevant inquiry to be carried out. That inquiry is not dependent on proof of the existence of those facts." 325 It seems to me unnecessary to resolve this conflict in the present case. As I have said, the Law Reform Commission's concern related to expert opinions based on hearsay. There may well be cases in which a court would wish to admit expert opinion evidence based on the kind of hearsay described by the Commission in the passages identified above. In such a case it may be necessary to decide whether Makita is an absolute bar to doing so. Where, however, the expert's opinion is based wholly on a fact rendered inadmissible by s 68(3) of the ASIC Act, it is hard to imagine any circumstances in which the court would not exclude evidence of the opinion under s 135, if it were otherwise admissible. To allow evidence of such an opinion to be given would surely be to subvert the legal policy underlying s 68(3) and the privilege against exposure to a penalty, and to allow privileged evidence to be adduced by the back door. 326 Where an expert's opinion is based on a number of facts, some of which may be proven only by inadmissible evidence while others are amenable to proof in the ordinary manner, the position is more difficult. In Pownall v Conlan Management Pty Ltd, 16 ACSR at 233, Ipp J contemplated that in some cases it will be possible for the evidence to be trimmed, with the objectionable material being discarded so that the legitimate evidence remains. He added: "But there may be cases where the inadmissible and the admissible evidence is so intertwined that they cannot readily be separated. In such an event, the entire body of evidence will be rejected. The same result follows where it is not possible to say which of the evidence is admissible in which is not, or to what degree the witness has relied on inadmissible evidence." 327 Ipp J had in mind cases where the expert relies partly on his or her own observations and partly on hearsay, but in my opinion, the principle articulated by his Honour applies a fortiori where part of the factual basis for the opinion is inadmissible because of s 68(3). 328 Thus, the position is that if the expert's report fails to identify some of the factual bases for the expert's opinions, the report is inadmissible under Makita for that reason, regardless of whether the matters not identified are capable of proof by admissible evidence; but if the report identifies an assumed or accepted fact which is inadmissible under s 68(3), and relies on that fact in a significant manner for the expression of an opinion, the expression of opinion is likely to be excluded under s 135 for that reason alone.
6.8 Expert's delegation and reliance on others 329 The defendants have complained that Mr Carter relied on "unidentified work done by unidentified assistants" as the basis for his opinions. They do not contend that it was impermissible for Mr Carter to delegate tasks connected with the preparation of his Report to staff of PwC. There is nothing in the law to prevent such delegation from occurring. But it is necessary for the expert who is the author of a report to apply his or her mind to the analysis and reasoning processes that his or her subordinates have developed, so that when the report is finalised, the whole of the reasoning and conclusions that it contains have been adopted as the expert's own reasoning and conclusions. Were that not the case, the expert could not claim to be the author of the report. To the extent that an expert's report contains evidence of facts by direct lay or expert observation, that evidence is (subject to s 60) inadmissible unless the observation is the expert's and not the observation of someone else who has relayed it, as hearsay, to the expert. 330 The defendants' contention was that, because Mr Carter has used assistants to prepare drafts of his Report, without adequately identifying the assistants and their work, the Carter Report has failed to identify the factual basis for Mr Carter's opinions, and that it has failed to set out the reasoning process adopted by Mr Carter to support his conclusions, as required in each case by Makita. 331 It is clear that ineffective delegation of work to assistants can lead to the exclusion of the expert's opinion evidence. As Jacobs JA said in Steffen v Ruban [1966] 2 NSWR 622, at 626: "If his evidence is such that it is impossible to analyse and determine what are conclusions based on his own observations and what are conclusions based on what he has been told, then in such a case as the present one the danger of a mistrial becomes great …". 332 If the expert has not properly reviewed the assistant's work, and fully understood it, and then adopted it as his or her own reasoning and conclusions, the other party to the litigation would be unfairly prejudiced by admission of the expert's evidence, because the party who has actually carried out the work leading to the conclusions expressed in the report, namely the assistant, will not be called and cannot therefore be cross-examined: R v Sing (2002) 54 NSWLR 31, at [34]-[36] per Hodgson JA; Roach v Page (No 11) [2003] NSWSC 907, at [71] per Sperling J.
6.9 Considerations relating to expert's independence 333 One of Cresswell J's propositions in The "Ikarian Reefer", [1993] 2 Lloyd's Reports at 81, was that "expert evidence presented to the Court should be, and should be seen to be, the independent product of the expert uninfluenced as to formal content by the exigencies of litigation [citing Whitehouse v Jordan [1981] 1 WLR 246, at 256 per Lord Wilberforce]". As noted earlier, Cresswell J's propositions appear to have been strongly influential upon the drafters of the Expert Witness Code of Conduct, to which Part 36 rule 13C of the Supreme Court Rules refers. The Code, paragraph 2, imposes on an expert witness an overriding duty to assist the court impartially. In paragraph 11, dealing with joint conferences and joint reports, the Code speaks of an expert witness exercising "independent, professional judgment". For the reasons given earlier in these reasons for judgment, neither Cresswell J's propositions nor the propositions in the Expert Witness Code are to be construed as rules of admissibility of expert opinion evidence, but instead, they form a code of conduct designed to improve the quality of expert opinion evidence. 334 According to the preponderance of Australian authority, the fact that an expert is aligned to the party engaging him or her, and biased or not independent, is not a bar to the admissibility of the expert's opinion evidence, though it may go to the weight of the evidence: JD Heydon, Cross on Evidence (looseleaf), para [29080]; S Odgers, Uniform Evidence Law (6th ed, 2004) para [1.3.4340]; Ritchie's Supreme Court Practice para [36.13C.4]; JD Heydon, "Comments on May LJ's Paper", Supreme Court of New South Wales Annual Conference, 22 August 2003, at pp 6-8 and 10-12; and generally, HD Sperling, "Expert Evidence: the Problem of Bias and Other Things", Supreme Court of New South Wales Annual Conference, 3 September 1999; JJ Spigelman, "Forensic Accounting in an Adversary System" (2003) 41 Law Society Journal 60. The reason, as explained by Pagone J in Fagenblat v Feingold Partners Pty Ltd [2001] VSC 454, at [8]-[9], is that the evidence of the witness can be tested in adversarial proceedings, and so the possibility that the witness may be biased does not infect the impartiality of the court. The ability of the court to give biased evidence little or no weight ensures that there is no inherent unfairness to the other party in admission of the evidence. Indeed, the presence of a risk of bias (unconscious or otherwise) is not of itself a reason to exclude evidence of an expert either on grounds of admissibility or in the exercise of discretion: Li v R (2003) 139 A Crim R 281, at [71] per Ipp JA, Whealy and Howie JJ; see also SmithKline Beecham (Australia) Pty Ltd v Chipman [2003] FCA 796 at [40] per Weinberg J; Jarrama Pty Ltd v Caltex Australia Petroleum Pty Ltd [2004] FCA 144, at [10] per Crennan J. 335 The structure and content of the present law for responding to "the problem of bias" in expert evidence, as Sperling J described in the conference paper to which I have referred, is controversial and arguably unsatisfactory, and at present it is under review: Law Reform Commission of New South Wales, Issues Paper: Expert Witnesses (IP 25, November 2004), especially Issues 2.1 and 2.2. But it is not the role of a judge sitting at first instance to anticipate the outcome of a reform process or to decline to apply the existing law simply because it may have been validly criticised. 336 In Fagenblat there was a partnership dispute between solicitors. An accountant, who had experience in the failure of partnership businesses, was called to give expert evidence. He had for many years prepared the financial statements and tax returns of the partnership and the majority of its members. He was also the brother-in-law of the plaintiff, whose share in the partnership was held in trust for his wife, the accountant's sister. This was not a case where the expert had been required to form an opinion on the basis that he or she would disregard information acquired during the course of his longstanding relationship with the parties. The question was simply whether the expert's relationship with the plaintiff gave rise to such an apprehension of bias that it would not be safe to allow him to give opinion evidence. 337 At first instance, Pagone J said (at [7]): "An expert witness has a special and important role in judicial proceedings to assist the Court by providing objective and unbiased opinions about matters that bear upon the determination which the Court is called upon to make. The exclusion of an expert's evidence should only occur where the Court is satisfied that the evidence to be led by the expert is unsound and cannot provide probative material of value to the Court's task of determining the issues in the proceeding. The possibility of a witness having a bias in favour of a party (directly or indirectly) is undoubtedly a matter to take into account by a court when deciding what weight to give to the expert's evidence, but it is not a ground for the Court rejecting evidence that may be of assistance to the Court in reaching the correct result. It is for the Court to do justice between the parties and in doing so should properly take into account all matters which bear upon the ultimate issues to be decided." 338 Later his Honour said (at [9]): "Experts do have duties to the Court to be independent. Those duties have some similarity to the duties owed by counsel conducting a case. The risk that such duties might be breached permits testing of the partiality of a witness so that the Court may assess the assistance that can be gained from the expert evidence which is given. The product of the expert should itself be 'the independent product of the expert, uninfluenced as to form or content by the exigencies of the litigation'. The reason for these duties, however, stems from the need to ensure that the evidence which is before the Court is useful in the sense of being probative and reliable. The fact of partiality goes to those issues rather than to admissibility. It is for the Court to assess the value of the evidence. It is easy to conceive of instances of expert evidence where partiality could have no conceivable impact upon the reliability of the expert evidence tendered." 339 On appeal (sub nom FGT Custodians Pty Ltd v Fagenblat [2003] VSCA 33), the Court of Appeal of the Supreme Court of Victoria agreed in substance with Pagone J's decision. Ormiston JA (with whom Chernov and Eames JJA agreed) noted that where a question is raised about the independence of an expert, the real issue relates to testimonial capacity or competence rather than to admissibility as such, saying (at [7]): "Technically competence also goes to admissibility, but the issue is to be resolved by determining whether the witness can give expert evidence at all and by considering the desirability of that witness giving any opinion evidence …, not specific aspects of the evidence to be given." 340 His Honour observed (at [4]) that if the witness from whom it is sought to adduce expert opinion evidence is suitably qualified, then "there is no rule of exclusion … which would deny either its relevance or its admissibility in general". He distinguished between testimonial capacity and matters that may go to impeach the reliability of a witness's testimony by showing inadequate expertise or bias or interest (at [5]). He concluded that there was no basis in principle for excluding the evidence of the expert on the basis of alleged lack of independence, "whatever one might have said as to the wisdom of calling him as an expert in this action and whatever one may say as to the ultimate decision to prefer his evidence" (at [9]). He said that there is not and never has been "a basis for excluding evidence of the kind under consideration as incompetent or for any other reason" (at [10]). He provided a brief historical analysis of the case law dealing with circumstances in which a witness (expert or otherwise) might be held to be incompetent by virtue of interest (at [10]-[12]). He rejected the idea that there might be a principle of common law that would exclude as incompetent the evidence of a person otherwise qualified to give expert testimony, who was said to be affected by interest or bias (at [12]). He also rejected the contention, borrowed from the law of apprehended judicial bias, that expert evidence should be excluded where, in the perception of a fair-minded observer, the expert witness may not have applied an impartial and unprejudiced mind to the formation of his or her opinions (at [27]). 341 Fagenblat was a case about the common law. In Collins Thomson Pty Ltd v Clayton [2002] NSWSC 366 I followed Pagone J's judgment at first instance in a case to which s 79 of the Evidence Act applied. In that case an accountant who was the liquidator of a company that was one of the parties sought to give expert opinion evidence relating to the other party's proof of debt in the liquidation, and also relating to the company's asserted claim against that other party for breach of fiduciary duty. Again, Collins Thomson was not a case where the expert had previously been exposed to information subsequently to be disregarded for the purposes of giving expert opinion evidence. I followed Pagone J's statement of the law, treating the Expert Witness Code as a set of propositions about the expert's conduct and the quality of expert evidence rather than as rules going to admissibility. I said that considerations going to independence are weighty matters which may lead the court to exercise its discretion under s 135, or to attach little or no weight to the evidence in question, but lack of independence did not render the expert's evidence inadmissible per se. 342 A similar approach was subsequently taken by Campbell J in Kirch Communications Pty Ltd v Gene Engineering Pty Ltd [2002] NSWSC 485. Dealing specifically with expert accounting evidence, Allsop J said the Evans Deacon case, [2003] FCA at [676], that "there is no ethical reason why [expert evidence] cannot be given by the person providing assistance [in the litigation], as long as that person and the legal advisers understand and recognise the difference between the two tasks and keep them separate". 343 It appeared, for a while, that a different approach to the admissibility of opinion evidence by a biased expert had been taken in England. In Liverpool Roman Catholic Archdiocesan Trustees Inc v Goldberg (No 2) [2001] 1 WLR 2337, the question for determination related to the admissibility of evidence by Queen's Counsel with expertise in taxation matters. The defendant sought to rely on this expert evidence in answer to an action by the plaintiff for professional negligence with respect to the defendant's advice on the plaintiff's taxation affairs. The defendant was also Queen's Counsel, and in the same chambers as the expert, and they were good friends, having known each other for 28 years. The question was whether that relationship should disqualify the expert. Once again, it was not suggested that the expert had thereby obtained access to information which he would be required to exclude for the purpose of expressing his expert opinion. 344 In an interlocutory ruling, Neuberger J held that this connection alone was not sufficient to exclude the expert's evidence. However, at the final hearing Evans-Lombe J disagreed, holding that the witness was unable to fulfil his role as an expert witness because of his close relationship with the defendant. His Lordship's remarks were published as a "Practice Note", since the action was settled and it was agreed that the full judgment would not be handed down. He observed (at 2340): "In my judgment, where it is demonstrated that there exists a relationship between the proposed expert and the party calling him which a reasonable observer might think was capable of affecting the views of the expert so as to make them unduly favourable to that party, his evidence should not be admitted, however unbiased the conclusions of the expert might probably be. The question is one of fact, namely the extent and nature of the relationship between the proposed witness and the party." 345 His Lordship relied on some observations of Lord Wilberforce in Whitehouse v Jordan, where Lord Wilberforce endorsed the statement of Cresswell J that it is necessary that expert evidence presented to the court should be, and should be seen to be, the independent product of the expert uninfluenced as to form and content by the exigencies of litigation. However, as Ormiston JA pointed out in Fagenblat at [16] (and I also noted in Collins Thomson at [31]), when Lord Wilberforce's observations are taken in context, it is plain that his Lordship was not intending to enunciate any rule of admissibility of evidence. He was in fact dealing with evidence that had been admitted, and the thrust of his remarks was to be critical of that evidence. Whitehouse v Jordan does not support Evans-Lombe J's observations about the admissibility of evidence, as Ormiston JA concluded in Fagenblat. Moreover, his Lordship's observations appear to be inconsistent with later remarks by the English Court Appeal in R (Factortame Ltd) v Secretary of State for Transport (No 8) [2002] 3 WLR 1104, at 1127 per Lord Phillips MR, speaking for the Court. The English law now appears to be the same as the Australian law. 346 In summary, the fact that the expert may have had a family, personal or business relationship with the party retaining him or her, of kind that might cause a reasonable bystander to apprehend or even expect a lack of impartiality in the expert's opinions, is not of itself a ground for determining that the expert lacks testimonial capacity or competency, or otherwise for holding that the expert's opinion evidence is inadmissible. The possibility remains that matters of his kind might influence the court to exercise its discretion to exclude the evidence under s 135, but such a matter would not, of itself, to cause the discretion to be exercised against admitting the evidence. It follows that there is no basis for holding inadmissible or excluding the Carter Report merely because PwC were retained to assist ASIC in its investigation before the proceeding was commenced and Mr Carter provided his report of 21 November, and Mr Carter's assistants at PwC continued to perform assignments for ASIC concurrently with Mr Carter preparing his Report for use in the proceeding. 347 There may, however, be additional factors that would make the evidence inadmissible or, at least, would cause the court to exclude it in the exercise of its discretion. For example, the court might exclude an expert's evidence if it appeared that the expert, having formed his or her opinions for another purpose, was not prepared to consider changing his or her mind for the purposes of giving evidence in court. But that is not the evidence in the present case (T 2643.41-2644.21). 348 One additional factor especially pertinent in the present case is that expert opinion evidence might be excluded if the expert, in the course of his or her prior relationship with the party who has retained him or her, has obtained information relevant to the formation of his or her expert opinion, which is not part of the identified body of information to which the expert is authorised to have regard in preparing the report. Here the problem is not lack of independence per se, but the fact that, in the course of acting in relationship with a party to the litigation in a non-independent way, the expert may have obtained information which is not appropriate or permissible to be used as a factual basis for expert opinions. 349 ASIC submitted that it is common, as well as being proper and understandable, that an expert will obtain additional information in dealing with his or her client, which is not included in the factual basis for the expert opinions. For example, it is proper and common for an expert to express views to his or her client about documents within the expert's field of specialised knowledge produced by another party on discovery, or about expert reports from another party, and the expert may sit in court and listen to evidence and provide explanations to the client of the evidence that is given, and even suggestions to counsel as to relevant questions that may be asked. I accept that there is a range of such things that the expert may do without providing ground for excluding his or her opinion evidence. This because, in engaging in such conduct, the expert does not raise any question as to whether his or her opinions are based wholly or substantially on his or her specialised knowledge. Where, however, the expert has obtained extraneous information in the course of another relationship with the client prior to reaching his or her opinions, and the information is relevant to the opinions, a question would seem to arise as to whether the expert has failed to set out the factual basis that the opinions and has therefore made it impossible for the court to be sure whether the opinions are based wholly or substantially on the expert knowledge. 350 The additional factor was not present in any of the cases about the independence of experts cited above. The researches of counsel have identified only three cases where the additional factor been given judicial consideration, namely McMartin v Newcastle Wallsend Coal Company Pty Ltd [2003] NSWIRComm 292, R v Kovats (Provincial Court of British Columbia, Judge D Pothecary, unreported, 10 November 2000), and Elliott v Ivey [1998] NSWSC 116. 351 McMartin was a prosecution under the Occupational Health and Safety Act 1983 (NSW), relating to a disastrous accident in a coal mine. The prosecution sought to rely on reports by a Mr Anderson, in which he expressed opinions leading to conclusions that the primary cause of the disaster was failure by the manager to conduct an adequate professional analysis of a hazard at the mine, and that a secondary cause of the disaster was a failure by the Department of Mineral Resources to deal effectively with an application for approval of the method of mining used at the site. Mr Anderson was at the relevant times a Senior Inspector of Coal Mines employed by the Department. He was involved in assessing the application for approval of the mining methods at the site. After the disaster occurred, there was a judicial inquiry under the Coal Mines Regulation Act 1982, and Mr Anderson was seconded from the Department to work with senior counsel assisting the inquiry. He was part of the team investigating a number of aspects of the accident and for that purpose, he had the powers of an Inspector conferred by s 60 of the Coal Mines Regulation Act. That section authorised him to compel a person to answer questions, but it provided that answers given under compulsion would not be admissible in evidence against the person. Some of the persons interviewed by Mr Anderson in the exercise of his powers under s 60 became defendants in the prosecution. 352 Staunton J, in the Industrial Relations Commission of New South Wales in Court Session, held that Mr Anderson's reports should be excluded from evidence, under s 137 of the Evidence Act (which requires the court in a criminal proceeding to refuse to admit evidence adduced by the prosecutor if its probative value is outweighed by the danger of unfair prejudice to the defendant). It appears that she would also have applied s 135. She held that Mr Anderson's expert opinion was tainted by the risk of impartiality and advocacy of his own and the Department's causes (at [52], [59]-[60]). Relevantly to the present case, she accepted a submission that the expert evidence was tainted by the information that Mr Anderson obtained from the defendants as an Inspector assisting the inquiry, information that could not be adduced in evidence against the defendants (at [66]). Mr Anderson accepted in cross-examination that he had relied on information and knowledge obtained from his role in the judicial inquiry to express the opinions contained in his reports; indeed, his experience in the inquiry was relied upon as a source of the specialised knowledge that qualified him to give expert opinion evidence. 353 According to her Honour, it was "not sensibly possible" for Mr Anderson to assert that the distilled knowledge that he relied upon to express his opinions did not come in part from information obtained by him in the exercise of his compulsory powers of investigation. She continued (at [75]): "In my view, the perception is very strong that, in expressing the opinions that he has and relying as he does upon a body of knowledge gained from the judicial inquiry and his involvement in the inquiry, impinging in the way that it has upon the defendants before me, Mr Anderson has drawn upon information obtained from answers given by the defendants before me. In other words, it is simply not possible, in my view, for Mr Anderson to compartmentally excise from a distilled body of knowledge, precise answers to diverse questions in cross-examination or otherwise that, when taken together with all the other information gathered, forms the knowledge that he now relies upon to express the opinions that he does." 354 In Kovats the defendant was charged with possession for the purpose of trafficking heroin and cocaine. The prosecution relied on evidence by a police constable, who was an investigator in the street enforcement unit of the police. The constable testified as to the sources of information that led him to conduct surveillance of the defendant, and as to the defendants arrest in possession of drugs and associated paraphernalia such as aluminium foil and a crack pipe. Then the prosecution sought to adduce opinion evidence from the constable, with respect to the trafficking of cocaine and heroin, its packaging, methods of distribution, and the use of the associated paraphernalia. It was accepted that the constable was experienced and qualified to give such evidence. But the defendant objected on the grounds that the constable's opinion would inexorably be coloured by information that could not be proven in the trial, namely information supplied to the constable by confidential informants who would not be produced at the trial, that it would be "simply asking too much of him to separate and erase from his mind" the information he had received (for example, that the defendant was an active drug trafficker and therefore would be likely to have had possession of paraphernalia for the purpose of drug trafficking rather than for personal use). It was also contended that there would be a perception of bias because the constable seeking to be qualified as an expert was also the lead investigator. 355 After referring to Canadian authorities, the judge said (at [21]) that "in this case, where the single most important investigator, the lead investigator, is also the person called upon to be the impartial and independent and objective expert, in my view those roles are simply incompatible". He added (at [22]) that to ask the constable to disabuse his mind of extraneous matters was "asking more of this constable, or any other witness in this position, than can reasonably be expected of that witness to be done". 356 It may be that the approach taken by the courts of British Columbia to the role of juries is a little different from the approach taken in Australia. The judge said (at [21]) that while it was not uncommon for judges to be asked to disabuse their minds of certain matters, that is a task not often given to a jury, and when matters arise that the jury is not to know about, there may be mistrial. In Australia, though circumstances can arise in which a jury might need to be discharged, that step is reserved for an extreme case: R v Glennon (1992) 173 CLR 592, at 603 per Mason CJ and Toohey J. In my opinion, however, any difference in approach as to juries does not derogate from the force of the judge's reasoning about the incompatibility of the constable's two roles and the impossibility of asking him to disabuse his mind of extraneous matters. 357 One of the cases relied on by the judge in Kovats was Sebastian v Neufeld (1995) BCJ 1684, a decision of Preston J in the Supreme Court of British Columbia. The plaintiff was injured in a motor vehicle accident for which the defendant admitted liability, the issue being whether the plaintiff suffered a brain injury in the accident, and if so, the extent of the injury. Evidence was tendered by a psychologist, who listed as sources of information a number of medical reports and medical/legal reports of other doctors, and also some reasons for judgment in matrimonial proceedings between the plaintiff and her former husband. The other medical reports were not tended and the reasons for judgment in the matrimonial proceedings were inadmissible. Ruling that the psychologist's reports were inadmissible, Preston J said (at [14]): "I am of the view that it is impossible to discern from the report[s] the extent to which [the psychologist] relied on matters which will not be in evidence before me." 358 Both McMartin and Kovats were criminal cases. In Fagenblat (at [18]), Ormiston JA said that the decision in Kovats went not to admissibility but to the discretion which exists in all criminal courts to exclude evidence on discretionary grounds, such that the present prejudicial nature of a biased expert's evidence might be seen to outweigh its probative value at [18]. In New South Wales, that discretion is codified in s 137 of the Evidence Act, a provision upon which Staunton J expressly relied. However, the statutory discretion to exclude evidence in civil cases, in s 135, while expressed in less mandatory terms, raises similar issues about the weighing of the probative value of the evidence against its prejudicial effect and, indeed, Staunton J appears to me to have been prepared to exercise her discretion under s 135, as well as or instead of s 137, to exclude the evidence. I regard these cases as giving me some real assistance, by analogy, in the exercise of my statutory discretion, though neither is binding upon me. They are not decisions about the strict admissibility of the evidence in question. 359 I think the analogy with McMartin is fairly strong. McMartin was in one respect a stronger case: Mr Anderson played a role in the very process that was of evidentiary importance in ultimately determining the defendant's culpability: see at [59], per Staunton J. However, in both that case in the present one, the witness had an extensive involvement in another investigatory process in which he was exposed to a substantial quantity of information, which he was then required to exclude from consideration in forming his expert opinions. In two other respects, the present case is a stronger one than McMartin: first, in the present case Mr Carter's involvement with ASIC included an involvement in the decision-making process for commencement of the proceeding in which he then was proffered as an expert witness; and secondly, in the present case the PwC team, but not Mr Carter personally, continued to have a role in assisting ASIC in connection with the proceeding, in circumstances where the arrangements to prevent the flow of information from them to him were neither adequate nor wholly effective. 360 The analogy between the present case and Kovats is a little less strong. In Kovats the expert witness was a police constable in the permanent service of the Crown, which was a party to the litigation, whereas Mr Carter is a forensic accountant available to be retained by any client, subject to conflicts (as he pointed out in his affidavit of 2 November 2004, para 8(b)). But in that case, like the present case, the witness had accumulated a great deal of information in an investigative capacity, which he would be required to exclude from his mind of the purpose of giving expert opinion evidence. 361 In my opinion Elliott v Ivey is not inconsistent with McMartin and Kovats, although a different conclusion was reached. Mr Ivey was an agricultural and management consultant. He was retained in 1994 by the New South Wales Rural Assistance Authority to advise concerning the Elliotts' farming business. He spoke with members of the Elliott family, inspected their property, was shown certain documents, and prepared a report that (inter alia) stated Mr Ivey's favourable impression about aspects of the management of the farm, which he sent to the Elliotts and to the Authority. During 1997 Mr Ivey prepared a report for the State Bank of New South Wales for the purposes of proceedings brought by the Bank against the Elliotts for debt and possession of mortgaged property. The report to the Bank contained Mr Ivey's opinion about the Elliotts' management ability. The Elliotts had filed a cross-claim arguing that they had acquired additional farming property with money borrowed from the Bank, in reliance on the Bank's encouragement and assurances of viability of the business, whereas the acquisition allegedly rendered the enterprise as a whole unviable. The question for Sperling J to decide was not whether to reject Mr Ivey's evidence. The Elliotts commenced a separate proceeding against Mr Ivey and the Bank, seeking injunctions to prevent Mr Ivey giving evidence for the Bank in the primary proceeding, and to prevent Mr Ivey disclosing confidential information to the Bank relating to their farming business. The issue was whether those injunctions should be granted. 362 His Honour declined to grant the injunctions. He assumed, without deciding, that an injunction would be available to restrain a breach of confidence, just as it is available to restrain a solicitor from acting against a previous client, if it is shown that there is a real and sensible possibility that mischief and prejudice would result if relief were not granted, and it is not necessary to show a reasonable probability of mischief and prejudice. But according to his Honour, the evidence showed that nothing seen or heard in 1994 concerning management influenced or might have influenced the views reached by Mr Ivey in 1997 concerning management ability. In the course of reaching that conclusion, his Honour contrasted the position of a solicitor, who is required to employ all the information at his or her disposal for the benefit of the client, to the position of expert who is required to express an opinion on a limited basis of stated assumptions, and he expressed his belief (set out above) about the capacity of a professional person to give an opinion based on an exclusionary set of assumptions. 363 Elliott v Ivey was much more straightforward case that the present one, and also more straightforward than the McMartin and Kovats cases. Mr Ivey's report was limited to opinions on two topics, namely whether the financial position of the Elliotts in their farming business would have been better if they had not purchased the additional property, and whether their management of the property contributed to their financial difficulty. His information about the Elliotts related to their farming business and he acquired his knowledge of it over a short period of time. In the present case, Mr Carter's opinions in November 2001 and May 2002 ranged over a much wider field of financial considerations, with respect to a much larger business enterprise, and involved Mr Carter and his team immersing themselves in the ASIC investigation and hence the excluded information for many months. Therefore the difficulty of segregating and excluding information is much more acute here. Moreover, Sperling J reached the conclusion that the information obtained in 1994 was essentially irrelevant to the questions addressed in 1997, which were different questions. 364 It was not necessary for Sperling J to consider, as the judges in McMartin and Kovats considered and as I must consider in this case, whether exposure to substantial quantities of later-to-be-excluded information over a period of time during the course of an investigation in which the expert has formed opinions, should prevent the expert from giving opinion evidence. One starts with Sperling J's view that a professional person can, as part of his or her stock in trade, give opinions after excluding information known to them, but there are limits to that capacity, and McMartin and Kovats provide some guidance as to what they are. 365 In the ultimate analysis, the principal question for me has been one of fact, namely whether to accept or reject Mr Carter's evidence, corroborated by Ms Reynolds, to the effect that he put the excluded materials out of his mind and re-formed his opinions without them. My finding, on the facts and inferences from the facts, that it is more likely than not that Mr Carter took into account information, not identified in Appendix B or otherwise in his Report, gleaned in the course of his other work for ASIC, means that the Carter Report does not comply with the requirements for admissibility set out in Makita. But an alternative conclusion, if the evidence were thought to be not strong enough to warrant that finding of fact, is that the risk of use of excluded material, in a manner and to an extent that cannot now be ascertained, was sufficiently high that the evidence should be excluded on discretionary grounds under s 135. Judicial statements made in other circumstances about the ability or propensity of people, including forensic accountants, to exclude relevant facts in making judgments may be of assistance by way of analogy, on the discretionary question. 366 ASIC's submissions relied on the proposition that a judge is able to make decisions upon the basis of identified material, notwithstanding having knowledge of other material not available for use (referring to cases on the disqualification of judges for apprehended bias, such as Johnson v Johnson (2000) 201 CLR 488 at [12]). They contended that the same principle applies to other professionals such as forensic accountants and, indeed, to non-professionals such as a jury instructed to disregard aspects of what they have seen or heard in court or outside the courtroom. They said that the law of legal professional privilege works on the premise that an expert is able to confine his or her deliberations to defined material notwithstanding having access to other knowledge, since the privilege is waived only in respect of materials used by the expert to form an opinion, and perhaps also materials considered by the expert for that purpose: Interchase Corp Ltd (in liq) v Grosvenor Hill (Queensland) Pty Ltd (No 1) [1999] 1 Qd R 141, at 148-153, 156, per Pincus JA, de Jersey J agreeing, and 162 per Thomas J, de Jersey J agreeing; Filipowski v Island Maritime Ltd [2002] NSWLEC 177, at [22]-[23] per Lloyd J; Spassked Pty Ltd v Commissioner of Taxation (No 4) [2002] FCA 491, at [20] per Lindgren J. 367 It seems to me that the analogies invoked by ASIC are not directly on point. The problem here is not whether Mr Carter has, or is able to, exclude particular, identified information, or consider only particular, identified information. The problem arises because Mr Carter was exposed to and absorbed an enormous quantity of information over a period of months, relating to his understanding of the meaning and significance of documents, and then he was instructed to disregard substantially everything except the documents themselves. But by that time his understanding of the documents had been moulded by the material he was then required to disregard. That task is of different dimensions from the tasks of the judge and the member of a jury hypothesised by ASIC. 368 Counsel for the defendants invoked analogies from two other areas. They referred to the problem that arises out of impermissible use of material obtained on search warrant (see Grollo v Macaulay (1993) 45 FCR 336, at 352-3 per Jenkinson J), and the problem of a solicitor in possession of the confidential information of a former client excluding it from his or her mind while acting for a client with an adverse interest (D & J Constructions Pty Ltd v Head (1987) 9 NSWLR 118, at 122 per Bryson J, Mallesons Stephen Jaques v KPMG Peat Marwick (1990) 4 WAR 357, at 362-3; Carindale Country Club Estate Pty Ltd v Astill (1993) 42 FCR 307, at 313 per Drummond J, Pradhan v Eastside Day Surgery Pty Ltd [1999] SASC 256, at [52] per Bleby J; and Bolkiah v KPMG [1999] 2 AC 222, at 239 per Lord Millett; and see RSG Chester and ors, "Conflicts of Interest, Chinese Walls and the Changing Business of the Law", [2000] BLI Issue 2 35). 369 I regard a search warrant cases as fairly remote from the present question, but there are some interesting and useful observations in the cases about solicitors' and accountants' conflicts of interest, especially on the subject of arrangements to keep information from flowing from one part of a firm to another. 370 Where the issue is whether to restrain a solicitor (or a forensic accounting firm which has provided litigation support services, conceded in Prince Jefri Bolkiah v KPMG [1999] 2 AC 222 at 234 to be in the same position, relevantly, as a solicitor) from acting for a person with an interest adverse to a former client, the court takes the approach that it will intervene by injunction unless it is satisfied that there is no risk of disclosure of the former client's confidential information: Bolkiah, at 237 per Lord Millett. To put the proposition in positive terms, the court will intervene by injunction to restrain a solicitor from acting for a new client with an interest adverse to a former client if a reasonable observer, aware of the relevant facts, would think that there was a real, as opposed to a theoretical, possibility that confidential information given to the solicitor by the former client might be used by the solicitor to advance the interests of the new client to the detriment of the old client: Carindale Country Club Estate Pty Ltd v Astill, at 312 per Drummond J. 371 In assessing whether such a real possibility of misuse of information exists, courts have taken a sceptical approach to attempts to build Chinese walls or other barriers to information flows. In D & J Constructions Pty Ltd v Head, at 122, Bryson J said: "… it is not realistic to place reliance on such arrangements in relation to people with opportunities for daily contact over long periods, as wordless communication can take place inadvertently and without explicit expression, by attitudes, facial expression or even by avoiding people one is accustomed to see, even by people who sincerely intend to conform to control". 372 That a sceptical approach to the curtailment of information flows between partners of a law firm is warranted, has been confirmed in the profession's own literature: RSG Chester and ors, op. cit., at 45, where the authors, who are members of Mcmillan Binch, Toronto, a large Canadian law firm, said "there is a strong inference that lawyers who work together share confidences" - an inference that must be equally available in the case of those who work in the same department of a large accounting firm. 373 In Bolkiah, where a former litigation support client of KPMG sought to restrain the firm from acting in an adverse interest because the firm possessed his confidential information, Lord Millett (with whom the other members of the House of Lords agreed) said (at 239): "It is one thing, for example, to separate the insolvency, audit, taxation and forensic departments from one another and erect Chinese walls between them. Such departments often work from different offices and there may be relatively little movement of personnel between them. But it is quite another to attempt to place an information barrier between members all of them are drawn from the same department and have been accustomed to work with each other. I would expect this to be particularly difficult where the department concerned is engaged in the provision of litigation support services, and there is evidence to confirm this. Forensic accountancy is said to be an area in which new and unusual problems frequently arise and partners and managers are accustomed to share information and expertise. Furthermore, there is evidence that physical segregation is not necessarily adequate, especially where it is directed within a single department." 374 Perhaps an even more sceptical approach is taken of the ability of a single partner to avoid using the former client's information for the benefit the new client, where the information is personally known to him or her (Carindale Country Club, at 313 per Drummond J, who says it has long been recognised that a solicitor possessing such information "may still subconsciously draw" on it to the disadvantage of the former client). 375 One would expect a similarly sceptical approach to be taken to evidence that an expert has not personally taken into account, for the purposes of forming opinions and preparing a report, relevant information obtained by his or her partner or employee, especially where the partner or employee in possession of the information is in the same forensic department of the firm; and also to evidence that the expert has been able to exclude from his or her mind relevant and perhaps highly material information which the expert knows but is told to disregard. 376 The defendants urged me to apply, by analogy with the conflict of interest cases, the approach that I should exclude Mr Carter's evidence if there was a "real and sensible possibility" that Mr Carter had made use of the excluded information. Counsel drew an analogy between the position of an expert witness and the position of a solicitor, saying that in both cases there was the duty owed to the court, and there was an issue about preserving public confidence in the administration of justice (citing Murray v Macquarie Bank Ltd (1991) 33 FCR 46, at 49). That question does not arise when one is considering strict testimonial capacity, according to the judgment of Ormiston JA in the Fagenblat case. Nor is it the correct question to ask when one is considering admissibility. The relevant issue at that level is whether the Makita principles are satisfied, and in particular, whether the evidence is rendered inadmissible by the fact that the expert, taking into account excluded material, has to that extent failed to state the factual basis for the opinions expressed in the report. 377 Nevertheless it is relevant to consider the degree of risk that the excluded materials will influence the formation of opinions, when one is considering the exercise of the statutory discretion to exclude evidence conferred by s 135. Under that section, the question is whether the probative value of the evidence is substantially outweighed by the danger that the evidence might be unfairly prejudicial, misleading or confusing, or cause or result in undue waste of time. The assessment of the degree of danger that evidence might be unfairly prejudicial, or misleading or confusing, seems to me to involve, in a case such as the present case, considering the degree of risk that the expert might have unwittingly relied on, been influenced by or taken into account material that has not been identified as part of the factual basis for the opinions he or she has expressed. 7. Application of these principles to the Carter Report 378 The defendants' attack on the Carter Report contains several components. Much attention was paid, in argument, to the question whether the Report adequately distinguished between facts and assumptions and opinions. For reasons I shall explain, my view is that the Report does not always provide an adequate basis for statements cast in the form of facts, but the deficiencies are not so endemic and widespread as to render the Report inadmissible on that basis alone. In my opinion, the Carter Report also survives the attack on some other fronts. But it is fatally flawed in the following ways: · it is more likely than not that Mr Carter has not excluded from consideration, for the purpose of forming his opinions, information acquired during the investigation phase and by his assistants during performance of their assignments for ASIC concurrently with the drafting of the Report; · consequently, the Carter Report does not identify adequately the factual basis for the opinions he has expressed, as required for admissibility by Makita; · even if it had not been established on the evidence that Mr Carter took into account excluded information, there would be a substantial risk that this may have occurred, creating a danger that the evidence in the Carter Report might be unfairly prejudicial to the defendants or misleading and confusing, outweighing its probative value, with the result that the court's discretion to exclude the evidence under s 135 is enlivened; · in the exercise of that discretion, taking into account all relevant matters, the Carter Report should be excluded from evidence as a whole. 379 I shall deal with the defendants' criticisms by reference to the application of the legal principles I have set out at 6.1-6.9 above, though the matters at 6.4 to 6.9 need to be addressed together.
7.1 How should the intermediate propositions in the Carter Report be categorised? 380 The defendants criticised the Carter Report on the ground that throughout the document, Mr Carter has put forward what appear to be statements or findings of fact. Their submission is that the Report is not confined, as it should have been, to statements of assumed or accepted facts, evidence based on lay or expert observation, general propositions of an expert nature, and statements of opinion. 381 If it were true that the bulk of the assertions in the Report are statements of fact not falling within the permissible categories that I have outlined at 6.1, the Report would be open to objection on that basis. However, in my opinion this is not the correct categorisation of the bulk of the statements in the Report. 382 The Carter Report contains quite a few statements that are clearly expressions of opinion, including the ultimate answers to ASIC's seven questions. On a few occasions it appears that assumptions are made, the most obvious one being in paragraph 11, where (as noted above) Mr Carter tells the reader that he expresses no opinion on the reliability or completeness of the information supplied to him, except as specifically stated in the Report. 383 Far more commonly, however, the Report contains intermediate propositions, which usually have the appearance of statements of fact - for example, that at a certain time the company's true cash position was at a certain dollar sum, or the true EBITDA was at a certain dollar sum - notwithstanding that different figures were supplied to the board. According to the defendants' submission, which appears to me to be correct on this point, in the section of the report entitled "Cash and Creditors" (paragraphs 49 to 155) there are dozens of assertions of fact, but only one express assumption, at footnote 74 to paragraph 143), and only six express opinions (at paragraphs 50, 57, 66, 69, 73 and footnote 67 to paragraph 130). 384 These propositions cannot accurately be characterised as assumed or accepted facts, or as lay or expert evidence based on observation. There is usually a reasoning process (sometimes elaborate, sometimes more skimpy) to support them, purportedly by reference to the documentary facts listed in Appendix B. 385 The defendants contended that, because Mr Carter did not perceive that he was expressing opinions in his intermediate propositions, he did not set out the factual basis for those opinions or the reasoning process by which he arrived at them. They said that, in most cases, he either provided no source at all for his assertions or merely footnoted a document without endeavouring to explain the process of reasoning by which he reached the view that the fact could be inferred from the document. In my opinion this is not an accurate account of the Report as a whole. When the intermediate propositions are read in their context and the flow of reasoning that surrounds them is understood, there is often some reasoning process, sufficient to indicate that the basis for the intermediate propositions is, for the most part, a process of inference. Whether the reasoning process disclosed in the Report is adequate is another matter, which is considered at 7.5. 386 My view is that the intermediate propositions are to be understood, for the most part, as themselves statements of expert opinion, formed along the way to formation of the ultimate opinions which answer ASIC's questions. In their context, they purport to be inferences from the assumed facts comprised in the Appendix B documents. My conclusion is supported, in the manner shown above, by the reasoning of Branson J in Quick v Stoland. It is also supported by Mr Carter's evidence of his own understanding of the role of the intermediate propositions played in the Report, given in cross-examination. He said that the bulk of the Report was intended by him to be "an analysis of documents setting out the basis upon which I formed my opinions" (T 2433.30). He said his Report had accepted "the meaning of documents based on my experience as an accountant and what they say on their face" (T 2433.39), and that his statements were based on "significant specialist knowledge that enables me to interpret the accounting information necessary to form an opinion" (T 2435.12). 387 The Report discloses a process of reasoning in which inferences are directly or indirectly made from the primary documents, so as to produce the intermediate propositions. The reasoning process includes inferences as to the meaning and interpretation of documents and inferences as to the significance of documents. Part of the process, in a case like the present one, is for the expert to decide which documents in a mass of material are helpful for the purposes of answering the questions that the expert addresses. I see nothing inappropriate in the same expert carrying out the task of sifting through the documents so as to identify the significant ones, and then expressing opinions on the basis of views as to why and how those documents are significant. As ASIC submitted, it would be very time consuming and inefficient to segregate those tasks and allocate them to separate experts. 388 It is helpful to compare the Carter Report with the reports considered by Lindgren J in the Harrington-Smith case. His Honour considered the admissibility of some 30 reports by historians, anthropologists and others, which addressed questions relating to whether there are communal or individual traditional rights and interests of Aboriginal peoples to land and waters. He found that, while the reports had tables of contents, headings and subheadings, substantial parts of them were "undifferentiated combinations of speculation, summary description of facts, opinion (including opinion beyond the witness' field of specialised knowledge), hearsay, unsourced assertion and sweeping generalisation": at 430. 389 The Carter Report cannot be characterised in any of these ways, in general. By and large, it is a reasoned report, with propositions frequently supported by footnotes referring to documents or making explanatory comments. Inferences are explained, and the Report addresses matters within Mr Carter's field of specialised knowledge as delineated in his curriculum vitae. I can see no valid basis for a general objection to intermediate propositions simply on the ground that they are expressed as assertions of fact, since in my view the disclosed reasoning process exposes the matters of inference, and the court is presented with the means of properly categorising the propositions. 390 I do not believe there are any propositions in the Report that are properly to be characterised as "scientific facts" in the sense described by Phipson (or, more precisely, "analytical facts" arrived at by an expert process of calculation). Normally there is an element of judgment or inference in what is said, rather than pure observation/calculation. There are, however, some intermediate propositions in the Report which do not fall within the general description of the Report in the last paragraph. Properly characterised, they are inadmissible assertions of fact sourced in hearsay, unless they are saved under s 60 of the Evidence Act. 391 The assertions I have in mind are within the four examples that were considered at 5.17-5.21 above. In summary, and for the reasons set out there, it seems to me that the following propositions in the Report are not facts based on observation, or general propositions of expertise, or assumed or accepted facts, and they cannot be treated as opinions because they are not surrounded by any reasoning process that would establish them to be inferences from the documentary facts: · paragraph 388(b); · paragraphs 242-249, to the extent that they contain propositions cast as statements of fact rather than opinion, where the only source is comparison.xls; · possibly parts of paragraphs 125-154, to the extent that they contain propositions cast as statements of fact rather than opinion, made in reliance on the deferred payments lists (although the deferred payments lists are said to be only an "indication" and the general conclusion about systematic deferral of payment of creditors seems to be an opinion); · the last sentence of paragraph 141; · paragraphs 177 and 204, to the extent that reliance has been placed solely on the profile summaries and collection profile summaries. It is possible that there are, consequentially, other propositions in the Report that should be classified in the same way, in light of my conclusions on these paragraphs. 392 Although my findings about these propositions would lead to the admissibility or exclusion of some important parts of the Report, if this were the only problem with the Report I would exclude the offensive parts rather than the Report as a whole. As to the remainder of the Report, the defendants' challenge on this ground would be unsuccessful. 393 I do not mean to say that the remainder of the Carter Report is beyond reproach in this respect. In my opinion experts, particularly experts who are required to prepare discursive reports based upon voluminous information, should take particular care to ensure that the reader of the report can readily distinguish between matters of fact and opinion. Sometimes the language of the Carter Report fights against the conclusion that is drawn by a careful analysis of the role of the intermediate propositions in the reasoning process. It would be tedious and distracting for the author of an expert's report to introduce each intermediate proposition with some such expression as "In my opinion" or "I infer that", but sometimes express clarity is desirable for a proposition of particular importance, and on other occasions adequate clarity can be achieved through the structuring of the report and the headings used.
7.2 What is Mr Carter's specialised field of knowledge? 394 Mr Carter is a qualified chartered accountant, who has undertaken additional training in expert evidence and investment analysis. According to his curriculum vitae, his practical experience has encompassed, over a period of more than a decade, foreign investment advice, insolvency practice, business valuations and financial modelling, tax planning, audit, and special investigations. He claims substantial practical experience in advising telecommunication companies, internet service providers and mobile telephone resellers. According to his claims, his specialised knowledge extends to knowledge gained from experience in the review of the entire income and expenditure of a telecommunications company over a substantial period, and various other similar tasks. 395 It would be incomplete to describe a person with Mr Carter's specialised knowledge as having the specialised knowledge of a chartered accountant. His claimed specialised knowledge extends to the skills involved in assessing the overall financial health of a large business enterprise, including assembling and analysing large quantities of financial information about the enterprise, and making factual inferences from it as to matters going to the company's overall financial position and prospects. I infer that those matters would include such things as the company's trading position, cash usage, overdue creditors, collectable debtors, profitability, financing needs, overall liquidity and variations in net worth - in other words, the very matters addressed by Mr Carter in answer to the first five questions put to him by ASIC. 396 Mr Carter's asserted experience extends to due diligence and acquisition reviews, which could plausibly be said to give him experience of special relevance to management financial systems and financial reporting to boards of directors. That implies an aspect of "specialist knowledge" relevant to answering ASIC's sixth and seventh questions. 397 Therefore the scope of Mr Carter's claimed expertise is wide enough to cover not only the formation of accounting opinions in a strict or formal sense (opinions drawn directly from an analysis of financial statements, ledgers and vouchers, as to such matters as trading profits), but also both the ultimate and intermediate opinions formed during a process of analysis and distillation of a large volume of financial information for the purpose of ascertaining the financial position of a large corporate group - with a claim to particular expertise, in this context, in the telecommunications industry.
7.3 Are the opinions expressed in the Carter Report based on Mr Carter's specialised knowledge? 398 The defendants made the general submission that Mr Carter's opinions were not wholly or substantially based on his specialised knowledge. They said that this could be seen from Mr Carter's use of non-accounting documents such as internal e-mails (paras 53, 79 and 103 fn55), a spreadsheet as a basis for speculation about inconsistencies between board records in internal records (para 117), correspondence involving Lucent and Mr Keeling's voicemail record as examples of "management of creditors" (paras 148-153), and internal correspondence said to evidence systematic deferment of payment of creditors (paras 154-155). 399 They also submitted that in substantial parts of the Report, the link between any specialised knowledge of Mr Carter and the topics which were the subjects of his opinions was tenuous. They gave, as examples, provisioning for doubtful debts (which they said was patently a management decision depending on knowledge of the character of the particular debtors involved), quality of information provided to the board (a matter, they said, which the court was well able to assess for itself), and the manner in which One.Tel dealt with creditors (which required knowledge of the course of dealings over time). They made specific and detailed reference to Mr Carter's opinions at paras 127-155 about the inferences to be drawn as to the conduct of management and what he referred to as "indicators", which were to be "considered collectively" and, so considered, showed "a systematic process of managing cash and creditors". They gave particulars of the reasoning process in these paragraphs and the documentation upon which Mr Carter placed reliance. They submitted: "No doubt, in considering whether some of these facts existed, the court might gain some assistance from an accounting expert if accounting calculations were required or some piece of accounting knowledge were required in order to interpret a particular accounting record, but whether this assemblage of 'evidence' allows the inference to be drawn that One.Tel was engaged in 2001 in 'a systematic process of managing cash and creditors' is not a matter on which Mr Carter is entitled to express an opinion". 400 In my opinion this submission misconceives the breadth of expertise that Mr Carter would bring to bear as a forensic accountant and financial expert. As I have explained at 6.2 above, there is a category of financial expertise going beyond narrow accounting specialisation. Decisions in other cases cannot govern the outcome here, but there are some factual analogies between the Carter Report and reports considered in modern cases concerning accounting and financial experts. The cases show that is appropriate for an accounting and financial expert to have regard to a wide range of business records not confined to accounting records in a narrow sense. 401 For example, Mr Madden's report in Quick v Stoland expressed a general conclusion as to the financial position of the company (namely, that it was insolvent during the relevant period), tabulated the documentation that had been provided to the accountant for the purposes of his review, addressed the company's working capital and net assets position, and contained Mr Madden's "summary" of certain company accounts. Although the Carter Report is no doubt much more extensive in scope and documentation (given the size and complexity of the One.Tel Group and the fact that Mr Madden was expressing an opinion about the solvency of a proprietary building company), and the specific questions addressed in the reports are different, there appears to be some general similarity in the scope and content of the two reports. It appears from the judgment at first instance (Stoland Pty Ltd v Thurn (1997) 29 ACSR 280, at 284-6, that Mr Madden's consideration extended to a range of documents going beyond financial statements and accounting records, including a Report as to Affairs, correspondence with creditors and financiers, a handwritten document "releasing" a bobcat to a creditor as part payment of a debt, and a letter to the ANZ Bank giving information as to the state of the company's business. It is probable, from the descriptions of Mr Madden's report given in the judgments, that it contained, like the Carter Report, intermediate reasoning about particular aspects the financial position of the company (such as the amount of working capital and the value of net assets). But, whereas Emmett and Finkelstein JJ detected in Mr Madden's report opinions going outside his expertise, I do not detect in the Carter Report, on any general basis, reasoning that goes outside the expert's specialised knowledge into the sphere of commonsense inferences of a kind that the court can make for itself. 402 My opinion is that, considered overall, the Carter Report presents a chain of reasoning leading to the ultimate opinions expressed in answer to ASIC's questions, and the steps in the reasoning process are related to Mr Carter's specialised knowledge as an accounting and financial expert (I put to one side the background and chronology in Part 2 of the Report). I agree with ASIC that, while it is up to management to make decisions from time to time as to provisions for doubtful debts, it is within the field of expertise of an accounting and financial expert to express his opinion, considering all relevant documentation, as to the adequacy of the provision for doubtful debts, along the way to forming a conclusion as to the financial health of the business enterprise. The same reasoning applies to the expression of opinions, from a financial point of view, as to management's dealings with creditors and arrangements for the deferral of payment of debts, and as to the adequacy of financial information provided by management to the board of directors. 403 In reaching this conclusion, I do not mean to say that, if the Carter Report had been otherwise allowed into evidence, there would not have been scope for challenging particular propositions for failure to comply with this requirement. 404 As noted at 6.3, one of the aspects of the requirement that the opinions be based on the expert's specialised knowledge is that observations that could have been undertaken by the court without the expert's assistance are not admissible as expert opinion evidence. The defendants submitted that some of Mr Carter's assertions, when tested on the voir dire, were shown to have been based not on any specialised knowledge or expertise, but on a process of reasoning which the court was more than capable of undertaking for itself. One example was whether payment transactions for which there was no proof either way should be assumed to have been paid or not paid. Another was whether one should assume that the ARPU figures on one page of a document were more accurate than the ARPU figures on another page because one page appeared to contain "more detailed analysis" than the other. 405 I disagree, to the extent that this submission is meant to establish a general deficiency in the Report. I am inclined to think that the reasoning process for preferring one set of ARPU figures to another was within the Carter's expertise, though the reasoning was very general. If the evidence its final form as to paragraph 141 was that Mr Carter or one of his assistants had simply made an assumption that nine debts had not been paid before the appointment of the voluntary administrators, without evidence whatever, then of course that "reasoning" would go outside Mr Carter's specialised knowledge, and indeed would not be reasoning at all. The relevant sentence of paragraph 141 would not be allowed, unless the evidence were permissibly supplemented. But these matters would not warrant the exclusion of the Carter Report as a whole. Compare the Carter Report with the report in the Evans Deakin case, which had a general similarity to the Carter Report, as regards the nature of the specialised knowledge brought to bear and the scope of the opinions. I would not describe the Carter Report, in general terms, as a discursive body of views putting forward an argumentative case; and in contrast with the report in the Evans Deakin case, here there are many accounting opinions displayed, and they are certainly not buried. 406 Although many of the intermediate propositions in the Carter Report have, in form, the appearance of findings of fact, those propositions are, by and large, properly analysed as opinions, for the reasons I have given. That being so, it cannot generally be said that Mr Carter has "usurped the functions of the trier of fact", if (notwithstanding the views I have expressed) there is a separate principle of admissibility to that effect. 407 My conclusion on this ground is subject to considerations that arise out of the history of Mr Carter's relationship with ASIC and the unarticulated assumptions and reasoning processes that appear to have emerged from it. For the reasons given above and summarised at 7.4 and 7.5, the Carter Report suffers from the general deficiency that, having regard to the history of the matter, Mr Carter has failed to disclose the true factual basis and reasoning processes supporting his opinions. That means, in turn (as Heydon JA explained in Makita at [85]), that the court could not be sure whether the opinions are based wholly or substantially on the expert's specialised knowledge.
7.4, 7.5, 7.6, 7.7, 7.8 and 7.9 Does the Carter Report adequately identify the factual basis for Mr Carter's opinions? Does it adequately disclose the reasoning upon which Mr Carter's opinions are based? Does it fail to identify factors considered but discarded? Are Mr Carter's opinions based on inadmissible facts? Was there impermissible delegation to assistants? Is it objectionable by reference to considerations going to independence? 408 It is appropriate to deal with these matters together, because the factual application of the principles involves considerable overlapping. 409 The defendants submitted that Mr Carter's presentation of the intermediate propositions in the form of assertions of fact rather than as expressions of opinion led him to fail to disclose, or to disclose adequately, the factual basis and the reasoning process for his opinions. I do not agree that the formal structure of the Report or the presentation of intermediate opinions as if they were opinions of fact has led to any general failure to disclose the factual basis of the expert opinions. By and large, the nature of the intermediate propositions is adequately exposed by the place that they occupy in the reasoning process, and so the mischief that arises when an expert's report does not set out to distinguish between facts, assumptions and opinions and consequently fails to disclose adequately the factual basis and reasoning process, does not arise here. 410 In my opinion there is no general formal or structural flaw in the Report that would prevent the court, reading the Report as a whole, to identify the factual basis and general reasoning process, including the intermediate inferences, that have led to Mr Carter's concluding opinions in answer to ASIC's questions. ASIC submitted that the defendants' written objections to the admissibility of the Report (Exhibit P2) show the very limited extent to which they were able to find alleged oversight in identification of source documents. But I need not reach conclusions on this derivative basis. My conclusion arises from my own consideration of the Report. When considering particular statements in the Report, it is necessary to bear in mind Appendix O, which provides detailed references to documents supporting the tables on the Report. To the extent that there were a few occasions when the source documents for statements were not identified, it would have been appropriate, in my view, to allow the problem to be rectified by supplementary evidence. Indeed, Mr Carter's report of 23 July 2004, Appendix C, purports to do so. 411 No problem arises here out of lack of independence in the traditional sense. The evidence does not support any inference that Mr Carter behaved in a subjectively biased or partial way. Mr Carter was not in the kind of close or financial relationship with ASIC that has led to problems about bias in other cases. Even if he were, that fact alone would not, according to the authorities, have destroyed his testimonial capacity or the admissibility of his expert evidence. A fortiori, the very fact that Mr Carter was engaged by ASIC in another capacity before becoming an expert witness for the Commission would not of itself provide a basis for excluding his expert evidence. The problem is, rather, the exposure to information that he had during the investigative process, on a broader front than he was allowed to consider for the purposes of his expert report. 412 It seems to me that there are problems arising out of the history of the relationship between Mr Carter and PwC and ASIC that lead to difficulties of four kinds, namely: · failure fully to articulate the factual basis of the opinions, because of undisclosed assumed or accepted facts about the meaning, significance and status of documents; · failure to disclose the true reasoning process by which the opinions were formed; · a substantial risk that the reliance has been placed, in factual assumptions and reasoning, on information not before the court and (to a degree) not capable of being placed before the court; · a process of involvement in ASIC's investigation as a result of which it is humanly not possible for Mr Carter to exclude extraneous influences. 413 These difficulties arise in consequence of my cumulative findings of fact that, in summary: · it is likely that the 21 November report influenced the preparation of the initial draft of the Carter Report (at 5.12 above); · it is likely that information obtained by Ms Reynolds and other PwC personnel in carrying out their continuing assignments for ASIC while they were assisting with the drafting of the Report influenced the drafts (at 5.12 above); and · it is likely that Mr Carter, directly or through his assistants, took into account and relied upon information other than the information in Appendix B, arising from his and their other connections with ASIC (at 5.15 above). 414 These findings of fact are general findings as to the likelihood of excluded information leaking into the opinion-forming process. They do not depend upon identifying a particular fact that has crossed the barrier. There are evidentiary indications, in the four areas explored by the defendants in cross-examination that, subject to such further evidence that Mr Carter may have given had he been permitted to do so, specific facts were used to support the opinions in the Report. My conclusion does not depend on those particular subject areas, but rather on facts which create such an implausibility that excluded materials can be kept out of the opinion-forming process, as to lead to the conclusion that it was humanly impossible to maintain the exclusion, or in other words the use of excluded information was inevitable. The absence of contemporaneous or other satisfactory records leaves the court uncertain as to how extensive the use of excluded materials has been. But factors that lead to the conclusion that usage was inevitable also make it likely that usage was significant. In particular, usage of information explaining the meaning and significance of particular documents and the way they were used within One.Tel, once learned, could not be forgotten and in my opinion, must have been extensively used, probably unconsciously, both by those who drafted the Report and Mr Carter when he settled the draft. 415 It follows from these findings of fact that the Carter Report has failed to comply with the Makita requirements as to identification of the factual basis of the opinions and reasoning process that were used, and it has failed to do so in a significant manner. The statements of principle in Makita, which, I have held, should be followed at first instance in New South Wales, and are in any case good law, produce the consequence that the Report is inadmissible as a whole. It is inadmissible as a whole because the failure to comply with the Makita principles is pervasive. This is not a case where particular propositions can be identified and excised with surgical precision. The problem has arisen because of a serious defect in the process, arising when it was decided that Mr Carter would be used as the expert witness notwithstanding involvement in the investigation, and it has affected the entire process of formation of the opinions ultimately expressed in the Report. 416 This is not a case, in my view, where the expert has failed to disclose a reasoning process that should have been disclosed, that has lead to the discounting or disregard of a document or documents apparently relevant to the opinions. Rather, the problem is a probably unconscious use of excluded material and a consequent failure to state the full and real factual basis and reasoning process. 417 It does not seem to me that Mr Carter excessively or impermissibly delegated to his assistants. The evidence indicates that the final settlement of the draft was undertaken by him, and those who prepared it did so in a subsidiary role. The problem arising with respect to the assistants was that they had access to information (including excluded information) for the purpose of drafting, which assisted them to formulate the reasoning and draft opinions, and contributed thereby to the conclusion that it had become inevitable that excluded materials would be used in the formation of the opinions. 418 As I have explained, in both the 21 November report and the 9 April draft, references were made to the transcripts of Mr Rich's s 19 examinations. Those references were removed before finalisation of the Carter Report. There is a residual concern that the s 19 transcripts may have affected the formation of the final opinions. But I am not able to find, on the evidence, that this was generally the case or was the case in relation to particular opinions. I have not reached my conclusion on the inadmissibility of the Report on any basis relating to the use of inadmissible materials. 8. Should the Carter Report be excluded under s 135? 419 My conclusion as to admissibility makes it strictly unnecessary for me to consider the discretionary question under s 135. However, if I am wrong in my view that the evidence justifies a positive finding of reliance on excluded material, then in my opinion the same evidence supports, at the very least, the conclusion that there was substantial risk, higher than a real sensible possibility of the kind referred to in Elliott v Ivey, that the excluded material may have unconsciously affected Mr Carter's opinions, such that I should intervene by the exercise of my discretion under s 135. 420 The defendants submitted that they should not be left to extract a clear statement of the opinions, factual assumptions and reasoning processes of Mr Carter by cross-examination, and therefore the correct approach was for the court to exclude the Carter Report under s 135. 421 They contended that they would be unfairly prejudiced if the Report were not excluded, in two ways. The first, more general submission was that they would be forced to "unravel and test the assertions made about the factual basis of the reports in circumstances whether the records which would allow a proper testing are manifestly inadequate". They would be forced to choose between either cross-examining in the dark, "with all the perils which usually faced journeys into darkness" (Makita, at [62] per Heydon JA), or choosing not to cross-examine, running the risk that the court might attach weight to unsubstantiated opinions. Secondly, they said that if they are left to cross-examine Mr Carter in order to show that he has illegitimately relied on such information in preparing his Report, they would run the gauntlet of putting some potentially prejudicial material before the court during the cross-examination process. 422 The defendants submitted, additionally, that receiving the Report into evidence would be likely to result in confusion and undue waste of court time. They relied on the following remarks by Allsop J the Evans Deakin case, [2003] FCA 171 at [679]: "Whatever may be the strict requirements of s 79 of the Evidence Act, s 135, in at least other than straightforward cases, demands that the basis of expert opinion be apparent, and that the opinions, in respect of which the witness has expertise, be displayed and apparent. Cross-examination, in particular of a determined and dialectically combative kind, should not be necessary … to shear away the layers of evidence, in order to assess whether such evidence does involve opinions, and if so, what they are and whether they are relevant …." 423 ASIC submitted that the defendants have had the Carter Report for over 2.5 years, and they drew attention to some evidence (the affidavit of Mr Johnston made on 7 September 2002) which indicates that the defendants have been working on the Report, with expert assistance, for most if not the whole of that period. Further, ASIC said, the defendants have had access to the business records of One.Tel in the possession of ASIC since 2002, and they obtained the remaining business records in the possession of the liquidators in 2003. They drew attention to evidence which indicates that in 2002 the lawyers then acting for Mr Rich sought access to these records in order to respond to the material contained in the Carter Report. They did not, at that stage, assert that they were prejudiced by the form of the Report. Since, therefore, Mr Carter's reasoning and the documents to which he refers have been available to the defendants for a substantial period of time, there is, on ASIC's submission, no unfairness in any prejudice that would arise from admitting the Carter Report into evidence. 424 ASIC challenged the assertion by the defendants that, in order to test Mr Carter's conclusions, it would be necessary for them to put before the court "a body of potentially prejudicial material". ASIC's point was that if the documents in Appendix B do not support what Mr Carter says in the Report, then there is no need to go further, and therefore no need to put before the witness and the court any other prejudicial material. In any event, ASIC submitted, the position of the defendants could be protected, to the extent that it might be necessary to put such material before the court, by an application for appropriate orders under s 136 of the Evidence Act. 425 In my opinion the defendants' submissions are correct on this issue. I am persuaded, in terms of s 135, that I should refuse to admit the Carter Report as a whole, on the ground that its probative value is substantially outweighed by the danger that the evidence constituted by the Report might be unfairly prejudicial to the defendants, or might be misleading or confusing, or might cause or result in undue waste of time. The defendants' submissions as to unfair prejudice are made out, once it is appreciated that they would be confronted, if the Carter Report were allowed into evidence, with the prospect that evidence would be held against them, and given weight, that was derived from excluded materials, unless they embarked upon a process, illustrated in the four areas explored on the voir dire, of exposing that reliance. The process of exploration of the four areas pursued on the voir dire amply demonstrates the danger that the evidence in the Carter Report might be confusing and result in undue waste of time. As I have said, there is a reasonably strong factual analogy with the McMartin and Kovats cases, where courts exercised comparable discretions to exclude evidence in similar circumstances. 9. Conclusions 426 I have therefore reached the conclusion that the Carter Report is inadmissible as a whole. If the facts did not, contrary to my view, support the findings upon which my decision as to admissibility is based, then I would exercise my discretion to exclude the Carter Report from the evidence in this case, as a whole, under s 135. I shall give the parties the opportunity to prepare submissions as to whether any other part of Mr Carter's evidence should be admitted, in view of my conclusions on the principal Report.
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
ASIC
Rich
[1998] NSWSC 116
[2001] VSC 454
[2004] VSC 196
[2004] QCA 61
[2003] VSCA 33
[2002] VSC 85
[2004] QSC 67
[2002] QSC 432
[1999] SASC 256
[2003] QCA 413
[2004] QSC 265
(1996) 64 FCR 73
(1990) 24 FCR 313
(2001) 189 ALR 370
(1993) 42 FCR 307
(1960) 103 CLR 486
(1987) 9 NSWLR 118
(1993) 45 FCR 336
(1998) 154 ALR 527
(2003) 130 FCR 424
(1999) 197 CLR 414
(2000) 201 CLR 488
(2001) 52 NSWLR 705
(1990) 4 WAR 357
(1971) 17 FLR 141
(1991) 33 FCR 46
(2003) 205 ALR 145
(1985) 59 ALJR 844
(1940) 64 CLR 282
(1995) 12 WAR 370
(1998) 87 FCR 371
(1992) 173 CLR 592
(1981) 28 SASR 119
(2002) 54 NSWLR 31
(1991) 34 NSWLR 129
(1961) 108 CLR 642
(1973) 47 ALJR 161
(2003) 84 SASR 507
(2002) 55 IPR 354
(1990) 21 FCR 324
(2003) 179 FLR 1