Azmin Firoz Daya v CX Reinsurance Company Limited

Judgment (ex tempore) 1The defendants tender reports of Alastair Campbell, a United Kingdom accountant, dated 21 March 2011 and 4 October 2011, as opinion evidence addressed to the following questions summarised in paragraph 9 of Mr Campbell's first report, namely: (a)how has the "little stop loss" (referred to in this report as the "leg one contract") been treated in the draft half year accounts to 30 June 1998 (if at all)? (b)on the assumption that the draft half year accounts to 30 June 1998 were to have been prepared in accordance with US GAAP, how should the little stop loss have been treated in those accounts? Has the little stop loss transaction been properly treated in those accounts? (c)what is the net worth of NCRH revealed in the draft half year accounts to 30 June 1998? (d)if the little stop loss should have been given a different accounting treatment in the draft half year accounts to 30 June 1998, pursuant to the requirements of US GAAP, what would those accounts have shown the net worth of NCRH to have been had the little stop loss been given the appropriate treatment? 2The plaintiff objects to the tender on the basis that Mr Campbell is said not to be appropriately qualified to give evidence that depends essentially on the interpretation and application of US GAAP (that is, the United States Generally Accepted Accounting Principles). 3Being opinion evidence, the admissibility of Mr Campbell's opinions depends on (NSW) Evidence Act 1995, s 79(1), which provides as follows: 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. 4Accordingly, the essential question is whether Mr Campbell has the requisite specialised knowledge based on training, study or experience to base the opinions that he expresses in his reports. The defendants who tender his report bear the onus of qualifying him and establishing that he has that specialised knowledge. 5At the outset it is to be noted that, whatever the position might have been at Common Law, experience, as distinct from formal study or training, can suffice to qualify an expert with the requisite specialised knowledge, either alone or in combination with formal study or training [BI (Contracting) Pty Limited v University of Adelaide [2008] NSWCA 210, [26]]. 6But where experience alone is relied upon, that experience must be clearly demonstrated. Generally speaking, merely observing and discussing with practitioners what they do and why they do it does not arm the observer with the requisite degree of specialised knowledge of the particular field in which those practitioners practise. Specialised knowledge connotes something beyond the product of observations of a non-participant observer [Australian Cement Holdings Pty Limited v Adelaide Brighton Limited [2001] NSW SC 645, [6]; and Australian Securities & Investments Commission v Vines [2003] NSWSC 1095, [12]; [2003] 48 ACSR 291]. 7Next, the specialised knowledge required must be assessed in the light of the precise character of the question that the expert is asked to address. In The Queen v Farquharson [2009] VSCA 307, the Victorian Court of Appeal explained (at [79]): It is important to keep in mind that is not only the general nature but also the precise character of the question upon which expert evidence is sought to be given which is determinative of whether the putative expert's qualifications are sufficient. Satisfaction of the second test is thus a question of fact and degree. For example, it has been held that it is not necessary for a general practitioner to have specialised in studies concerned with the rate at which alcohol metabolises in order to give evidence of that rate based on analysis tables. On the other hand, an emergency room physician and a surgeon who treated an accused for knife wounds following the death of his wife were held not to be competent to give expert opinion evidence as to whether the wounds were self-inflicted. In the former case, it is considered that the rate at which alcohol metabolises was a matter within the ordinary knowledge of a general practitioner and therefore something on which he was entitled to refresh his memory from a publication of the British Medical Association which provided the current knowledge on the subject. In the latter case, the forensic analysis of knife wounds (in order to determine the probability of self infliction) was found to be a specialised field of knowledge within medicine in which neither the physician nor the surgeon was able to demonstrate that he was qualified by study or experience. [citations omitted] 8The dichotomy illustrated by that passage is closely analogous to the situation presented by the present tender. Essentially, the question is whether the interpretation and application of US GAAP, generally, or specifically in the context of reinsurance transactions, is a specialised field of knowledge in which Mr Campbell has not been able to demonstrate that he is qualified by study or experience. 9In Mr Campbell's primary report of 21 March 2011, his conclusions are conveniently summarised in section 2, at pages 9 and 10. 2. Summary of conclusions 2.1 In my opinion the net worth of NCRH at 30 June 1998, prepared under US GAAP, amounted to US$112.188 million. 2.2 The amount of net worth is dependent on the treatment of Leg 1 and Leg 2, the allocation of premium relating to Leg 1, and the proper treatment relating to an unexplained reduction of US$7.4 million in the provision for IBNR made by NCRH when the Australian Interim Financial Statements were converted to the US Interim Financial Statements. 2.3 In my opinion the inclusion of Leg 1 in the US Interim Financial Statements was not in accordance with US GAAP. 2.4 In my opinion the net impact of US$6.5 million from including Leg 1 in the US Interim Financial Statements was material. Consequently the amounts relating to Leg 1 should have been removed when the Australian Interim Financial Statements were converted to US GAAP. 2.5 My figure for net worth may be increased by US$7.4 million if a satisfactory explanation and adequate evidence is available to support the reduction of the provision for IBNR made by the Company in its own conversion from Australian GAAP to US GAAP. 2.6 If, contrary to my opinion, it was appropriate for Leg 1 to be recognised under US GAAP at 30 June 1998, it should have been accounted for as an investment transaction, having regard to its linkage with Leg 2. On that basis there would have been little or no impact on the net worth as a result of recognising Leg 1. 2.7 In my opinion, under US GAAP Leg 1 and Leg 2 should be viewed as being linked such that if either was recognised then both should have been. If they had been recognised as investment transactions the net liability of up to US$3.7 million due to GCR under the two contracts should have been provided in the US Interim Financial Statements and the net worth would have been reduced by up to US$3.7 million. The precise amount of the reduction would have been dependent on the estimate of the amount GCR were entitled to claim as at 2 September under Leg 2. 2.8 If, contrary to my opinion, it was appropriate for Leg 1 to be included within the US Interim Financial Statements as a normal reinsurance policy, and not as a contract of financial reinsurance, then my figure for the net worth should be increased by US$6.5 million. A downward adjustment to the net worth of US$1.25 million should also have been made to reflect the proper allocation of the premium payable under Leg 1 to the appropriate accounting period. So the net adjustment to the net worth should have been an increase of US$5.25 million to US$117.436 million. 2.9 If, contrary to my opinion, Leg 1 should have been properly recognised under US GAAP as at 30 June 1998 as a normal reinsurance policy, then in my opinion Leg 2 should also have been recognised as a normal reinsurance policy. The recognition of Leg 2 would have reduced the net worth of NCRH by up to US$10.7 million. The precise amount of the reduction would have been dependent on the estimate of the amount GCR was entitled to claim under Leg 2. 2.10 In each of the scenarios set out above, if the central estimate of outstanding claims was US$150 million (as I am instructed to assume was the amount recommended by NCRH's independent actuary) rather than US$141 million (which I am instructed to assume was the amount the directors adopted), then the prudential margin under Australian GAAP would have been US$5 million and all the net worth figures under USGAAP would have been US$9 million lower. 2.12 On any interpretation of these possible variations in the net worth of NCRH under US GAAP, the net worth was below US$125 million. 10It is noteworthy that paragraph 2.2 refers to the treatment of the two legs of the little stop loss when the Australian interim financial statements were converted to United States statements; paragraph 2.3 contains an opinion that the inclusion of leg one was not in accordance with US GAAP; paragraph 2.4 contains an opinion that the amounts relating to leg one should have been removed when the Australian statements were converted to US GAAP; paragraph 2.6 contains an alternative opinion based on the assumption that it was appropriate for leg one to be recognised under US GAAP; paragraph 2.7 contains an opinion as to how the two legs of the transaction should be viewed under US GAAP; paragraph 2.9 contains an opinion as to how leg one should have been recognised under US GAAP; paragraph 2.11 contains an opinion as to the net worth figures under US GAAP; and paragraph 2.12 contains an ultimate conclusion in connection with the net-worth of NCRH under US GAAP. What emerges from that examination is that, at the heart of the evidence sought to be tendered through Mr Campbell, is the interpretation and application of US GAAP to a two-legged transaction. 11As to his qualifications to opine on that topic, they are to be found in a number of places in the evidence. In paragraph 1.3.2 of his primary report, he appends a summary of his experience and qualifications, to which I shall shortly come. In paragraph 1.3.3, he says that as a practising accountant in the United Kingdom, his principal area of accounting expertise has been in relation to UK (as distinct from US) GAAP, but that in the course of that work: I have been involved with insurers and their financial statements in other jurisdictions, particularly in the US, both in the course of due diligence assignments in the context of acquisitions and in converting financial statements from US GAAP and regulatory reporting regimes to UK GAAP for inclusion in audited consolidated financial statements prepared under UK GAAP. 12In Appendix 1, to which I have referred, he says that his clients have included, principally, owner-managed companies in the UK, but also UK subsidiaries of UK and overseas parent companies; that he has extensive experience in the non-life insurance industry, including general and motor business; that he has acted in relation to insurance companies operating in the United Kingdom, in the United States and in Belgium; and that the work he has carried out includes audit, tax advice, accounting support, conversions of financial statement between accounting frameworks, due diligence for acquisitions, advice on purchases and sales contracts and acting as an expert accountant in litigation, in respect of which he says: "I have considered the accounting policies and accounting treatment adopted by insurers and their compliance with the appropriate accounting framework", a statement which he elaborated in oral evidence to refer to the framework of the relevant jurisdiction, including the United States. 13In his second report of 4 October 2012, given after an opposing expert had suggested that he did not have the requisite expertise as a preparer or auditor of US GAAP financial statements to opine as to materiality under US GAAP, he referred back to paragraphs 1.3.3 and 1.3.4 of his first report and added: My experience in dealing with materiality stretches over more than 40 years of auditing, accounting and investigation work. While my experience has been predominantly in the context of UK GAAP, the concepts of materiality are very similar under US and UK GAAP. 14He then sets out relevant extracts from US GAAP, and a draft statement of principles for financial reporting issued by the Accounting Standards Board in the United Kingdom in 1998, and concludes that it would be seen (from those documents) that the approaches of both were very similar. 15In an email to the plaintiff's solicitors at a time when they had considered approaching him for an opinion, Mr Campbell said: I believe we have appropriate experience having been active in the London market for many years and having advised on reinsurance policies and their accounting treatment in the UK on many occasions. I confirm that I am competent to act as expert on insurance and reinsurance accounting ... practice from an accounting perspective. 16For the defendants, it is submitted that essentially what Mr Campbell is asked to do is to opine whether it is permissible to account for only one leg of a transaction, such as the little stop loss, and not the other. I am not sure that that precisely puts the issue, which I am inclined to think is more along the lines whether accounts prepared were materially incorrect if they included one leg of the little stop loss and not the other. This is important, because, from Mr Campbell's own statement, it appears that the answer might differ according to jurisdiction. It might be that, in Australia, if the first leg were brought to account but an adequate prudential provision made, the accounts might not be materially incorrect; whereas under US GAAP, if it be the case that a prudential provision cannot be made and the two legs must be viewed as linked, then the result might be otherwise. Thus it seems to me that, from Mr Campbell's own report, the possibility that there are material differences between the result that would be reached on the application of the GAAP of one jurisdiction and those of another jurisdiction is a very distinct one. 17Mr Campbell concedes that he has no qualification in the United States; that he is not a United States accountant; and that he is not qualified to audit accounts according to the US GAAP. He concedes that he has no experience in the preparation of accounts under the US GAAP, nor in auditing such accounts. His report contains no reference to literature on the US GAAP, either generally or specifically for the purposes of preparing this report. It seems to me that the components of his experience, established by the evidence, can be analysed as follows. 18First, it was said that he has read and is, therefore, familiar with United States GAAP. He has annexed at least relevant parts of US GAAP to his second report and he has extracted some aspects of them in his reports, in particular the passages to which I have referred, in section 7 of his second report. It does not seem to me that having read US GAAP can, of itself, possibly qualify anyone as having specialized knowledge of US GAAP. The clearest answer to that proposition is that it is just as easy for the court to read US GAAP as it is for a UK accountant - or for that matter, for an Australian or other accountant - to read them. The mere fact that they have been read does not establish the requisite level of specialized knowledge. There is no evidence that, beyond reading them, or part of them, Mr Campbell has undertaken any further study of them, even of an informal nature, such as would amount to specialized knowledge. Indeed, even the evidence that he has read them depends on inference from their annexure to his second report and the extraction of aspects of them. The real difficulty with treating this as specialized knowledge in any sense is that the conclusion that the approach of US GAAP and UK GAAP to materiality in 1998 was very similar is a highly contentious one, and a lawyer, reading the relevant paragraphs of the two documents, might readily come to a different conclusion. The interpretation of such documents is not really a question of accounting expertise, but a question of construction, and what Mr Campbell does not do is to give evidence as to how those tests are applied in the two jurisdictions in practice, which could have been the subject of appropriately qualified accounting opinion. 19Secondly, it is said that Mr Campbell is an experienced United Kingdom accountant. That is undoubted, but it goes without saying that that does not qualify him to answer questions on the application of accounting principles of a different jurisdiction, when it is clearly possible that the application of those principles might differ. 20Thirdly, it is said, by reference to the email to which I have referred, that he has experience in advising on the accounting treatment of reinsurance policies in the United Kingdom on many occasions. Assuming in his favour that is a reference to his having given such advice, as distinct from his firm having done so - a matter which is at least less than clear on the email - the fact of having given advice on the appropriate accounting treatment of reinsurance policies in the United Kingdom is not a basis to express an opinion on their appropriate treatment under the GAAP of a different jurisdiction. His bare assertion in that email of competency to be an expert cannot, of course, qualify him. 21Fourthly, it is said that part of his work involves the conversion of the United States accounts to United Kingdom accounts. In conjunction with that it is said - and he gave evidence to this effect - that from time to time he has discussions with United States accountants concerning the conversion of United States accounts to United Kingdom accounts. But it seems to me that experience in converting United States accounts to bring them into compliance with United Kingdom accounts is not, by any means, the same thing as experience in the interpretation and application of United States accounting standards to transactions of the type in question here. The experience in the conversion work that he described, and the discussions that he described, does not equate to experience in the appropriate accounting treatment under United States principles of reinsurance transactions. In cross-examination, he referred to two instances that he could recall in which he had involvement of this kind, one in the late 1970s or early 1980s, and another about two years ago. In neither case did the evidence reach a standard of demonstrating experience in the application of United States GAAP to reinsurance transactions. There was none of the evidence that one might normally expect to qualify an expert listing instances in which he had gained experience of the type in question here. 22It was said that the question of materiality was practically self-evident. If so, it is not a matter for expert evidence, but a matter that the court will be able to recognise uninformed by expert evidence. 23Mr Campbell's response, in paragraph 7 of his second report, to the questioning of his relevant qualifications was the assertion that while his experience was in the United Kingdom, the test was practically the same, but as I have already indicated, that conclusion and assertion depends, not on his experience, but on his reading of the two documents in question, which, again, is a matter for the court and not for an expert witness. 24Ultimately, I think, the position can be summarised at its highest as being that Mr Campbell is a United Kingdom accountant of undoubted experience and competence, who has in the course of his practice been incidentally exposed to, and acquired some derivative familiarity with, some aspects of United States accounting practice, but not such as to amount to specialized knowledge that would equip him or permit him to give expert evidence of the specific type sought to be adduced from him in this case. 25For those reasons, in my view, the tender of his reports must be rejected.