20110414_InnofCourts_RoleForensicAccountingLitigation
-
Upload
rajendran-kajananthan -
Category
Documents
-
view
216 -
download
0
Transcript of 20110414_InnofCourts_RoleForensicAccountingLitigation
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
1/78
Inns of Courts
Chattanooga, Tennessee
Bill Acuff, CPACFF, CFE
Sharon Hamrick, CPACFF, CFE
Brent McDade, ASA, CBABVAL
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Role of the Forensic Accountant in
Litigation
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
2/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Accounting firm with nearly 150 CPAs
Headquartered in Chattanooga, TN
Offices in Cincinnati, OH; Atlanta and Dalton, GA; Grand
Cayman, USVI; Memphis, Nashville, Knoxville, TN;Huntsville, AL
Perform tax, audit, and/or business advisory for manyrestaurants
Expertise in multiple industries
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
3/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Audit, tax, & more: Strategic Transition Planning, business succession planning, insurance
and estate planning, retirement plan consulting
Forensic accounting, fraud risk assessment, and fraud prevention
R&D tax credits, transfer pricing, U.S. Customs compliance and
reporting, tax services for global businesses and individuals, captiveinsurance companies
Network vulnerability testing and IT security consulting
Healthcare consulting, due diligence, and M&A advisory, physicianpractice management
Recruiting and placement
Real estate development consulting, hedge and real estate fundconsulting
Audit defense and representation, due diligence
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
4/78
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
5/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Maximizing Value for the Middle Market:
Sell-side and buy-side advisory
Debt and equity capital sourcing
Fairness opinions and other valuations
Due diligence and other transaction advisory services
Formalization of investment banking services provided by Decosimo for
more than 35 years:
More than 100 Coca-Cola and Seven-Up bottlers
Five MLB teams
Many restaurants
Member FINRA, SIPC
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
6/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
What is Forensic Accounting?
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
7/78
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
8/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
What is Forensic Accounting?
Accounting for dead people
Finding the beans other people hide
Dissecting the entrails of corporations
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
9/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
The Art of figuring out what we dont know
What is Forensic Accounting?
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
10/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
What is Forensic Accounting?
The evidence of economic transactions and
reporting as contained within an accounting
system, and
The legal framework which allows such
evidence to be suitable to the purpose(s) of
establishing accountability and/or valuation
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
11/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
What is Forensic Accounting?
Accounting suitable for legal review
When a professional accountant accepts an
engagement anticipating his or her finding or
analysis may be subject to adversarial or
judicial scrutiny or administrative review
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
12/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Forensic Accounting Services
Application of specialized knowledge and
investigative skills possessed by CPAs
Collecting, analyzing and evaluating evidential
matter
Interpreting and communicating findings in the
courtroom or other legal/administrative venue
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
13/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Core Skills
Effective oral communicator
Simplify the information
Critical/strategic thinker
Identify key issues
Investigative ability
Synthesize results of discovery and analysis
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
14/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Characteristics of a Good ForensicAccountant
Analytical Mind
Ability to understand the big picture
Ability to communicate well orally and in
writing
Ability to think on your feet
Tenacious
Ability to organize large amounts of
information
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
15/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Roles of Forensic Accountants
Expert Consultant
Expert Witness
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
16/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Areas of Specialty
Valuation
Personal Injury and Wrongful Death Damages
Calculations
Economic Damages Calculations Bankruptcy, Insolvency and Reorganization
Family Law
Financial Statement Misrepresentation
Computer Forensic Analysis
Fraud Prevention, Detection, and Investigation
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
17/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Occupational Fraud and Abuse
- The use of ones occupation for
personal enrichment
- The misconduct of employees,
managers and executives
- Internal fraud
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
18/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Occup ationa l Fraud and Abu se
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
19/78
Occup ationa l Fraud and Abu se
Fraudulent
Statements
Asset
MisappropriationCorruption
Non-
FinancialFinancial
Ass et/ R even ue
Overstatement
Ass et/ R eve nu e
Understatement
Employment
Crede ntials
Internal
Documents
External
Documents
Timing
Differences
Fictitious
Revenues
Concealed
Liabilities &
Expenses
Improper
Disclosures
Improper
As se t
Valuations Inventory
and all
Other Assets
Cash
Misuse Larceny
Ass et R eq .
& T ransfer
False Sales
& Shipping
Purchasing &
Receiving
Unconcealed
Larceny
Larceny Skimming
Fraudulent
Disbursements
Cash
On Hand
From the
Deposit
Other
Sales R eceivables Refunds &
Other
Unrecorded
Unders tated
Write-off
Schemes
Lapping
Schemes
Unconcealed
Billing
Schemes
Payroll
Schemes
Expense
Reimbursements
Check
Tampering
Register
Disbursements
Shell
Company
Non-Accomplice
Vendor
Personal
Purchases
Ghost
Employees
Commission
Schemes
Workers
Com pensation
Falsified
Wages
Mischaracterized
Expenses
Overstated
Expenses
Fictitious
Expenses
Multiple
Reimbursements
Forged
Maker
Forged
Endorsement
Al ter ed
Payee
Concealed
Checks
Au tho riz ed
Maker
False Voids
False
Refunds
Conflicts
of Interest Bribery
Illegal
Gratuities
Economic
Extortion
Purchase
Schemes
Sales
Schemes
Other
Invoice
Kickbacks
Big Rigging
Other
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
20/78
Inns of Court
Chattanooga, Tennessee
Sharon Hamrick, CPACFF, CFE
ADVISORY SERVICES
BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
A Financial Experts Overview ofPecuniary and Personal Injury Damages
for Attorneys
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
21/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Agenda for Today
Types of Damages
Issues in Calculating Damages
Aspects of Damage Calculations Special Case Situations
Timing Issues
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
22/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
General Damages
Amount awarded is not fixed since it cannot
be precisely calculated
Court has broad discretion is these awards
Examples
Physical and mental injury
Past, present, and future physical pain and suffering
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
23/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Special Damages
Calculated with more ease and precision than
general damages
Includes medical expenses and lost wages from
date of injury to trial and future losses
Future losses are more difficult to calculate
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
24/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Punitive Damages
Awarded to punish the wrongdoer and set an
example to deter others from doing the same
Awarded along with provable damages
Must evince that the action was willful
Limited use
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
25/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
CPA Qualifications in Personal Injury and
Wrongful Death Calculations
Knowledge and training
Knowledge of Compensation
Financial and Economic Data
Income Tax Rules Extrapolation of damages
Explaining different aspects of the damages calculation
Litigation Experience
Such experience is recommended when choosing a CPA or
other financial expert
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
26/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Issues Involved in Damages Calculations
What would the individual would have earned but
for the injury, death, or incident?
What other damages occurred?
What additional expenses have or will be incurred?
How long is the period of loss?
What is the growth rate of the damages over the loss
period? At what rate should the damages be discounted to
present value?
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
27/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Issues Involved in Damages Calculations
Should legal interest be applied to past losses?
Are growth and discount rates real or nominal?
Should one consider taxes?
What are the key dates involved in the calculation?
What is the jurisdiction?
What is the applicable law surrounding the
damages? Other relevant information?
O h U f l I f i i D
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
28/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Other Useful Information in Damages
Calculations
General data needed inlosses calculations of aperson:
Education Health History
Occupational History
Income History
Employment capacity ofan unemployed person
Household services
Family composition
Personal consumption
Funeral, burial, medicalexpenses
Attendant care andnursing home expenses
Occupational earnings
Earnings growth ratesand interest rates
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
29/78
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
30/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Conditions and Calculations
Work Life
The number of years in the commercial labor forceeither working at a job or actively seeking
employment before leaving the labor marketthrough death or final retirement.
Work life expectancy
The average number of years of work life
(employed or seeking employment) thatindividuals can be expected to have through theirlives
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
31/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Conditions and Calculations
Calculations of Fringe Benefits:
These are subdivided into two types:
Legally mandated benefits: Medicare, Social Security
Discretionary benefits: pension programs, health
insurance, life insurance
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
32/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Conditions and Calculations
Loss of Household/Family Services
Household Services
These are non-market goods and services that are
produced within households that have similar productswithin the open market.
Goods and services produced within families include
both household good services and relational goods and
services. Cleaning services, lawn maintenance, parental counseling
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
33/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Conditions and Calculations
Expected Earnings
Expected earnings is the amount an individual
worker would be expected to earn.
Voluntary and involuntary reasons for leaving the
work affect estimated expected earnings
Voluntary: attending school, raising a child, retirement,
etc
Involuntary: unemployment, illness, death, etc
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
34/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Conditions and Calculations
Future Wage Increases
Caused by several factors
Inflation
Increases in productivity
Merit
Increased demand for a skill
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
35/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Conditions and Calculations
Life Care Costs
Life care costs include both medical and non-
medical costs an individual will pay in the future
due to personal injury. These costs may include medications, medical
treatments, rehabilitation, special education, special
housing requirements, or expenses made necessary
because of the injury.
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
36/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Conditions and Calculations
Personal Consumption and Maintenance
In wrongful death cases, personal consumption
and maintenance amounts are those that would
have been used by the deceased in usingresources and supplying the necessities of life
Damage reductions for personal consumption areapplied to calculations
Special and Other Types of Losses to
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
37/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Special and Other Types of Losses to
Consider
Valuing a Child
Investment approach to parental loss in the death
of a child
Determining a childs occupation
Would the child attend college?
Did he/she have an intended occupation?
Childs Probability of Completing School Levels
Based on probability tables
Special and Other Types of Losses to
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
38/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Special and Other Types of Losses to
Consider
Childs Future Employment Status
Necessary to establish the level of education the
child would have received.
Children and structured settlements
When the plaintiff is a child, structured
settlements can be established to protect theinterests of the child
Special and Other Types of Losses to
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
39/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Special and Other Types of Losses to
Consider
Lost Business Profits
This involves personal injury or wrongful death
that affects the income of a business.
Businesses can be injured if harm comes to theirincome, goodwill, reputation, etc.
Special and Other Types of Losses to
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
40/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Special and Other Types of Losses to
Consider
Difficulties in Calculating Earnings
Lack of earnings paperwork or difficulties in stated
earnings
Examples
Truck drivers
Waiters/Waitresses
Migrant farmers
Self employed persons with a home office
Losses in a foreign currency
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
41/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Time Value of Money
Identifies difference between income before
and after the event in question.
A discount rate is chosen to calculate future
income/losses to the present period.
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
42/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Time Value of Money Discount Rate
Rate is market investment rate
Two principles of choosing a discount rate
Application to time frame of future income
Risk-free from default
Federal courts have ruled that rates should be the
best and safest
The only investment meeting this criteria are obligations of
the United States government
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
43/78
ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Time Value of Money Discount Rate
Once discount rate is selected, the present
value of the damages can be calculated.
Other forms of discount rates
Below market discount rates
Total offset method
Discount rates in commercial cases
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
44/78
A Financial Experts Overview of Lost
Profits Damages for AttorneysInns of Court
Chattanooga, TN
Brent McDade, ASA, CBABVAL
BUSINESS VALUATION
LITIGATION SUPPORT
TRANSACTION ADVISORY
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
45/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Agenda for Today
What are lost profits?
How to calculate lost profits
Ex post vs ex ante calculations
45
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
46/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
The Present Value Equation
46
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
47/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Compensatory Damages
Damages sufficient in amount to indemnify the
injured person for the loss suffered.
--Blacks Law Dictionary, 7 ed. abr.
47
El f L P fi D
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
48/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Elements of Lost Profits Damages
Claims
Causation
Plaintiff must establish that the defendant caused
the economic harm
Did other causes contribute to the economic
harm?
48
Elements of Lost Profits Damages
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
49/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Elements of Lost Profits Damages
Claims
Causation
Foreseeability
General damages
Special or consequential damages
49
El f L P fi D
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
50/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Elements of Lost Profits Damages
Claims
Causation
Foreseeability
Reasonable Certainty No undue speculation
Higher standard for new businesses
Additional complications for the expert
50
El t f L t P fit D
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
51/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Elements of Lost Profits Damages
Claims
Causation
Foreseeability
Reasonable Certainty Mitigation
51
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
52/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Definition of Profit
the difference between the purchase price
and the costs of bringing to market whatever it
is in terms of the component costs of
delivered goods and/or services and anyoperating or other expenses
http://en.wikipedia.org/wiki/Profit_%28accounting%29
52
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
53/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Michael Scott on Wikipedia
Wikipedia is the best
thing ever. Anyone in the
world can write anything
they want about any
subject. So you know you
are getting the best
possible information.
--- Michael Scott The Office
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
54/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Definition of Profit
Websters defines profit as The excess of revenuesover outlays in a given period of time and Excess
of value received for producing, keeping, or selling,
over cost, hence, pecuniary gain in any transactionor occupation
profit Websters Online Dictionary. 2010http:// www.websters-online-dictionary.com/definitions/profit
54
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
55/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Further Definitions
1 : a valuable return : gain2 : the excess of returns over expenditure in a transaction orseries of transactions; especially: the excess of the sellingprice of goods over their cost
3 : net income usually for a given period of time4 : the ratio of profit for a given year to the amount of capitalinvested or to the value of sales5 : the compensation accruing to entrepreneurs for theassumption of risk in business enterprise as distinguishedfrom wages or rent
"profit." Merriam-Webster Online Dictionary. 2010.Merriam-Webster Online. 16 April 2010
55
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
56/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
The Definition of LostProfits
The difference between what you shouldhave
made on whatever transaction or series of
transactions occurred or should have occurred
and what you actuallymade on whatever
transaction or series of transactions actually
occurred
56
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
57/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Five Aspects of Lost Profits
Lost profits are:
1. Net profits
2. Incremental profits3. But for profits
4. Pretax
5. Reasonably certain
57
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
58/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Incremental Can Be Problematic
Not uncommon for experts to make errors in
calculating incremental revenue and costs
Not uncommon to make errors with fixed
costs
Show your work! experts should make
calculations transparent and understandable
58
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
59/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Reasonable Certainty
Damages are not rendered uncertain because
they cannot be calculated with absolute
exactness. It is sufficient if a reasonable basis of
computation is afforded, although the result be
only approximate.
Eastman Kodak Co. v. Southern Photo Materials, 273 U.S. 359(1927)
59
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
60/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Methods of Calculating Lost Profits
Before and After
Sales Projection
Accounting for Profits Yardstick
Market Share
Economic Modeling
60
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
61/78
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
62/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Sales Projection Method
Compares actual performance after the bad
act with a forecast of performance before the
bad act
How reliable was the forecast?
62
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
63/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Accounting for Profits Method
Relies on the accounting records of a party
other than the Plaintiff (typically the
Defendant) to establish sales or profits
Common in cases where the Defendant made
the purchases or sales in question
63
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
64/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Yardstick Method
Compares profits in each period to a yardstick
Common for processing and other similar
businesses
Does the yardstick really measure something
relevant?
64
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
65/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Market Share Method
Assumes a certain market share would have
been achieved or maintained
Uses market share information to determine
lost sales
How reliable is data on the size of the total
market?
How reasonable is the assumption regarding
Plaintiffs share?
65
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
66/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Economic Modeling Method
Catch all for other ways of determining lost
sales or lost profits
How reasonable is the model?
66
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
67/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Timing Considerations
Damages happen over time
A dollar tomorrow is worth less than a dollar
today A dollar yesterday should have grown to be
more than a dollar today
Future cash flows are not certain
67
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
68/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Timing Issues and Lost Profits
Past lost profits were lost prior to trial
Future lost profits are expected after the trial
Making the injured party whole is thereforecomplicated by timing issues
68
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
69/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Timing Issues and Lost Profits
Damage Period
What is the appropriate period over which the lost
profits should be calculated?
69
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
70/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Timing Issues Terminology
Interest rate an amount paid for the use ofmoney over time
Rate of return the benefit of making an
investment Discount rate the rate at which a future cash
flow is discounted to present value
Required return the rate of return thatwould induce an investor to take a specificlevel of risk
70
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
71/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Ex Ante Calculation
Damages are calculated as of the date of the
breach
Expected future damages are based on what
was known or reasonably knowable as of the
date of the bad act
Damages are discounted to the date of the
bad act
71
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
72/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Ex Ante Damages
Date of Breach Date of Trial
Damages Occurring from Date of Breach into the Future
Discounted to Present Value as of Date of Breach
Prejudgment Interest
(If Applicable)
72
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
73/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Ex Post Damages
Damages calculated as of a date after the
breach (typically an assumed trial date)
Damages that occurred between date of
breach and trial informed by intervening
events
Post trial damages discounted to trial date
Pretrial damages brought forward at
prejudgment interest or some other rate
73
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
74/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
Ex Post Damages
Date of Breach Date of Trial
Damages Occurring from Date of Breach into the Future
Future Damages Discounted to
Present Value as of Date of Trial
Past Damages Brought
Forward to Date of Trial
74
What Does a Damages Calculation
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
75/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
What Does a Damages Calculation
Look Like?
For damages occurring in the past
Provides an opinion of what should have
happened
Demonstrates what actually happened
Calculates the difference
May bring the difference to present value
75
What Does a Damages Calculation
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
76/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
What Does a Damages Calculation
Look Like?
For damages that are expected to occur in the
future
Provides an opinion of what we should have
expected
Demonstrates what we actually expect
Calculates the difference
Reduces the difference to present value
76
How do Attorneys and Experts Mess
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
77/78
ADVISORY SERVICES
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
How do Attorneys and Experts Mess
Each Other Up?
Opinion does not match the facts
Opinion does not match the law
Failure to get the expert involved early
Failure to prepare with the expert
Failure to redirect / rehabilitate
77
To Contact Us
-
8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation
78/78
To Contact Us
If we can help you with a case, if you would liketo discuss a case, please contact us.
423.756.7100
[email protected]@decosimo.com