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Role of the Forensic Accountant in Litigation
 

Role of the Forensic Accountant in Litigation

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Bill Acuff, Sharon Hamrick and Brent McDade made this presentation to the Inns of Courts in Chattanooga, TN.

Bill Acuff, Sharon Hamrick and Brent McDade made this presentation to the Inns of Courts in Chattanooga, TN.

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    Role of the Forensic Accountant in Litigation Role of the Forensic Accountant in Litigation Presentation Transcript

    • FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICESRole of the Forensic Accountant in Litigation Inns of Courts Chattanooga, Tennessee Bill Acuff, CPA•CFF, CFE Sharon Hamrick, CPA•CFF, CFE Brent McDade, ASA, CBA•BVAL
    • • 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 many restaurants • Expertise in multiple industries FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • • 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, captive insurance companies – Network vulnerability testing and IT security consulting – Healthcare consulting, due diligence, and M&A advisory, physician practice management – Recruiting and placement – Real estate development consulting, hedge and real estate fund consulting – Audit defense and representation, due diligence FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES
    • • A practice of Decosimo firm • Provides business valuation, litigation support, and transaction advisory services • More than 35 years of transaction experience • Professionals hold ASA, CBA, and/or ABV credentials • Significant valuation, litigation support, and transaction advisory experience with restaurants FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • • “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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • What is Forensic Accounting? FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • What is Forensic Accounting? Accounting for dead people Finding the beans other people hide Dissecting the entrails of corporations FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • What is Forensic Accounting? The Art of figuring out what we don’t know FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • Core Skills • Effective oral communicator • Simplify the information • Critical/strategic thinker • Identify key issues • Investigative ability • Synthesize results of discovery and analysis FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • Characteristics of a Good Forensic Accountant • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • Roles of Forensic Accountants Expert Consultant Expert Witness FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • Occupational Fraud and Abuse - The use of one’s occupation for personal enrichment - The misconduct of employees, managers and executives - Internal fraud FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • O c c u p a tio n a l F r a u d a n d A b u s e A ss e t F r a u d u le n t C o r r u p ti o n M i sa p p r o p r i at i o n S t a t em e n tsC o n f l ic t s Ill e g a l E c o n o m ic N on - B ri b e ry F i n a n c ia lo f In t e re s t G ra t u it ie s E x t o rt io n F i n a n c ia l P u r ch a s e In v o ic e A s s e t/R e ve n u e A s s e t/R e ve n u e E m p lo y m e n t S chem es K ic k b a ck s O v e rs ta te m e n t U n d e rs ta te m e n t C re d e n tia ls T im in g In te rn a l S a le s B ig R ig g in g D iffe r e n ce s S chem es D o cu m e n ts F ic titio u s R e ve n u e s E x te rn a l O th e r O th e r D o cu m e n ts C o n ce a le d L ia b ilitie s & E xpenses Im p ro p e r D is c lo su r e s Im p ro p e r A sset In v e n t o ry V a lu a tio n s C ash a n d a ll O t her A ss ets Larceny S k im m in g M is u s e Larceny C a sh S a le s R e ce iv a b le s R e fu n d s & O n H and O th e r A sset R eq. & T ra n s fe r W r ite - o ff U n re c o rd e d F ro m th e S chem es D e p o sit F a ls e S a le s & S h ip p in g U n d e rs ta te d L a p p in g S chem es O th e r F r a u d u le n t P u r ch a s in g & D is b u r s e m e n ts R e ce iv in g U n co n c e a le d U n co n c e a le d L a rc e n y B illin g P a y ro ll E xpense C h e ck R e g is te r S chem es S chem es R e im b u r se m e n ts T a m p e rin g D is b u rs e m e n ts S h e ll G host M isc h a ra c te riz e d F o rg e d C om pany E m p lo y e e s E xpenses M aker F a ls e V o id s N o n -A c c o m p lic e F o rg e d F a ls e C o m m is s io n O v e rs ta te d V endor E n d o r se m e n t R e fu n d s S chem es E xpenses P e r so n a l A lte re d W o r ke r s F ic titio u s P u r ch a s e s P ayee C o m p e n sa tio n E xpenses C o n ce a le d F a ls ifie d M u ltip le C h e ck s W ages R e im b u r se m e n ts A u th o r iz e d M aker
    • BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES A Financial Expert’s Overview ofPecuniary and Personal Injury Damages for Attorneys Inns of Court Chattanooga, Tennessee Sharon Hamrick, CPA•CFF, CFE
    • Agenda for Today • Types of Damages • Issues in Calculating Damages • Aspects of Damage Calculations • Special Case Situations • Timing Issues FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES
    • 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? FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES
    • 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? FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES
    • Other Useful Information in Damages Calculations• General data needed in – Family composition losses calculations of a – Personal consumption person: – Funeral, burial, medical – Education expenses – Health History – Attendant care and – Occupational History nursing home expenses – Income History – Occupational earnings – Employment capacity of – Earnings growth rates an unemployed person and interest rates – Household services FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES
    • Conditions and Calculations• Earning Capacity – Earning capacity is sometimes presented as an alternative to “expected earnings.” – Only involuntary reasons for leaving the workforce affect earning capacity estimates FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • Conditions and Calculations• Work Life – The number of years in the commercial labor force either working at a job or actively seeking employment before leaving the labor market through death or final retirement.• Work life expectancy – The average number of years of work life (employed or seeking employment) that individuals can be expected to have through their lives FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 products within 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” FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • Conditions and Calculations• Future Wage Increases – Caused by several factors • Inflation • Increases in productivity • Merit • Increased demand for a skill FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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. FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 using resources and supplying the necessities of life – Damage reductions for personal consumption are applied to calculations FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • Special and Other Types of Losses to Consider• Valuing a Child – Investment approach to parental loss in the death of a child• Determining a child’s occupation – Would the child attend college? – Did he/she have an intended occupation?• Child’s Probability of Completing School Levels – Based on probability tables FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • Special and Other Types of Losses to Consider• Child’s 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 the interests of the child FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 their income, goodwill, reputation, etc. FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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. FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES
    • BUSINESS VALUATION LITIGATION SUPPORT TRANSACTION ADVISORYA Financial Expert’s Overview of Lost Profits Damages for Attorneys Inns of Court Chattanooga, TN Brent McDade, ASA, CBA•BVAL
    • Agenda for Today• What are lost profits?• How to calculate lost profits• Ex post vs ex ante calculations FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 45
    • The Present Value Equation FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 46
    • Compensatory DamagesDamages sufficient in amount to indemnify the injured person for the loss suffered. --Black’s Law Dictionary, 7 ed. abr. FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 47
    • 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? FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 48
    • Elements of Lost Profits Damages Claims• Causation• Foreseeability – General damages – Special or consequential damages FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 49
    • Elements of Lost Profits Damages Claims• Causation• Foreseeability• Reasonable Certainty – No undue speculation – Higher standard for new businesses • Additional complications for the expert FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 50
    • Elements of Lost Profits Damages Claims• Causation• Foreseeability• Reasonable Certainty• Mitigation FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES 51
    • Definition of Profit… the difference between the purchase priceand the costs of bringing to market whatever itis … in terms of the component costs ofdelivered goods and/or services and anyoperating or other expenseshttp://en.wikipedia.org/wiki/Profit_%28accounting%29 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES 52
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES
    • Definition of ProfitWebster’s defines profit as “The excess of revenuesover outlays in a given period of time” and “Excessof value received for producing, keeping, or selling,over cost, hence, pecuniary gain in any transactionor occupation”“profit” Webster’s Online Dictionary. 2010 http:// www.websters-online- dictionary.com/definitions/profit FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES 54
    • Further Definitions1 : 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 cost3 : 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 <http://www.merriam-webster.com/dictionary/profit> FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES 55
    • The Definition of Lost ProfitsThe difference between what you should havemade on whatever transaction or series oftransactions occurred or should have occurredand what you actually made on whatevertransaction or series of transactions actuallyoccurred FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 56
    • Five Aspects of Lost ProfitsLost profits are:1. Net profits2. Incremental profits3. But for profits4. Pretax5. Reasonably certain FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 57
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 58
    • Reasonable CertaintyDamages are not rendered uncertain becausethey cannot be calculated with absoluteexactness. It is sufficient if a reasonable basis ofcomputation is afforded, although the result beonly approximate.Eastman Kodak Co. v. Southern Photo Materials, 273 U.S. 359 (1927) FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES 59
    • Methods of Calculating Lost Profits• Before and After• Sales Projection• Accounting for Profits• Yardstick• Market Share• Economic Modeling FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES 60
    • Before and After Calculations• Based on time series data• Compares profit before bad act to profit after bad act• Typically more suited to stable businesses or contractual relationships• Did other things change during that time? FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 61
    • Sales Projection Method• Compares actual performance after the bad act with a forecast of performance before the bad act• How reliable was the forecast? FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 62
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 63
    • Yardstick Method• Compares profits in each period to a yardstick• Common for processing and other similar businesses• Does the yardstick really measure something relevant? FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 64
    • 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 Plaintiff’s share? FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 65
    • Economic Modeling Method• Catch all for other ways of determining lost sales or lost profits• How reasonable is the model? FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 66
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 67
    • 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 therefore complicated by timing issues FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 68
    • Timing Issues and Lost Profits• Damage Period – What is the appropriate period over which the lost profits should be calculated? FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 69
    • Timing Issues Terminology• Interest rate – an amount paid for the use of money 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 that would induce an investor to take a specific level of risk FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 70
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 71
    • Ex Ante Damages Damages Occurring from Date of Breach into the Future Discounted to Present Value as of Date of Breach Prejudgment Interest (If Applicable)Date of Breach Date of Trial FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 72
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 73
    • Ex Post Damages 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 TrialDate of Breach Date of Trial FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 74
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 75
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES 76
    • 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 FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY ADVISORY SERVICES 77
    • To Contact UsIf we can help you with a case, if you would liketo discuss a case, please contact us.423.756.7100billacuff@decosimo.comsharonhamrick@decosimo.combrentmcdade@decosimo.com FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORYADVISORY SERVICES