InnofCourts RoleForensicAccountingLitigation

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
ADVISORY SERVICES
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
ADVISORY 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
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
ADVISORY 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
ADVISORY SERVICES
What is Forensic Accounting?
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Accounting for dead people
Finding the beans other people hide
Dissecting the entrails of corporations
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The Art of figuring out what we dont know
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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
ADVISORY SERVICES
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
ADVISORY 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
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Core Skills
Effective oral communicator
Simplify the information
Critical/strategic thinker
Identify key issues
Investigative ability
Synthesize results of discovery and analysis
ADVISORY 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
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Roles of Forensic Accountants
Expert Consultant
Expert Witness
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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
ADVISORY SERVICES
Occupational Fraud and Abuse
- The use of ones occupation for
personal enrichment
- The misconduct of employees,
managers and executives
- Internal fraud
ADVISORY SERVICES
Occupational Fraud and Abuse
Fraudulent
Statements
Asset
Mi sappropri ati on
Corrupti on
Non-
Fi nancial
Fi nancial
Asset/Revenue
Overstatement
Asset/Revenue
Understatement
Employment
Credentials
Internal
Documents
External
Documents
Timing
Differ ences
Fictitious
Revenues
Concealed
Liabilities &
Expenses
Improper
Disclosur es
Improper
Asset
Valuations
Inventory
and all
Ot her Assets
Cash
Misuse Lar ceny
Asset Req.
& Transfer
False Sales
& Shipping
Pur chasing &
Receiving
Unconcealed
Larceny
Lar ceny Skimming
Fr audulent
Disbur sements
Cash
On Hand
From the
Deposit
Other
Sales Receivables Refunds &
Other
Unrecorded
Understated
Wr ite- off
Schemes
Lapping
Schemes
Unconcealed
Billing
Schemes
Payroll
Schemes
Expense
Reimbur sements
Check
Tampering
Register
Disbursements
Shell
Company
Non-Accomplice
Vendor
Per sonal
Pur chases
Ghost
Employees
Commission
Schemes
Wor ker s
Compensation
Falsified
Wages
Mischaracterized
Expenses
Overstated
Expenses
Fictitious
Expenses
Multiple
Reimbur sements
Forged
Maker
Forged
Endor sement
Altered
Payee
Concealed
Checks
Author ized
Maker
False Voids
False
Refunds
Confl ict s
of Interest
Bri bery
Ill egal
Gratuit ies
Economic
Extort ion
Pur chase
Schemes
Sales
Schemes
Other
Invoice
Kickbacks
Big Rigging
Other
Inns of Court
Chattanooga, Tennessee
Sharon Hamrick, CPACFF, CFE
ADVISORY SERVICES
BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
A Financial Experts Overview of
Pecuniary and Personal Injury Damages
for Attorneys
ADVISORY SERVICES
Agenda for Today
Types of Damages
Issues in Calculating Damages
Aspects of Damage Calculations
Special Case Situations
Timing Issues
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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
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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
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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
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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
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?
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?
ADVISORY SERVICES
Other Useful Information in Damages
Calculations
General data needed in
losses calculations of a
person:
Education
Health History
Occupational History
Income History
Employment capacity of
an unemployed person
Household services
Family composition
Personal consumption
Funeral, burial, medical
expenses
Attendant care and
nursing home expenses
Occupational earnings
Earnings growth rates
and interest rates
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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
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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
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Calculations of Fringe Benefits:
These are subdivided into two types:
Legally mandated benefits: Medicare, Social Security
Discretionary benefits: pension programs, health
insurance, life insurance
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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
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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
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Future Wage Increases
Caused by several factors
Inflation
Increases in productivity
Merit
Increased demand for a skill
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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.
ADVISORY SERVICES
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
ADVISORY 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 childs occupation
Would the child attend college?
Did he/she have an intended occupation?
Childs Probability of Completing School Levels
Based on probability tables
ADVISORY SERVICES
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 the
interests of the child
ADVISORY SERVICES
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.
ADVISORY SERVICES
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
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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.
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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
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
A Financial Experts Overview of Lost
Profits Damages for Attorneys
Inns of Court
Chattanooga, TN
Brent McDade, ASA, CBABVAL
BUSINESS VALUATION
LITIGATION SUPPORT
TRANSACTION ADVISORY
ADVISORY SERVICES
Agenda for Today
What are lost profits?
How to calculate lost profits
Ex post vs ex ante calculations
45
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The Present Value Equation
46
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Compensatory Damages
Damages sufficient in amount to indemnify the
injured person for the loss suffered.
--Blacks Law Dictionary, 7 ed. abr.
47
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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
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Claims
Causation
Foreseeability
General damages
Special or consequential damages
49
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Claims
Causation
Foreseeability
Reasonable Certainty
No undue speculation
Higher standard for new businesses
Additional complications for the expert
50
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Claims
Causation
Foreseeability
Mitigation
51
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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 any
operating or other expenses
http://en.wikipedia.org/wiki/Profit_%28accounting%29
52
ADVISORY SERVICES
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
ADVISORY SERVICES
Definition of Profit
Websters defines profit as The excess of revenues
over outlays in a given period of time and Excess
of value received for producing, keeping, or selling,
over cost, hence, pecuniary gain in any transaction
or occupation
profit Websters Online Dictionary. 2010
http:// www.websters-online-
dictionary.com/definitions/profit
54
ADVISORY SERVICES
Further Definitions
1 : a valuable return : gain
2 : the excess of returns over expenditure in a transaction or
series of transactions; especially : the excess of the selling
price of goods over their cost
3 : net income usually for a given period of time
4 : the ratio of profit for a given year to the amount of capital
invested or to the value of sales
5 : the compensation accruing to entrepreneurs for the
assumption of risk in business enterprise as distinguished
from wages or rent
"profit." Merriam-Webster Online Dictionary. 2010.
Merriam-Webster Online. 16 April 2010
<http://www.merriam-webster.com/dictionary/profit>
55
ADVISORY SERVICES
The Definition of Lost Profits
The difference between what you should have
made on whatever transaction or series of
transactions occurred or should have occurred
and what you actually made on whatever
transaction or series of transactions actually
occurred
56
ADVISORY SERVICES
Five Aspects of Lost Profits
Lost profits are:
1. Net profits
2. Incremental profits
3. But for profits
4. Pretax
5. Reasonably certain
57
ADVISORY SERVICES
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
ADVISORY SERVICES
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
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Methods of Calculating Lost Profits
Before and After
Sales Projection
Accounting for Profits
Yardstick
Market Share
Economic Modeling
60
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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?
61
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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
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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
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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
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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
ADVISORY SERVICES
Economic Modeling Method
Catch all for other ways of determining lost
sales or lost profits
How reasonable is the model?
66
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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
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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
68
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Timing Issues and Lost Profits
Damage Period
What is the appropriate period over which the lost
profits should be calculated?
69
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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
70
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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
ADVISORY SERVICES
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
ADVISORY SERVICES
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
ADVISORY SERVICES
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
ADVISORY SERVICES
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
ADVISORY SERVICES
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
ADVISORY SERVICES
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
ADVISORY SERVICES
To Contact Us
If we can help you with a case, if you would like
to discuss a case, please contact us.
423.756.7100
billacuff@decosimo.com
sharonhamrick@decosimo.com
brentmcdade@decosimo.com

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