Expert Testimony for Non-Accountants

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Testifying is the pinnacle of an expert witness’s work in a case. It may well be the most important part of the expert’s work, as the assistance of a competent financial expert is the key to cases involving economic damages and other financial calculations.

An expert must do much more than just analyze facts and calculate figures. Traditional accounting and finance skills are not enough when it comes to litigation matters. A financial expert witness must qualify as an expert in court, and must be able to convey her or his findings to non-accountants in both the written and oral formats. Continue reading

The Devil is in the Details: Lost Profit Calculations

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Lost profits are a typical element of damage claims in legal actions. They seem fairly straightforward, yet opposing experts can come up with vastly different numbers. Often, the calculations are in fact not straightforward, and the process of estimating lost profits can become very detailed and cumbersome.

In general, lost net profits are calculated by first estimating the lost gross revenue or sales due to the act. The lost gross revenue is then reduced by the avoided costs, which include all of the normal costs related to providing a good or service. This results in the net profit that would have been realized if the sales would not have been lost.

Some experts like to use lost gross profit as a measure of damages. This usually isn’t the correct way to value damages. Gross profit only includes figures for revenue and cost of goods sold. Such a calculation fails to consider other costs of a business that may be closely related to providing a good or service.

Another key aspect of a damage calculation is correctly estimating the period of loss. The loss normally begins on the date the act occurred, which can be fairly easy to determine. The ending date of the loss period may be more difficult to estimate. It will likely be based upon the date business resumed to normal levels or the end of the term of the contract.

Calculating Lost Revenue

The first component of a lost profits calculation is the revenue lost due to the matter in litigation. The method used for calculating lost revenue will vary depending upon the industry, the data available for the calculation, and the type of loss. There are several common methods for calculating lost sales.

One method compares a company’s performance prior to the event, to the performance after the event. The theory behind this calculation is that “but for” the defendant’s actions, the company would have achieved sales and profits similar to those before the event. This calculation relies heavily on the company’s historical accounting records as a basis for the lost profits calculation.

A second method for calculating losses uses benchmark data to calculate the revenues and profits a company should have had. Benchmarks may include data from another company, financial results from a different location operated by the plaintiff, industry averages and norms, or the company’s budgets and projections. If the expert uses this method, she or he must first demonstrate that the benchmark is applicable to the plaintiff and therefore the proper measure for the damages.

Other approaches for calculating lost revenues and profits may certainly be appropriate, and should be evaluated on a case-by-case basis. A method that may be reasonable in one case might be totally inappropriate for another matter. It is wise for the expert to step back from the calculations and consider whether or not the numbers appear reasonable under the circumstance.

Calculating Expenses

To arrive at lost profits, the expert must calculate the costs associated with generating revenue. For example, a company that manufactures a widget incurs material costs, labor costs, utilities, supplies, and other costs to make each widget. To the extent that the company lost sales, the company also did not incur the expenses related to those sales. These avoided costs need to be calculated and factored into the net loss.

It’s important for the financial expert to understand the company’s cost structure, but the degree of detail required in estimating costs will vary from business to business. It is necessary to understand how the company’s costs relate to the sales and what factors affect the costs. The accounting concepts involved in understanding and dissecting the cost structure are many, and require diligence on the part of the expert.

As with the calculation of lost revenues, it is important for the expert to examine the calculated expenses for reasonableness. She or he must be satisfied that the numbers make sense in light of the information available in the case.

Other Issues
One critical part of the damage calculation process is the determination of causation. If a company suffers a loss of sales compared to “normal” levels, the expert should consider possible reasons for the drop in sales.

While the sales loss may be related to the legal matter at hand, it is also possible that market conditions may have impacted sales. It is important to examine how things such as economic conditions, government regulations, company reputation, and desires of the marketplace may have impacted a sales loss. Any reduction in sales related to these types of factors should be excluded from the calculation of lost profits in a litigation matter.

Lost profits for new businesses are difficult to estimate because of the lack of operating history. In these cases, other sources of data must be sought to help calculate damages. Sometimes business plans or budgets are used, even though these may be regarded as somewhat speculative. The expert is often left to make many assumptions about the new business, but ought to seek as much support for those estimates as possible.

If statistics or outside data are used to calculate damages, they should be derived from widely-respected and reliable sources. Experts often look for outside information to support assumptions made in the calculation of lost profit. This information should only come from sources that are known to provide reliable and accurate data.

The expert witness must consider whether the plaintiff was able to make up sales or in some other way mitigate the damages in the matter at hand. If a company can find alternative ways to produce a product or locate a new supplier of raw materials, these types of things might reduce the damages. The expert must also consider whether mitigation was possible, even if the plaintiff did little or nothing to mitigate the damages.

The calculation of lost profits can be a very detailed, time-consuming process. It is necessary to be as accurate as possible when estimating lost sales and avoided costs. Yet it is important to remember that this is not a precise process, and does rely on estimates. The expert must calculate damages that are reasonable and that use reliable information and widely-accepted methodology.

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How to Catch Employees Stealing

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top-secret-confidentialHave you ever wondered how and when your employees are stealing from the company? Did you ever wish that you were a fly on the wall, hearing all of the conversations that led up to a group theft? Have you considered secret cameras throughout your workplace to catch employees in the act? Have you wondered what employees are discussing with one another via your internal messaging system? Are you curious about how often employees are surfing the Internet?

It’s no secret that employees routinely steal from their employers. Whether it’s the office supplies taken home for the kids, the extra break while still on the clock, or stealing customer payments, they all constitute theft. Possibly even worse may be the instances of employee disloyalty, such as badmouthing the boss or encouraging good employees to leave the company. Continue reading

Naturopathic Medicine Scam

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Alternative forms of medicine and therapy are all the rage. What are they an “alternative” to? Traditional western medicine, which is science-based. The American Cancer Society describes naturopathy:

Naturopathic medicine is a complete alternative care system that uses a wide range of approaches such as nutrition, herbs, manipulation of the body, exercise, stress reduction, and acupuncture. Parts of naturopathy are sometimes used as complementary therapy along with mainstream medicine. Naturopathic medicine is a holistic approach (meaning it is intended to treat the whole person) that tries to enlist the healing power of the body and nature to fight disease.

While there are some benefits to naturopathy, patients should not be fooled into thinking that it is a legitimate treatment for any medical condition. Yes, things like stress reduction and acupuncture can have positive benefits to the body overall. Proper exercise and paying close attention to your body and the signs it is giving are good.

But when consumers substitute naturopathy for real medical treatments, they are going down a dangerous path. Real doctors will tell you that naturopathy is nothing but quackery. Continue reading

Arbitration Scam on Consumers

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Back in the day, arbitration was a reasonable alternative to court rooms. Consumers could seek justice when they were wronged, but in a forum that was quicker and cheaper than going to court. Unfortunately, arbitration has become nothing but a scam on consumers. Companies force consumers into arbitration via their contracts, mainly because the process favors the companies so heavily.

Namely, the arbitration clauses prohibit consumers from banding together to file class action lawsuits. Class action suits have a tarnished image, but are often the only option when there are thousands of consumers who have been harmed by products and services, but the monetary harm to each is relatively small. It is financially impossible for each consumer to pursue a relatively small case, so banding together in class action lawsuits creates economics that make sense. Continue reading

What is an Accounting Review?

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An independent financial statement audit done by external auditors is the most extensive attest service provided by auditors, and it is still limited. A review of financial statements by an independent auditor is even more limited in scope.

Reviews amount to auditors looking at account balances and determining whether or not the balances look reasonable. They will perform some analytical procedures on the financial statements to further analyze the numbers. On occasion, they may ask to see some details about accounts and their balances, but this happens on a very limited basis. Continue reading

Multi-Level Marketing is not a Business (It’s a Pyramid Scheme)

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direct-selling-pyramid-schemeOver the weekend, cracked.com posted an insightful article about the realities of multi-level marketing. Simply put, MLM is the same thing as pyramid scheme. It’s not a business. Almost everyone loses money. The behaviors are cult-like. And you will NOT be successful with MLM, so don’t bother trying to recruit your friends and family.

Author Kathy Benjamin calls pyramid schemes the world’s fastest growing industry, and she is right. You see the evidence all over Facebook. Several of you friends are inviting you to their party, or they’re posting staged before and after pictures and leaving cryptic messages that say “ask me how!” They often will not mention the name of the product they’re pushing, because they know they’ll lose you as a potential victim if you Google the product before they can fill your head with lies about how good the product is. Continue reading

Finding a Thief: Personal Red Flags of Fraud

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As victims of occupational fraud reflect on crimes committed against their companies, they wonder if there were any signs that a fraud was occurring. They wonder how a trusted employee could steal from the company. Sadly, frauds are committed by people in positions of trust. What is it about those people that leads them to commit fraud?

Corporate thieves have many things in common with one another. There are many tell-tale characteristics about people and their lifestyles that signal the potential for fraud. These range from personal financial circumstances to attitudes on the job. A few of these traits alone do not indicate the potential for fraud, but the probability rises as we identify more of the characteristics.  Continue reading