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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Making the Most of an Expert Witness

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gavel-moneyMore than ever, competent and dynamic expert witnesses are critical to winning legal cases. Even if a case doesn’t go to trial, a credible expert can be the key to settling the case for your client.

I believe that an expert witness has the opportunity to make or break a case. We all know that there are few chances to fix a bad opinion when you go to court. There is one chance to express the correct opinion and support it fully. A faulty opinion, or one with little reliable support, can doom a case.

Some attorneys have their preferred experts, while others get referrals from colleagues. Each attorney works with an expert witness in the way that she or he is comfortable. However, it never hurts to hear about it from the other side. This is my perspective on best utilizing your expert witness to her or his full value. Continue reading

What Types of Cases are Done By Forensic Accountants?

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Forensic accounting is sometimes called investigative accounting. There is a fairly wide variety of cases that can be done by a forensic accountant, with all of them having something to do with fraud or litigation. Tracy Coenen talks about some of the most common types of cases in which a forensic accountant will be called in.

Finding and Utilizing the Best Expert Witness

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More than ever, competent and dynamic expert witnesses are critical to winning legal cases. Even if a case doesn’t go to trial, a credible expert can be the key to settling the case for your client. I believe that an expert witness has the opportunity to make or break a case. We all know that there are few chances to fix a bad opinion when you go to court. There is one chance to express the correct opinion and support it fully. A faulty opinion, or one with little reliable support, can doom a case.

Some attorneys have their preferred experts, while others get referrals from colleagues. Each attorney works with an expert witness in the way that she or he is comfortable. However, it never hurts to hear about it from the other side. This is my perspective on best utilizing your expert witness to her or his full value.

Finding the Right Expert
The most critical part of working with an expert witness is finding the right one. Naturally, the selection of an expert involves the evaluation of education and credentials. The examination of an expert’s credentials is a particularly critical process. Continue reading

Expert Witnesses and Reliable Methods

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Under the Federal Rules of Evidence, an expert witness is required to use reliable principles and methods in coming to expert opinions. In this video, Tracy discusses the rule and how it might apply to a damage calculation done by an expert witness.

Lifestyle Analysis in Divorce Cases: Investigating Spending and Finding Hidden Income and Assets (Video)

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Tracy Coenen, author of “Lifestyle Analysis in Divorce Cases: Investigating Spending and Finding Hidden Income and Assets,” shares her insight on uncovering financial details to ensure that divorce settlements are fair and equitable. A forensic accountant and fraud investigator, Coenen wrote the book to arm lawyers with a powerful tool when valuing and dividing property in complex divorce cases.

Judges and Financial Issues

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How much does your judge really understand about financial issues? Will he or she be able to sort out cases with complex accounting and finance scenarios? Tracy Coenen and Miles Mason discuss how your expert witness can help the judge understand.

Why Retain a Forensic Accountant in Your Divorce Case?

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divorce financial analysisOne of the hot new things in the area of divorce, especially for high net worth clients, is using a law firm that has forensic accountants on staff. Sometimes the divorce attorneys themselves have credentials in the area of forensic accounting, such as a CPA license, CFE (Certified Fraud Examiner) credential, or CFF (Certified in Financial Forensics) credential.

These law firms tout a number of advantages of retaining them:

  • Expertise in financial matters, including business valuations, tax law, and forensic accounting
  • Ability to investigate the value of financial assets
  • Skills necessary to perform a lifestyle analysis Continue reading