20110414_InnofCourts_RoleForensicAccountingLitigation

8/10/2019 20110414_InnofCourts_RoleForensicAccountingLitigation

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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


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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 manyrestaurants

Expertise in multiple industries


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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, 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


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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


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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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ADVISORY SERVICESFORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY


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


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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


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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


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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


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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


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Occupational Fraud and Abuse

- The use of ones occupation for

personal enrichment

- The misconduct of employees,

managers and executives

- Internal fraud


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Occup ationa l Fraud and Abu se


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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


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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


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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


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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?


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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


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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


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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


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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 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


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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.


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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


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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



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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



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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.



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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


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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


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A Financial Experts Overview of Lost

Profits Damages for AttorneysInns of Court

Chattanooga, TN

Brent McDade, ASA, CBABVAL

BUSINESS VALUATION

LITIGATION SUPPORT

TRANSACTION ADVISORY


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ADVISORY SERVICES


Agenda for Today

What are lost profits?

How to calculate lost profits

Ex post vs ex ante calculations

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The Present Value Equation

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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.

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El f L P fi D


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ADVISORY SERVICES


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?

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Claims

Causation

Foreseeability

General damages

Special or consequential damages

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El f L P fi D


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Claims

Causation

Foreseeability

Reasonable Certainty No undue speculation

Higher standard for new businesses

Additional complications for the expert

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El t f L t P fit D


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ADVISORY SERVICES



Claims

Causation

Foreseeability

Reasonable Certainty Mitigation

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ADVISORY SERVICES


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

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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


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ADVISORY SERVICES


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

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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

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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

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Five Aspects of Lost Profits

Lost profits are:

1. Net profits

2. Incremental profits3. But for profits

4. Pretax

5. Reasonably certain

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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

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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)

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Methods of Calculating Lost Profits

Before and After

Sales Projection

Accounting for Profits Yardstick

Market Share

Economic Modeling

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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?

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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

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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?

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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?

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Economic Modeling Method

Catch all for other ways of determining lost

sales or lost profits

How reasonable is the model?

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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

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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 thereforecomplicated by timing issues

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Timing Issues and Lost Profits

Damage Period

What is the appropriate period over which the lost

profits should be calculated?

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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

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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

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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)

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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

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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

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What Does a Damages Calculation


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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

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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

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How do Attorneys and Experts Mess


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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

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To Contact Us


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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]

[email protected]@decosimo.com