Knowledge and Insights

In today’s litigious society, disputes culminating in lawsuits are inevitable.  Economic damages are often awarded to make injured parties financially whole, and in some cases, that appears to be cut and dried.  However, supportable economic damage assessments that withstand the trier of fact’s (judge or jury) scrutiny are derived from complex calculations performed by third-party independent financial experts. With an economic damage assessment, injured parties can seek to recover economic damages suffered because of another’s harmful act under a variety of claims, including business interruption, employment discrimination, breach of contract, unjust enrichment, wrongful termination, and age discrimination. Economic damage claims pursuant to first-party insurance coverages may also require independent financial experts on behalf of the policy holder or insurance carrier.

A Certified Public Accountant (CPA) serving in a litigation support or consulting capacity is often called upon to perform an economic damage assessment to evaluate and quantify economic damages in court cases on behalf of counsel for plaintiffs and/or defendants. In some cases, the CPA also has the Certified in Financial Forensics (CFF^®) Credential, which is exclusively granted by the Association of International Certified Professional Accountants (AICPA) to qualified CPAs who demonstrate considerable expertise in forensic accounting through their knowledge, skills and experience. Forensic accounting focuses on techniques, analysis and findings that are suitable for use in a court of law.

The CPA’s role in each case usually depends upon the circumstances under which he or she is retained. However, in all cases, CPAs must stay abreast of: (1) theoretical damage issues and concepts; (2) damage calculation methodologies, approaches, and techniques; and (3) applicable professional standards and legal principles relevant to the claims and jurisdiction.

COMPONENTS OF LOST PROFIT CALCULATIONS

A combination of litigation support experience and practical business savvy goes a long way when calculating lost economic potential due to the occurrence of allegedly harmful acts. For example, lost profit calculations in a contract dispute are primarily based on three fundamental components:

1. Financial causation – relates to the causal link between a specific event and the alleged lost profits resulting from that event;
2. But-for profits – profits that would have been achieved but-for the specific event that allegedly caused the harm; and
3. Actual profits – profits that were ultimately achieved because of the specific event.

After a CPA obtains a thorough understanding of each of these components, he/she is in a strong position to provide meaningful insights into the merit and value of the economic damages claim.

ECONOMIC DAMAGE ASSESSMENTS FOR WRONGFUL TERMINATION

Similarly, CPAs are often retained to provide economic damages assessments in cases involving allegations of wrongful termination. Evaluation of these claims generally includes measurement of lost income and mitigation income over the recovery period, impact on employer-provided benefits, and valuation of stock options or other retirement plans. Economic losses claimed under these circumstances may also include estimates of medical costs or valuations of non-cash benefits such as the option to work flextime. Given their experience and credentials, CPAs are also in a good position to conduct similar analyses associated with personal injury and wrongful death claims.

HOW WE CAN HELP

CPAs specializing in litigation support services rely on economic theory and models developed from labor economics and statistics, but tailor their analyses for each matter, using case-specific data and relevant statistics to develop defensible quantitative damages models.

At Mercadien, we have extensive experience presenting economic damage assessments in first-party insurance claims, mediations and arbitrations, in expert reports and declarations, and via expert testimony both at deposition and at trial. We also provide consulting services related to wrongful termination and personal injury claims, helping concerned parties evaluate the potential scope of the claims. While many wrongful termination/death and personal injury cases often involve a single plaintiff or small group, Mercadien’s experts also have the requisite experience to evaluate such claims in a class action setting.

When it comes to assessing damages in commercial disputes, wrongful termination/death and personal injury cases, consider enlisting the help of Mercadien’s qualified CPAs.  Our litigation support professionals utilize a combination of expertise in the areas of forensic accounting, taxation, economics, and finance to evaluate and calculate economic damages in a variety of litigation matters.

If you have a need for an economic damage assessment and would like to learn more about our services, please contact me at [email protected] or 609-689-2319 or my colleague Jeffrey Baresciano, CPA/CFF/ABV, CVA at (609) 689-2386 or [email protected].

DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.