Chapter 10 Power Point - Forensic and Investigative...

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Unformatted text preview: Forensic and Investigative Accounting Forensic Chapter 10 Commercial Damages . Legal Framework of Damages In order to win an award for damages, the In injured party must generally prove two points: points: – That the other party was liable for the That damage. damage. – That the injured party suffered damages That as the results of the actions or lack of actions of the offending party. actions Chapter 10 Forensic and Investigative Accounting 2 Legal Framework of Damages Proximate (direct) cause—The damages caused were a —The direct result of the offending party’s actions or lack of actions. actions. Reasonable certainty—That it is “reasonably certain” —That that the injured party would have earned the claimed amount of damages “but-for” the actions of the other party. party. – Courts tend not to create profits where none existed Courts before before Forseeability—That a prudent person could look into —That the future and see that the actions of the offending party would damage the other party to the litigation. party Chapter 10 Forensic and Investigative Accounting 3 Two Types of Harm Tort—The occurrence of the harmful act —The itself is wrongful. itself Breach of contract—A failure without —A excuse or justification to fulfill one’s obligations under a contract. obligations Chapter 10 Forensic and Investigative Accounting 4 Two Types of Damages Restitution—When the harmful act unjustly —When enriches the defendant at the expense of the plaintiff. plaintiff. Reliance—When the harmful act is fraud —When and the intent of damages is to restore the plaintiff to the position as if no promises had been made. had Chapter 10 Forensic and Investigative Accounting 5 Damages Calculation Approaches The out-of-pocket loss refers to the difference The out-of-pocket he between the actual value received and the actual value conveyed. The plaintiff can recover nothing beyond his or her investment. recover Under the benefit-of-the-bargain theory (or Under (or expectations remedy), the damages include not expectations ), only the money invested but also other expenses such as increased costs, lost profits, and decreased value of the investment. and Chapter 10 Forensic and Investigative Accounting 6 Damages Calculation Example Debra (defendant) sells Paula (plaintiff) an asset Debra with an alleged value of $2 million for $1.8 million. However, the asset really had a market value of only $1.6 million. The fraud damages can be calculated in two ways: be – Out-of-pocket loss rule: $1.8 million - $1.6 Out-of-pocket million = $200,000. million – Benefit-of-the-bargain rule: $2 million - $1.6 Benefit-of-the-bargain million = $400,000. million Chapter 10 Forensic and Investigative Accounting 7 Lost Profits Methods Before-and-after method—Take sales or —Take sales growth before the act and compare to the comparable figures afterward. the Yardstick (or benchmark) method— Compare sales or sales growth of the Compare company to other companies or to other industry averages. industry Chapter 10 Forensic and Investigative Accounting 8 Lost Profits Methods “But-for” method—The difference in the —The estimated profits (but-for the actions of the defendant) and the actual profits. defendant) Direct method—Any agreement may —Any indicate how to calculate. indicate Combination method—May use a —May combination of methods. combination Chapter 10 Forensic and Investigative Accounting 9 Economic Framework for the Economic Lost Profits Estimation Process Lost Macroeconomic analysis. Industry analysis. Company-specific analysis. Financial analysis conclusion. Chapter 10 Forensic and Investigative Accounting 10 Length of the Loss Period Projecting lost revenues. Measuring profitability. Mitigation and offsetting profits. Time value of money considerations. Chapter 10 Forensic and Investigative Accounting 11 Components of Damages Lost profits Lost value Lost cash flows Lost revenue Extra costs Chapter 10 Forensic and Investigative Accounting 12 Defendant’s Damages Estimate The defendant’s expert report would The include his or her damages estimate along with support for the numbers presented. with In order to arrive at a “zero” damages In estimate, a defendant must demonstrate to the court that the plaintiff suffered no financial damages. financial Chapter 10 Forensic and Investigative Accounting 13 Plaintiff’s Damages Estimate Much of the support for the damages estimate Much for the plaintiff comes from various accounting records, but the use of those supporting data also shows that damages estimates are both an art and a science. The scientific part is primarily the understanding and appropriate use of accounting information. The art part of the process is in knowing how the accounting information is used in creating components of the damages estimate. estimate. (continued on next slide) Chapter 10 Forensic and Investigative Accounting 14 Plaintiff’s Damages Estimate In addition, expert witnesses frequently use In many other kinds of information other than traditional accounting records in arriving at and defending damages calculations. and Chapter 10 Forensic and Investigative Accounting 15 Expert’s Journey Through the Expert’s Legal System Legal Testimony early in case – Pretrial summary judgments – Decision to try the case (continued on next slide) Chapter 10 Forensic and Investigative Accounting 16 Expert’s Journey Through the Expert’s Legal System Legal Defending the expert report – Deposition testimony – Trial testimony – Questioning by client’s attorney – Questioning by opposing attorney – Preparation for trial testimony – Rebuttal testimony Forensic and Investigative Accounting 17 Chapter 10 Cost Behavior Defined In its simplest form, cost behavior is In cost the way that cost(s) change with respect to changes in the volume of activity. activity. Chapter 10 Forensic and Investigative Accounting 18 Developing a Theoretical Model for Damages Damages Sometimes it is necessary to develop a theoretical model Sometimes for damages for Frequently actual damage calculations are measured Frequently against the theoretical model against The theoretical framework should be supported by The accounting foundations such as accounting – – – – – Incurred historical costs The matching concept Relevant costs Conservatism Differential or incremental costs Forensic and Investigative Accounting 19 Chapter 10 ...
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