When a business suffers financial or economic damages as the result of the actions of another or due to a catastrophic event, business owners, attorneys and the courts rely on forensic accountants to calculate damages and determine the amount of financial or economic recovery necessary to restore the business to the position it would have been in had the damaging actions or catastrophe not occurred. But it might surprise you to know that there is more than one way for the forensic accountant to calculate economic damages.
“There are two distinctly different methodologies forensic accountants generally use to calculate these damages – calculation of lost profits and calculation of lost business value,” said David Anderson, principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides economic damage analysis, litigation support services and expert witness testimony in Philadelphia and the Delaware Valley. “Although there are similarities in the calculations, the two methodologies operate differently and can result in different damage amounts being calculated for the same set of circumstances.”
Anderson, a forensic accounting expert in Philadelphia and the Delaware Valley, said some courts have ruled in favor of the calculation of lost profits as the basis for recovery of economic damages, while others have ruled in favor of the calculation of lost business value. What the courts generally do agree on is that the business may not recover economic damages by using the total of both calculations, he said.
Determining which methodology should be used depends on the facts of each case, according to Anderson, a forensic accountant in Philadelphia whose full range of forensic accounting services in Philadelphia and the Delaware Valley includes economic damage analysis, litigation support services and expert witness testimony in Philadelphia.
Generally, the lost profits methodology is used when there is a breach of contract, intellectual property infringement or catastrophic loss from which the business is able to recover, Anderson said. The loss in business value methodology is normally used in instances of total destruction of a business, permanent impairment of business value (such as slander and defamation), shareholder oppression (or dissenting shareholder), marital dissolution or for certain tax matters, he explained.
Under the lost profits methodology, the various factors that make up the discount rate applied to lost profits (for example, rate adjustments for industry-specific and company-specific risks) can influence the calculation of the loss, said Anderson, a forensic accountant in Philadelphia whose company offers a full range of forensic accounting services in Philadelphia and the Delaware Valley, including expert witness testimony in Philadelphia.
Because the loss in business value methodology considers not just the income method (which serves as the basis for calculating lost profits) but also the asset and market methods, the calculation results may differ, Anderson said. For example, the market may place a premium or discount on the value of the business that is different from that calculated under the lost profits methodology, he said.
Regardless of which methodology is employed, the forensic accountant must consider reasonable assumptions for the time period of the damages, the future profit expectations of the business “but for” the actions of another or the occurrence of the catastrophic event, the future profit expectations of the business due to the actions of another or the catastrophic event, and the business’s efforts to mitigate the damage, Anderson said.
“With so many variables, these calculations obviously can be quite complex,” said Anderson, a forensic accounting expert in Philadelphia. “That is precisely why businesses, attorneys and the courts turn to forensic accountants to navigate the complex calculations needed to determine economic damages.”
If you require the services of a forensic accountant in Philadelphia and the Delaware Valley for any other reason, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.
About David Anderson & Associates
David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley. The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support services, economic damage analysis, business consulting and outsourced CFO services. Company principal David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner and a Certified Valuation Analyst. Anderson also has provided expert witness testimony in the Greater Philadelphia area and served as a forensic consultant on both civil and criminal cases.
