Forensic and Investigative Accounting Chapter 12 Computing Economic

Forensic and Investigative Accounting Chapter 12 Computing Economic Damages © 2009 CCH. All Rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646 -6085 1 800 248 3248 www. CCHGroup. com

Measuring Damages in Personal Cases Damage calculations that require additional knowledge and skills (other than those used in commercial damages), include: n n n Wrongful death. Wrongful discharge. Complete or partial disabilities. Divorces. Similar situations that take into account the economic value of persons. Chapter 12 Forensic and Investigative Accounting 2

Use of a Forensic Economist or a Forensic Accountant n What does an attorney look for in and expert witness in economic damages cases? – What is the nature of the damage calculations? – Who is best suited to calculate and explain the damage components? – Historically forensic economists have provided most economic damage testimony – Now many more forensic accountants are providing economic damages testimony Chapter 12 Forensic and Investigative Accounting 3

What is Necessary to Win a Economic Damages Case? n As with any civil litigation case it is necessary to prove: – Liability: some wrongful event has occurred, usually a tort – As a result of this wrongful event the plaintiff has incurred some measurable damages » The plaintiff must present and defend the damage amount » The defendant will attempt to reduce or eliminate any damage measure of the plaintiff Chapter 12 Forensic and Investigative Accounting 4

General Theory of Economic Damages n n n The wrongful act of the tortfeaser has caused the plaintiff to be in a different position that he/she otherwise would be Ideally the compensable damages will restore the injured party to his/her previous position Damages will depend upon what the law will allow – Different states allow different measures of damages under varying circumstances Chapter 12 Forensic and Investigative Accounting 5

Wrongful Death with Dependents Lost wages n Lost benefits n Lost services provided to survivors n Funeral and administration of the estate n Less income that the deceased would have used for consumption n Chapter 12 Forensic and Investigative Accounting 6

Wrongful Death of a Child Loss of a child’s services n Medical and funeral expenses n Cost of counseling for remaining family n Non-economic-loss of love and companionship to the end of the last parent’s life n Chapter 12 Forensic and Investigative Accounting 7

Issues that Impact Amount of Damages in a Personal Injury Case For a person who has sustained permanent work-related disabilities, the issues that impact the amount of damages that will accrue to the injured person over his or her remaining lifetime include: n How long will the person live? n What level of injuries were sustained? n What is the impact of those injuries on the employee’s remaining work effort and abilities to perform services outside of the workplace? Chapter 12 Forensic and Investigative Accounting 8

Calculation of Economic Damages in a Personal Injury Case For a person who sustains permanent work-related disabilities, the calculation of economic damages would be based on a variety of issues, including: n n What are the characteristics of that person’s work life? What is the employee’s educational background? What is the employee’s gender? What is the employee’s expected time left in the work force? Chapter 12 Forensic and Investigative Accounting 9

Government Data for Analysis and Support n There is a wealth of U. S. Government Data to use in case analysis and support – U. S. Department of Labor Bureau of Labor Statistics – The Economic Report of the President – The U S Census Bureau Statistical Abstract of the United States – Other Chapter 12 Forensic and Investigative Accounting 10

The Role of Statistical Data in Measuring Economic Damages n n Statistical data adds realism and conservatism to economic damage calculations There are many factors that may not be part of a person’s work/life plans that have a statistical probability of occurring – Life expectancy – Unemployment – Earnings trends – Injuries – Others Chapter 12 Forensic and Investigative Accounting 11

Measuring Economic Damages in a Wrongful Discharge Case Commonly used components for measuring economic damages in a wrongful discharge case include: n n Lost wages: – Earnings history – Earnings estimates – Royalties – Fringe benefits Lost profits. FICA tax payments that employer would have paid. Health insurance premiums that employer would have paid. Chapter 12 Forensic and Investigative Accounting 12

Present Value Concepts Frequently wages and other employee benefits are adjusted for future expected growth. n Conversely, amounts that would have been received in the future should be adjusted to their present value. n These two processes can have a major impact on the net amount of damages in a case n Chapter 12 Forensic and Investigative Accounting 13

Determining Growth and Discount Rates In some states there is a statutory rate of interest for certain types of cases n In other situations, the expert is expected to determine and defend an appropriate discount rate n Sometimes experts can use statistical data for growth or discount rates n Chapter 12 Forensic and Investigative Accounting 14

Common Components of Fringe Benefits n n n Paid health care. Life insurance. Education programs. Payroll taxes (FICA taxes, federal and state unemployment taxes, workers’ compensation taxes). You cannot “double count” damage costs Chapter 12 Forensic and Investigative Accounting 15

Measuring Damages for Household Services n When a person is injured or killed, it may be logical to assess the amount of lost household services – What amount of services did the person in question provide before the event that caused the loss? – What amount of services can the person in question provide after the event? What percent of services was lost? – What is the “value” of the lost services? Chapter 12 Forensic and Investigative Accounting 16

Examples of Job-Related Costs Job-related costs need to be deducted form the Damage estimate. Job-related costs are costs that employees incur as the result of their employment. Some examples include: n Cost of commuting to work. n Union dues. n Professional fees. n Job-related clothing costs. Chapter 12 Forensic and Investigative Accounting 17

Thoughts About Testifying in and Economic Damages Case Be accurate and complete n Know the facts about the case well n “Prepare” your own cross examination n To the extent that it makes sense show that your analysis in conservative n Be truthful n Chapter 12 Forensic and Investigative Accounting 18