Bill Acuff, Sharon Hamrick and Brent McDade made this presentation to the Inns of Courts in Chattanooga, TN.

1. FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
ADVISORY SERVICES
Role of the Forensic Accountant in
Litigation
Inns of Courts
Chattanooga, Tennessee
Bill Acuff, CPA•CFF, CFE
Sharon Hamrick, CPA•CFF, CFE
Brent McDade, ASA, CBA•BVAL

2. • 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 many
restaurants
• Expertise in multiple industries
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3. • 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, captive
insurance companies
– Network vulnerability testing and IT security consulting
– Healthcare consulting, due diligence, and M&A advisory, physician
practice management
– Recruiting and placement
– Real estate development consulting, hedge and real estate fund
consulting
– Audit defense and representation, due diligence
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4. • A practice of Decosimo firm
• Provides business valuation, litigation support, and
transaction advisory services
• More than 35 years of transaction experience
• Professionals hold ASA, CBA, and/or ABV credentials
• Significant valuation, litigation support, and transaction
advisory experience with restaurants
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5. • “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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6. What is Forensic Accounting?
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8. What is Forensic Accounting?
Accounting for dead people
Finding the beans other people hide
Dissecting the entrails of corporations
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9. What is Forensic Accounting?
The Art of figuring out what we don’t know
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10. What is Forensic Accounting?
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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11. What is Forensic Accounting?
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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12. 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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13. 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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14. Characteristics of a Good Forensic
Accountant
• 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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15. Roles of Forensic Accountants
Expert Consultant
Expert Witness
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16. 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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17. Occupational Fraud and Abuse
- The use of one’s occupation for
personal enrichment
- The misconduct of employees,
managers and executives
- Internal fraud
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19. O c c u p a tio n a l F r a u d a n d A b u s e
A ss e t F r a u d u le n t
C o r r u p ti o n
M i sa p p r o p r i at i o n S t a t em e n ts
C o n f l ic t s Ill e g a l E c o n o m ic N on -
B ri b e ry F i n a n c ia l
o f In t e re s t G ra t u it ie s E x t o rt io n F i n a n c ia l
P u r ch a s e In v o ic e A s s e t/R e ve n u e A s s e t/R e ve n u e E m p lo y m e n t
S chem es K ic k b a ck s O v e rs ta te m e n t U n d e rs ta te m e n t C re d e n tia ls
T im in g In te rn a l
S a le s
B ig R ig g in g D iffe r e n ce s
S chem es D o cu m e n ts
F ic titio u s
R e ve n u e s E x te rn a l
O th e r O th e r
D o cu m e n ts
C o n ce a le d
L ia b ilitie s &
E xpenses
Im p ro p e r
D is c lo su r e s
Im p ro p e r
A sset
In v e n t o ry
V a lu a tio n s
C ash
a n d a ll
O t her A ss ets
Larceny S k im m in g
M is u s e Larceny
C a sh S a le s R e ce iv a b le s R e fu n d s &
O n H and O th e r A sset R eq.
& T ra n s fe r
W r ite - o ff
U n re c o rd e d
F ro m th e S chem es
D e p o sit F a ls e S a le s
& S h ip p in g
U n d e rs ta te d L a p p in g
S chem es
O th e r F r a u d u le n t P u r ch a s in g &
D is b u r s e m e n ts R e ce iv in g
U n co n c e a le d
U n co n c e a le d
L a rc e n y
B illin g P a y ro ll E xpense C h e ck R e g is te r
S chem es S chem es R e im b u r se m e n ts T a m p e rin g D is b u rs e m e n ts
S h e ll G host M isc h a ra c te riz e d F o rg e d
C om pany E m p lo y e e s E xpenses M aker F a ls e V o id s
N o n -A c c o m p lic e F o rg e d F a ls e
C o m m is s io n O v e rs ta te d
V endor E n d o r se m e n t R e fu n d s
S chem es E xpenses
P e r so n a l A lte re d
W o r ke r s F ic titio u s
P u r ch a s e s P ayee
C o m p e n sa tio n E xpenses
C o n ce a le d
F a ls ifie d M u ltip le C h e ck s
W ages R e im b u r se m e n ts
A u th o r iz e d
M aker

20. BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
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A Financial Expert’s Overview of
Pecuniary and Personal Injury Damages
for Attorneys
Inns of Court
Chattanooga, Tennessee
Sharon Hamrick, CPA•CFF, CFE

21. Agenda for Today
• Types of Damages
• Issues in Calculating Damages
• Aspects of Damage Calculations
• Special Case Situations
• Timing Issues
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22. 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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23. 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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24. 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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25. 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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26. 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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27. 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?
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28. Other Useful Information in Damages
Calculations
• General data needed in – Family composition
losses calculations of a – Personal consumption
person: – Funeral, burial, medical
– Education expenses
– Health History – Attendant care and
– Occupational History nursing home expenses
– Income History – Occupational earnings
– Employment capacity of – Earnings growth rates
an unemployed person and interest rates
– Household services
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29. Conditions and Calculations
• Earning Capacity
– Earning capacity is sometimes presented as an
alternative to “expected earnings.”
– Only involuntary reasons for leaving the workforce
affect earning capacity estimates
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30. Conditions and Calculations
• Work Life
– The number of years in the commercial labor force
either working at a job or actively seeking
employment before leaving the labor market
through death or final retirement.
• Work life expectancy
– The average number of years of work life
(employed or seeking employment) that
individuals can be expected to have through their
lives
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31. Conditions and Calculations
• 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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32. Conditions and Calculations
• Loss of Household/Family Services
– Household Services
• These are non-market goods and services that are
produced within households that have similar products
within 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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33. Conditions and Calculations
• 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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34. Conditions and Calculations
• Future Wage Increases
– Caused by several factors
• Inflation
• Increases in productivity
• Merit
• Increased demand for a skill
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35. Conditions and Calculations
• 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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36. Conditions and Calculations
• Personal Consumption and Maintenance
– In wrongful death cases, personal consumption
and maintenance amounts are those that would
have been used by the deceased in using
resources and supplying the necessities of life
– Damage reductions for personal consumption are
applied to calculations
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37. Special and Other Types of Losses to
Consider
• Valuing a Child
– Investment approach to parental loss in the death
of a child
• Determining a child’s occupation
– Would the child attend college?
– Did he/she have an intended occupation?
• Child’s Probability of Completing School Levels
– Based on probability tables
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38. Special and Other Types of Losses to
Consider
• Child’s 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 the
interests of the child
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39. Special and Other Types of Losses to
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 their
income, goodwill, reputation, etc.
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40. Special and Other Types of Losses to
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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41. 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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42. 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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43. 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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44. BUSINESS VALUATION
LITIGATION SUPPORT
TRANSACTION ADVISORY
A Financial Expert’s Overview of Lost
Profits Damages for Attorneys
Inns of Court
Chattanooga, TN
Brent McDade, ASA, CBA•BVAL

45. Agenda for Today
• What are lost profits?
• How to calculate lost profits
• Ex post vs ex ante calculations
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46. The Present Value Equation
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47. Compensatory Damages
Damages sufficient in amount to indemnify the
injured person for the loss suffered.
--Black’s Law Dictionary, 7 ed. abr.
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48. 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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49. Elements of Lost Profits Damages
Claims
• Causation
• Foreseeability
– General damages
– Special or consequential damages
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50. Elements of Lost Profits Damages
Claims
• Causation
• Foreseeability
• Reasonable Certainty
– No undue speculation
– Higher standard for new businesses
• Additional complications for the expert
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51. Elements of Lost Profits Damages
Claims
• Causation
• Foreseeability
• Reasonable Certainty
• Mitigation
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52. 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 any
operating or other expenses
http://en.wikipedia.org/wiki/Profit_%28accounting%29
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53. 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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54. Definition of Profit
Webster’s defines profit as “The excess of revenues
over outlays in a given period of time” and “Excess
of value received for producing, keeping, or selling,
over cost, hence, pecuniary gain in any transaction
or occupation”
“profit” Webster’s Online Dictionary. 2010
http:// www.websters-online-
dictionary.com/definitions/profit
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55. Further Definitions
1 : a valuable return : gain
2 : the excess of returns over expenditure in a transaction or
series of transactions; especially : the excess of the selling
price of goods over their cost
3 : net income usually for a given period of time
4 : the ratio of profit for a given year to the amount of capital
invested or to the value of sales
5 : the compensation accruing to entrepreneurs for the
assumption of risk in business enterprise as distinguished
from wages or rent
"profit." Merriam-Webster Online Dictionary. 2010.
Merriam-Webster Online. 16 April 2010
<http://www.merriam-webster.com/dictionary/profit>
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56. The Definition of Lost Profits
The difference between what you should have
made on whatever transaction or series of
transactions occurred or should have occurred
and what you actually made on whatever
transaction or series of transactions actually
occurred
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57. Five Aspects of Lost Profits
Lost profits are:
1. Net profits
2. Incremental profits
3. But for profits
4. Pretax
5. Reasonably certain
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58. 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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59. 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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60. Methods of Calculating Lost Profits
• Before and After
• Sales Projection
• Accounting for Profits
• Yardstick
• Market Share
• Economic Modeling
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61. Before and After Calculations
• Based on time series data
• Compares profit before bad act to profit after
bad act
• Typically more suited to stable businesses or
contractual relationships
• Did other things change during that time?
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62. 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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63. 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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64. 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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65. 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
Plaintiff’s share?
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66. Economic Modeling Method
• Catch all for other ways of determining lost
sales or lost profits
• How reasonable is the model?
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67. 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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68. 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 therefore
complicated by timing issues
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69. Timing Issues and Lost Profits
• Damage Period
– What is the appropriate period over which the lost
profits should be calculated?
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70. Timing Issues Terminology
• Interest rate – an amount paid for the use of
money 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 that
would induce an investor to take a specific
level of risk
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71. 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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72. Ex Ante Damages
Damages Occurring from Date of Breach into the Future
Discounted to Present Value as of Date of Breach
Prejudgment Interest
(If Applicable)
Date of Breach Date of Trial
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73. 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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74. Ex Post Damages
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
Date of Breach Date of Trial
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75. What Does a Damages Calculation
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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76. What Does a Damages Calculation
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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77. 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
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
ADVISORY SERVICES 77

78. To Contact Us
If we can help you with a case, if you would like
to discuss a case, please contact us.
423.756.7100
billacuff@decosimo.com
sharonhamrick@decosimo.com
brentmcdade@decosimo.com
FORENSIC ACCOUNTING | BUSINESS VALUATION | LITIGATION SUPPORT | TRANSACTION ADVISORY
ADVISORY SERVICES