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Damages Calculations and Defense Against a Damage Model

Damages Calculations and Defense Against a Damage Model. Vincent J. Love, CPA/CFF, CFE. Topics. Ethics Considerations Damages Defending Against Damage Models Valuation Services—Malpractice Claims. Ethics Considerations. General Standards Independence Integrity Objectivity

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Damages Calculations and Defense Against a Damage Model

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  1. Damages Calculations and Defense Against a Damage Model Vincent J. Love, CPA/CFF, CFE

  2. Topics Ethics Considerations Damages Defending Against Damage Models Valuation Services—Malpractice Claims

  3. Ethics Considerations General Standards Independence Integrity Objectivity (Special Report 08-1: Independence and Integrity and Objectivity in Performing Forensic and Valuation Services)

  4. General Standards Professional Competence Due Professional Care Planning and Supervision Sufficient Relevant Data

  5. Credentials The Professional Competence Requirement of the General Standards Requires That a Member, or the Member’s Firm, Only Undertake Those Engagements That They Can Reasonably Expect to Complete With Professional Competence

  6. Credentials

  7. Statement of Standards for Valuation Services SSVS No. 1 Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset Due Professional Care

  8. Planning and Supervison Adequately plan and supervise the performance of professional services

  9. Independence Ethics Interpretation No. 101-3 Addresses Valuation Services for Attest Clients Okay to be the expert for a Large Group of Plaintiffs or Defendants (Attest Clients 20% of the Group, is Not the Lead, or Does Not Makes Expert Retention Decisions) Cannot Do Valuations for Attest Client if Results Are Material and Involves a Significant Degree of Subjectivity Cannot be an expert witness for an Attest Client

  10. Integrity and Objectivity Be Free of Conflicts of Interest Do Not Knowingly Misrepresent Facts Do Not Subordinate Your Judgment to Others

  11. Damages

  12. The Key to Damages Damages Must Be Calculated from Evidence, and Evidence Must Vary from Case to Case (Dan Dobbs, Remedies—Damages, Equity, Restitution) Although Themes Recur, No Two Cases Are Exactly Alike

  13. Compensatory Damages Dollar Damages Intended to Compensate an Injured Party for His or Her Loss. Their Purpose Is to Make the Plaintiff Whole by Compensating for Actual Losses or for Lost Expectancies.

  14. Damages Factors General Damages Special Damages Mitigation

  15. General Damages The value of the promised performance is often referred to as "general" damages. This will usually be its economic or fair market value.

  16. Special Damages “Incidental” and “Consequential” Losses Resulting From the Alleged Wrongful Act, e.g., Added Costs, Lost Profits, etc.

  17. General vs Special Damages Special damages are subject to stricter proof and causation requirements than general damages. **** This is because the law views general damages as arising naturally from the defendant's breach, while special damages are unique to the plaintiff's particular situation.

  18. Restitution Damages Damages awarded to prevent the "unjust enrichment" of the defendant. An alternative to compensation damages, restitution damages are defined as the value of the benefits that the plaintiff conferred on a breaching defendant.

  19. Restitution Damages Valuing the Asset in the Hands of the Defendant Constructive Trust Recission

  20. Three Basic Damages Limitations Causation Certainty Remoteness, Proximate Cause

  21. Causation Causation, simply put, means that the special damages must have been caused by the defendant's actions and not by other factors.

  22. Certainty Certainty, discourages speculation or conjecture and requires that assumptions and projections must have a “reasonable basis.”

  23. Remoteness, Proximate Cause Remoteness, the third limit, requires that special damages were reasonably "foreseeable" at the time the agreement in question was made.

  24. Selecting a Remedy The Attorney Must Advise the Expert as to The Legal Theory or Approach that Best Fits the Substance of the Case The Expert Advises the Attorney of Differences in the Amount of Compensation Using Differing Remedy Approaches The Combined Knowledge of the Lawyer and Expert Is Used to Devise an Overall Approach

  25. Defending Against Damage Models Were the Damages Caused by the Defendants’ Actions Are the Damages Calculated with Reasonable Certainty Are the Damages Too Remote from the Defendants’ Actions

  26. Valuation Specific Critique of Damages

  27. Building a Sustainable Model Know the Case, Understand the Law Know the Economy, Industry, Business The Economy The Industry Size and Growth Potential Barriers to Entry Competitors Critical Factor(s) for Success

  28. Building a Sustainable Model The Industry Size and Growth Potential Barriers to Entry Competitors Critical Factor(s) for Success Maturity Conditions of the Market Price Sensitivity of the Product or Services

  29. Building a Sustainable Model The Business Capacity Capital Historical vis-à-vis Prior Predictors (Budgets, etc.) Competition Special Considerations

  30. Building a Sustainable Model Know the Numbers! Keep It Simple Be Reasonable Consider the Business Situation as a Whole

  31. Professional Malpractice Claims You are not immune from claims of professional malpractice when issuing valuation reports for use outside of litigation

  32. Case Study 1 CPA Firm Provides Services to a Family Owned Business Death of One of the Original Founders CPA Does Business Valuation to Establish Interest of Deceased Plaintiffs Claim Valuation Overstated True Value of Firm Sons of the Decedent Received Excessive Distribution on Redemption of Stock Liability to Employees’ Union Not Recorded Plaintiffs’ Expert Testified That the CPA’s Work Did Not Meet Professional Standards Plaintiffs Claimed Damages of $500,000

  33. Case Study 1 - Result Parties Agree to Mediation and the Case Settled for $150,000

  34. Case Study 2 Long Standing Client of CPA Firm Hires CPA to Assist In Acquisition of a Business Prepares Forecasts, Budgets, etc for Business to be Acquired and Values Inventory, Among Other Assets Acquired Company Fails Shortly Thereafter Plaintiff Sought $2,000,000 in Lost Profit Damages and $1,400,000 Related to Lost Option to Purchase Real Estate

  35. Case Study 2 - Result After Numerous Settlement Conferences, the Case Settled for $350,000 and $230,000 Was Paid in Defense Costs

  36. Managing Malpractice Risks Client and Engagement Acceptance Practices Compliance with Professional Standards, Rules and Regulations Issuing a Customized Engagement Letter Documentation of Judgments

  37. Questions Comments

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