2005 CTCW Annual Conference August 11, 2005 CSI by Numbers: Forensic Accounting in Litigation Curtis J. Reynolds, CPA David C. McCormack, Esq. Peters & Associates, SC McCormack Law 2005 CTCW Annual Conference August 11, 2005

Overview Role & Use of Accountants Types of Assignments (Cases) When to Engage Red Flags/Triggers Documents Reviewed by Accountants Case Study Summary

Role & Use of Accountants Expert Calculation of damages Evaluation of damages claim Consultant Recommendations for discovery Deposition prep Cross examination prep

Types of Assignments Personal Injury Wrongful Death Wrongful Termination

Types of Assignments (Continued) Business Valuation/Financial Review Misrepresentation of Value/Income Dissolution Divorce Financial Motive for Arson

Types of Assignments (Continued) Breach of Contract/Contract Dispute Non-Compete Assisting Competitors Failure to Perform Malpractice/Negligence Failure to Pay as Agreed Overcharge for Products/Services

Types of Assignments (Continued) Economic Losses Caused by Physical Damage Fire Water Damage Faulty Construction Faulty Equipment Subrogation Pursuit and Defense

Types of Assignments (Continued) Economic Losses Caused by Faulty Product Product Recall Food Contamination Faulty Part or Manufacturing Component Faulty Equipment

When to Engage Early On Late in the Game Pre-Litigation Recommendations for Discovery Requests Prep for Depositions Late in the Game After Receipt of Opposing Expert Report Minimize Client Expense???

(Signals to trigger involvement of accountant) Red Flags (Signals to trigger involvement of accountant) Damage calculation based on sales with no provision for saved expense Damage calculation based on budgets/projections without consideration for historical performance Damages claimed while business was historically operating at a loss Lack of historical data (recently formed business, or damaged documents) Insufficient supporting data Large volume of supporting data/documents Opposing expert (CPA, Economists, Voc Rehab) to opine on economic damages

Documents Reviewed by Accountants Pleadings (Complaint, Interrogatories) Depositions and Exhibits Expert Reports Contracts Income Tax Returns (with supporting schedules) Financial Statements (annual and/or monthly) Quarterly Payroll Tax Returns, W-2s, W-3s Payroll Registers Sales Tax Returns, Customer Invoices, Sales Reports Production Reports Invoices for Purchases Made, Inventory Records Credit Card Statements/Bank Statements

Case Study Background Property damage case Plaintiff - chiropractic clinic Defendant – public utility company Complaint charges defendant with causing damage to underground pipe when installing buried telephone line Claimed economic losses caused by water damage to building/contents

Case Study (Continued) Claim Cost to repair building $111,853 Loss of business profit 70,374 Loss of goodwill 26,089 Cost of temporary relocation 35,000 Costs previously incurred 11,335 Damage to personal property 1,870 TOTAL CLAIMED DAMAGES $256,521

Case Study (Continued) Accountant Retained Complaint filed 11/15/02 Curt Reynolds retained on 3/1/04 Assignment: review damages claim of plaintiff prepare expert report provide trial testimony

Case Study (Continued) Role of Accountant Review pleadings and deposition transcripts for pertinent facts Analyze revenue trends using monthly productivity reports and tax returns Determine variable cost ratios using tax returns Research property values (real and personal) Review and opine on expert reports Prepare report and exhibits Provide trial testimony

Case Study (Continued) Role of Accountant Cost to repair building Loss of business profit Loss of goodwill Cost of temporary relocation Costs previously incurred Damage to personal property

Case Study (Continued) Claim Results Cost to repair building $111,853 $65,000 Loss of business profit 70,374 0 Loss of goodwill 26,089 0 Cost of temporary relocation 35,000 0 Costs previously incurred 11,335 0 Damage to personal property 1,870 225 TOTAL $256,521 $65,225

Comments & Questions