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What Does “Sufficiency of Analysis” Mean for Testimony on Future Profits?

A forensic accounting firm’s pretrial process must always account for the weak points in its analysis. It’s a rare case where a client’s data leaves no doubt at any stage of the forensic examination. “Most often an accountant must rely upon well-established methods to bridge gaps, develop projections, and craft reliable testimony regarding contingent facts,” said HSNO partner, Chris Money. “One facet of this process involves anticipating counterparties’ objections to the accountant’s expert testimony on grounds that it is based on insufficient analysis. This often comes up when forensic accountants testify regarding a business’s lost profits.”

When a plaintiff business claims damages for lost profits, the accounting analysis often hinges on a mixture of the business’s historic earnings and projections about future growth. The newer a business is the less likely it is to have reliable historical data to support its claims. A forensic accountant works with the client to develop a testable model of future earnings. Under Rule 702 of the Federal Rules of Evidence, the accountant’s testimony regarding future profits must have a basis in sufficient analysis. Courts have articulated a number of important points they use to determine the sufficiency of analysis, including the following:

  • Evidence necessary to show future profits with reasonable certainty depends on the circumstances of each individual case. While absolute certainty is not required, the court or jury must be guided by some rational standard in making an award for loss of future profits. Chung v. Kaonohi Center Co., 618 P.2d 283, 291 (Haw. 1980).

 

  • Courts consider a range of factors when evaluating the underlying analysis of a damages calculation for a new business’s future profits. Key to this question are factors that speak to the likelihood of the business’s future success, such as general business conditions and the performance of similar firms. Other tools that may go toward the sufficiency of analysis include market surveys, economic and financial data, records of similar firms, and other financial data. Kids’ Universe v. In2Labs, 95 Cal. App.4th 870 (2002).

 

  • Multiple analyses can be used to establish the sufficiency of analysis. In DaimlerChrysler Motors Co. v. Manuel, No. 02-07-00299-CV (Tex. App. 2012) the plaintiff established lost profits from a car dealership that wasn’t allowed to open for a year using testimony from a CPA and an economist, DaimlerChrysler’s online manual, and profit and expense records from the plaintiff’s other dealership in a nearby town. Experts testified as to the comparability of the two dealerships, emphasizing the common ownership and management as significant factors. The plaintiff was allowed to rely upon a “planning potential” developed by the manufacturer to establish an estimate of the number of cars the dealership would have sold. This estimate, though not verified by experts, was confirmed through DaimlerChrysler’s employee testimony to be based upon extensive market research. The experts’ damages model was tested in part by comparing the gross profit per unit sales for other area dealers.

As these examples show, “sufficiency of analysis” is a complex question involving numerous layers of factual enquiry. HSNO develops its expert testimony in coordination with client counsel to ensure that each step of its analysis anticipates potential. Our experienced team works with client counsel to ensure that each stage of the forensic analysis is documented, verifiable, and will meet the court’s standards of sufficiency. Contact us today to start the discussion of how HSNO can best serve your business’s needs.