Forensic & Valuation Services Practice Aid Measuring Damages Involving Individuals

Transcription

1 Forensic & Valuation Services Practice Aid Measuring Damages Involving Individuals Page 1

2 Copyright 2013 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please e- mail with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC Page 2

3 AICPA Practice Aid: Measuring Damages Involving Individuals Notice to Readers This publication is designed to provide illustrative information for the subject matter covered. It does not establish standards or preferred practices. The material was prepared by the AICPA staff and volunteers and has not been considered or acted upon by AICPA senior technical committees or the AICPA Board of Directors and does not represent an official opinion or position of the AICPA. It is provided with the understanding that the AICPA staff and the publisher are not engaged in rendering any legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. The AICPA staff and this publisher make no representations, warranties, or guarantees about, and assumes no responsibility for, the content or application of the material contained herein and expressly disclaim all liability for any damages arising out of the use of, reference to, or reliance on such material. This practice aid supersedes AICPA Forensic and Valuation Services (FVS) Practice Aid 98-2, Calculation of Damages From Personal Injury, Wrongful Death, and Employment Discrimination. Acknowledgments The principal author of this practice aid is Holly Sharp, CPA, CFE, CFF. In addition, members of the AICPA Forensic and Litigation Services Committee, FVS Executive Committee, and Forensic and Litigation Services Damages Task Force provided information and advice to the author and AICPA staff for this practice aid. AICPA Staff Jeannette Koger Vice President Member Specialization & Credentialing Eddy Parker Senior Technical Manager FVS Section Barbara Andrews Manager FVS Section Page 3

4 Chapter 1 Scope of This Practice Aid Overview Damages are succinctly defined in Black s Law Dictionary as [m]oney claimed by, or ordered to be paid to, a person as compensation for loss or injury. fn 1 Damages involving individuals include damages from personal injury (such as an auto accident, premise liability, product liability, or medical malpractice), wrongful death, and lost employment that may be awarded in a lawsuit or other dispute resolution matters. This practice aid provides an overview of the calculation of damages involving individuals with losses from personal injury, wrongful death, employment termination, and employment discrimination cases. Consideration should be given to local requirements, state laws, and other jurisdictional issues that may differ from the general guidance contained in the practice aid. This practice aid discusses the types of engagements, the engagement scope and acceptance considerations, the types of damages, the general approaches to damage estimation, and various specific damage calculations used in lawsuits and disputes involving individuals. This practice aid does not set standards for the performance of such engagements or other litigation services. Litigation, dispute resolution, and forensic accounting services may be provided by a CPA. The CPA may assist in matters that involve a pending or potential formal legal or regulatory proceeding before a "trier of fact" (for example, a judge, jury, arbitrator, mediator, or special master) in connection with the resolution of a dispute between two or more parties. Litigation services are a type of consulting service which may be provided by a CPA acting as a consultant (non-testifying expert) or as an expert witness (testifying expert). The CPA may also serve as a fact witness. The services provided by the CPA may include fact-finding (such as assistance in the discovery and analysis of data), damage calculations, document management, preparation of demonstrative exhibits, expert testimony, and other professional services. Useful Skills for the CPA Useful skills for the CPA in this technical area include familiarity with economic, auditing, and taxation concepts. The CPA performing damage calculations involving individuals generally analyzes financial statements and income tax returns to determine a base to measure lost earnings. Knowledge of individual income taxation is also helpful when taxes must be considered in calculations. Analysis of other relevant data, such as surveys, studies, and economic data, may be used to establish the base to measure lost earnings and other losses. Time-value-of-money concepts are used to calculate prejudgment interest and to discount future amounts to present value. Familiarity with statistics and sampling may be helpful in fn 1 Black s Law Dictionary, 8th ed. (2004), p Page 4

5 the analysis of data and evaluation of the reliability of independent surveys and studies. Computer skills will assist the practitioner in calculation of damages involving individuals; spreadsheet software is commonly used to perform the calculations. The Internet provides many useful information sources for formulating the elements of the damage calculation; however, the CPA should ensure that data obtained from online sources is fact-based and reliable before using as part of the damages calculations. Courts have precluded some testimony by experts using Internet materials. fn 2 Credentials are typically useful to establish skills, education, training, and experience. In addition to the CPA credential, the Certified in Financial Forensics (CFF ) credential is an AICPA credential for CPAs who specialize in forensic accounting. The CFF encompasses fundamental and specialized forensic accounting skills that CPA practitioners apply in a variety of service areas, including the following: Bankruptcy and insolvency Electronic data analysis Family law Valuations Fraud prevention, detection, and response Financial statement misrepresentation Economic damages calculations fn 2 Use caution with websites to ensure that the source is reliable. Websites such as Wikipedia may be edited by anyone with Internet access, and the site warns users against using its contents for research purposes. Courts have found Wikipedia to be an unreliable source of information in Bing Shun Li v. Holder, 400 F. App s 854, 858 (5th Cir. 2010), and Campbell v. Secretary of Health and Human Services, 69 Fed. Cl. 775, 781 (Fed. Cl. 2006). See also Loussier v. Universal Music Group, Inc., , 2005 U.S. Dist. LEXIS (S.D.N.Y. 2005), precluding an expert from testifying about Internet materials. Page 5

6 Chapter 2 AICPA Professional Standards and AICPA Guidance Statement on Standards for Consulting Services No. 1 and AICPA Code of Professional Conduct The consulting standards of Statement on Standards for Consulting Services (SSCS) No. 1 fn 1 and the AICPA Code of Professional Conduct apply to the CPA performing damage calculations involving individuals. Litigation services are classified as transaction services subject to SSCS No. 1 and the professional standards embodied in the AICPA Code of Professional Conduct. Rule 201 of the AICPA Code of Professional Conduct contains the professional competence, due professional care, planning and supervision, and sufficient relevant data requirements that apply to all services performed by AICPA members. fn 2 Rule 202 of the AICPA Code of Professional Conduct establishes standards for client interest, understanding with client, and communication with client. fn 3 SSCS No. 1 sets forth the CPA s communication responsibilities, which provides the client be informed of 1. conflicts of interest that may occur pursuant to interpretations of Rule 102 of the AICPA Code of Professional Conduct, fn 4 2. significant reservations concerning the scope or benefits of the engagement, and 3. significant engagement findings or events. AICPA Publications Various AICPA publications discuss relevant topics such as applicable professional standards, conflicts of interest, communication considerations for consulting engagements, and engagement letters. A conflict of interest fn 5 may occur if a significant relationship could be viewed by any party to the dispute as impairing the practitioner s objectivity in the performance of a professional service. Before accepting a litigation engagement, the CPA generally discloses to the engaging attorney and party to the litigation any situations which may be viewed as conflicts of interest. fn 1 Statement on Standards for Consulting Services No. 1, Consulting Services: Definitions and Standards (AICPA, Professional Standards, CS sec. 100). fn 2 fn 3 fn 4 fn 5 Rule 201, General Standards (AICPA, Professional Standards, ET sec. 201 par..01). Rule 202, Compliance With Standards (AICPA, Professional Standards, ET sec. 202 par..01). Rule 102, Integrity and Objectivity (AICPA, Professional Standards, ET sec. 102 par..01). Rule 102 states, "In the performance of any professional service, a member... shall be free of conflicts of interest." Page 6

7 Chapter 3 Overview of the Law of Damages Involving Individuals Types of Damages Although many types of damages can arise from an alleged loss or injury, the law does not permit recovery in every case or for each element of damages. Rules of causation have been developed to ensure a sufficient connection between the alleged event and the resulting damages. Recoverable damages generally flow naturally from the event in a direct and continuous sequence. Damages deemed too remote to have been reasonably expected are typically not recoverable. The role of the CPA in calculating damages involving individuals often relates to economic losses, or "special damages." Special damages include loss of earnings, fringe benefits, and other income, as well as increased costs resulting from the incident, such as medical expenses and property damages. Special damages may include past losses and future losses. Past losses are measured from the date of the wrongful act, injury, or death to the date of trial or other reference date. Future losses are measured after the date of trial or other reference date and are discounted to present value using an appropriate discount rate. Most courts have found that damages do not need to be calculated with mathematical precision (to the exact penny), but must not be speculative or remote. fn 1 That is, damages should be calculated with reasonable certainty. Because damages are generally recognized to be remedial rather than retributive, the goal is to restore the person to the pre-injury status by calculating a monetary sum sufficient to compensate for the injury. The exception to this rule is punitive or exemplary damages, which are awarded to punish the wrongdoer and deter others from similar behavior. Other types of damages in disputes involving individuals may include "general damages," such as pain and suffering, or "punitive or exemplary damages." General damages include physical or mental impairment and past, present, and future physical pain and suffering. General damages are presumed to have resulted from the nature of the injury, but typically cannot be precisely calculated. Therefore, CPAs would typically not assist with a calculation of the amount of general damages. The CPA may assist with a calculation of amounts related to general damages, such as prejudgment interest. fn 2 Hedonic damages relate to the loss of enjoyment of life and have been held by some jurisdictions as damages in addition to pain and suffering. In this area, a loss calculation attempts to quantify the diminished enjoyment of life caused by the injury. There is considerable debate regarding the calculation of loss of enjoyment of life with no national consensus regarding the application to damages involving fn 1 Black s Law Dictionary, 8th ed. (2004), p "Speculative Damages: Damages that are so uncertain that they will not be awarded. Also termed remote damages." fn 2 The rules for calculation of prejudgment interest vary, depending on the jurisdiction. For additional discussion of prejudgment interest calculation, see Litigation Services Handbook, The Role of the Financial Expert, 5th ed., Chapter 15 by Jeffrey M. Colon, Michael S. Knoll. Page 7

8 individuals. fn 3 The majority of jurisdictions do not allow Hedonic damages. fn 4 The CPA should be aware of the applicable jurisprudence before rendering an opinion in this area. Reasonable Certainty Mitigation The reasonable certainty principle is addressed in many cases fn 5 and is generally found to be met when damages have been calculated using assumptions that are not speculative; however, the calculated damages may be an approximation. References to reasonable certainty in court cases include the following: "Certainty as to the amount [of damages] goes no further than to require a basis for a reasoned conclusion." fn 6 "... the fact of economic loss damages must be proven with reasonable certainty but the amount of the damages need only be proved by a reasonable estimate." fn 7 "The claimant must establish the fact of damages with reasonable certainly, but it is not always possible to establish the amount of damages with the same degree of certainty." fn 8 To increase the likelihood that the CPA s opinion will be considered reasonably certain and accepted by the trier of fact, the CPA should exercise due care in the development of opinions and seek sufficient relevant data to support his or her opinions. The plaintiff in a personal injury, employment termination, or employment discrimination case is expected to mitigate losses by making reasonable efforts to offset losses when possible. The hiring attorney will generally be the source for case-specific considerations regarding mitigation factors. Other experts, such as vocational rehabilitation experts, may provide mitigation factors. An offset will generally apply for amounts the plaintiff earned, will earn, or could have earned during the loss period. fn 3 For example, see "The Misapplication of the Hedonic Damages Concept to Wrongful Death and Personal Injury Litigation," by Thomas Harvilesky, Journal of Forensic Economics, Vol. 6, No. 3, Summer, 1993, pp ; "The Flawed Hedonic Damages Measure of Compensation for Wrongful Death and Personal Injury," by W. Kip Viscusi, Journal of Forensic Economics, Vol. 20, No. 2, 2007, pp ; and "Hedonic Damages One More Time: A Symposium," by Peter Marks and Thomas R. Ireland, Journal of Forensic Economics, Vol. 20, No. 2, 2007, pp fn 4 For example, see James Bailey et al. v. Nyloncraft, Inc., USDC for the Eastern District of Michigan, So. Division, Case No , decided August 28, fn 5 9). fn 6 fn 7 fn 8 Robert L. Dunn, Recovery of Damages for Lost Profits, pp (6th ed. 2005), pp (SUPPLEMENT March 2013, pp. 4- Palmer v. Connecticut Railway & Lighting Co., 311 U.S. 544, 561 (1941). Hill v. Republic of Iraq, 328 F.3d 680 (D.C. Cir. 2003). Ameristar Jet Charter, Inc. v. Dodson International Parts, Inc., supra, 155 S.W3d at 55. Page 8