In many commercial damage cases, there is a need to create the “but for” world – essentially a model that analyzes the financial implications of what would have happened “but for” an alleged bad act. In situations where the expert analyzes the “but for” world, they will invariably need to assess and apply assumptions.
Assumptions that experts typically consider may include:
- The performance of the parties, but for the bad act
- The volume of product that would have been sold, but for the bad act
- The growth, if any, in sales volume and price, but for the bad ac
- The plaintiff’s operational and financial capacity to meet the sales volume, but for
the bad act
- The incremental expenses applicable to the lost sales
- The length of the damage period, including whether it might extend through any
potential contract renewal period
When a Certified Public Accountant (CPA) considers how to evaluate and apply assumptions like those just discussed, they ultimately follow the professional standards that are applicable to CPAs who perform damage analyses, specifically:
- Exercise due professional care by critically analyzing the assumptions made to determine if the assumptions make sense. This may entail evaluating the assumptions in light of historical financial results or industry information.
- Base the assumptions on sufficient, relevant and objective data. In other words, is there support for the assumptions that are made?
- Have a conversation with counsel and the client about what can or cannot be done with respect to the assumptions that underpin the calculation.
The creation of a “but for” damage world requires the application of assumptions to model out what would have occurred “but for” an alleged bad act. Assumptions, however, cannot be applied blindly. As CPAs providing damage analyses services, the expert has a professional duty to critically evaluate the assumptions that are used, and to ensure that those assumptions are based on sufficient, relevant and objective data, all with an eye toward putting forward objective damage analyses that are the function of reliable principles and methods.