If you’ve lost revenue due to business disputes or an interruption of usual operations due to the actions of a third party, you’ll naturally want to ensure you’re fully-compensated for the financial upheaval brought upon you. This is where a forensic accountant comes in.
Accurately calculating damages for loss of profits is crucial to claiming back what’s rightfully yours, however it’s not as straightforward as you might think — as we’re about to discover.
Join us as we delve into this complex topic, exploring the key criteria for claiming lost profits damages, the challenges involved in the process, and how forensic accountants will play a pivotal role in quantifying the damages and ensuring you are protected and your financial future is as secure as possible.
Understanding Lost Profits Damages
Lost profit damages refer to any revenue a business would have earned under normal circumstances that they did not receive due to either the wrongful actions of another party or circumstances out of their control. Claiming damages for loss of profits involves clearly demonstrating the link between the losses incurred and the actions of the accused.
To establish a fair and effective claim for damages due to loss of profits, certain criteria must be met. This includes:
- Breach of Duty: The claimant must be able to prove that the defendant caused damages by way of breaching a duty owed to them. This is only relevant in cases of breaches of contractual duty or duty of care.
- Foreseeability: The lost profits claimed must have been reasonably foreseeable at the time of the incident. This means that there must be a ‘reasonable degree of certainty’ that profits would have been earned but for the offending act.
- Causation: There must be a direct link between the defendant’s actions and the claimant’s lost profits. Proving causation will likely require thorough analysis of the circumstances and the finances of the company in question.
- Mitigation: In order for the claim to be legitimate, the claimant must have acted upon their fiduciary duty to mitigate losses by taking reasonable steps to mitigate financial arrears. A failure to mitigate could limit the amount of lost profits damages awarded.
When Can I Claim Damages for Loss of Profits?
You can claim damages for loss of profits whenever you’ve incurred any financial losses as a direct result of somebody else’s wrongful actions. This can include a person breaching their contract, infringing on your intellectual property, committing acts of fraud or misrepresentation, negligent actions, and more.
Here are some of the most common scenarios in which you may be able to claim lost profits:
- Breach of Contract: When a party fails to fulfil their obligations, resulting in financial harm to your business. This can include suppliers, service providers, and customers.
- Tortious Interference: A third party intentionally interfering with your business relationships or contracts, affecting your profits.
- Negligence: Negligent actions resulting in you suffering economic harm.
- Infringement of Intellectual Property: Somebody unlawfully using your IP (trademarks, copyright, patents, etc.) resulting in financial losses.
- Fraud: Financial losses caused by another party’s fraudulent or deceptive behaviour.
- Business Interruption: A period of inactivity where your business cannot operate due to something out of your hands.
It’s important to note that the specific requirements for claiming lost profits damages may vary depending on the jurisdiction and the nature of the legal claim. Consulting with a legal professional experienced in commercial litigation or business disputes can help you determine whether you have a viable claim for lost profits, and how best to pursue compensation. Additionally, for more information about causes for a legitimate claim for lost profits, view a section in our blog.
Top Four Challenges in Lost Profits Damages Calculation
From market uncertainty affecting the predicted amount owed, to hard to find data, and the presence of hypotheticals in the process, there are a number of major factors that will contribute to the complexity of the task of calculating damages for loss of profits.
The four main challenges in lost profits damages calculation are:
- Uncertainty: Predicting future and expected profits with absolute certainty is inherently challenging, if not impossible. This is particularly true in industries that are subject to market fluctuations or other external factors that could affect business, and in turn profitability, for any period of time.
- Availability of Data: In order for you to accurately quantify lost profits, you might require access to detailed financial records and other relevant data (profit and loss statements, customer/inventory records, etc). The problem comes when this data isn’t readily available — particularly if the company in question had a shaky history of document storage.
- Dealing in Hypotheticals: When it comes to assessing lost profit damages, determining the claimant’s financial position ‘but for’ the incident in question becomes necessary. This involves creating a ‘counterfactual scenario’ based on hypotheticals and assumptions. Yet, relying on such assumptions can introduce uncertainty and challenge the reliability of the assessment. As a general rule, businesses should look to steer clear of engaging in hypotheticals.
- Expertise Necessary: Assessing damages for loss of profits claims will likely require specialised knowledge. Without expert input, calculations may lack accuracy, credibility, and be unable to withstand scrutiny.
The Role of Forensic Accountants in Calculating Damages for Loss of Profits
Forensic accountants play a crucial role in the litigation process, including when it comes to cases involving damages for loss of profits. Their expertise in thorough financial analysis, accurate interpretation of data, and key forensic techniques enable them to:
Investigate and Analyse
You can expect a forensic accountant to conduct a thorough investigation into the financial records of your business. This will involve scrutinising financial statements, contracts, invoices, receipts, etc. in order to better understand the nature and extent of the loss.
Identify Losses
A forensic accountant should have extensive experience when it comes to following trails of money. This skill is vital for identifying the various different losses incurred.
Loss of profits can vary from decreased sales, increased expenses, lost opportunities, damaged reputation, and beyond, so having somebody comfortable juggling such figures and costs is vital.
Calculate Damages
Forensic accountants will be able to accurately calculate the damages suffered by your business as a result of the loss of profits.
This will require them to utilise key accounting principles and methodologies in order to determine the value of the losses incurred.
Assess All Mitigating Factors
Assessing mitigating factors in the calculation of damages for loss of profits is crucial. It ensures accuracy in determining the extent of the loss, fulfils legal obligations by evaluating whether your business took reasonable steps to minimise the impact of the breach, evaluates the effectiveness of decisions made to mitigate loss, and strengthens the defensibility of damages calculations.
Provide Evidence
In legal proceedings, forensic accountants will often give evidence as an expert witness. This is a common practice to support and give greater weight to calculations and findings.
They may be called upon to explain their findings, methods used, and assumptions made, in order to help relevant parties to better understand the financial aspects of the case.
Document and Report
Usually the final stage in the process, forensic accountants will be tasked with preparing detailed reports to document their findings, calculations, and ultimately their conclusions.
These reports will act as crucial evidence in legal proceedings and should act as a clear, transparent, and accessible explanation of the damages suffered by your business.
Inquesta Forensic: Your Partner in Navigating Damages for Loss of Profits
During times of significant business disputes or disruptions, the accurate calculation of damages for loss of profits becomes paramount if you’re to have any hope of weathering the storm and reclaiming lost funds owed to you.
At Inquesta Forensic, we recognise the critical importance of this process for business owners, and stand ready to assist them in navigating the complexities of quantifying their losses.
Our team of experienced forensic accountants is adept at conducting thorough and organised investigations into financial records, scrutinising contracts, invoices, and any other pertinent documents in order to uncover the true extent of financial harm suffered. By doing so, we provide a comprehensive assessment that forms the foundation for effective recovery strategies.
Moreover, our expertise extends far beyond simply identification of losses. Utilising advanced accounting principles and methodologies, we can accurately calculate damages, ensuring that our clients receive fair compensation for their setback.
If you’re faced with the daunting task of recovering funds lost due to wrongful/unforeseen circumstances, you can rely on Inquesta Forensic for unparalleled expertise and support. We offer tailored solutions designed to meet the unique needs of each client across a wide variety of forensic accounting services. Get in touch with a member of the team today and find out more about just how we can help you.
