Recovery of Damages for Lost Profits: Can Forensic Accounting Help?

The recovery of damages for lost profits can be a daunting task for any business or owner. Whether the losses were a result of a breach of contract, negligence, or another disruptive event, the financial impact of the loss of expected profits can be severe and often far-reaching, and the recovery process is by no means straightforward. It will involve intricate financial analysis, a thorough understanding of legal requirements, and the ability to prove a direct and causal link between a loss incurred and the actions of another party. For firms and directors facing these challenges head-on, the stakes are, more often than not, incredibly high, and the margin for error is slim. 

What if there was a way you could navigate this extremely complex terrain with greater confidence and precision? This is where forensic accounting comes in — a specialised field that merges financial expertise with investigation skills. An experienced forensic accountant could be the key to unlocking a successful outcome for your case, leading to damages being returned to you. This is a result of forensic accountant’s offering not only the technical skills needed to unlock a successful claim, but also quantify losses, as well as present as compelling a case as possible. 

In the sections that follow, we’ll explore how forensic accountants can play a pivotal role in the recovery of damages for lost profits — and how they can turn an overwhelming, highly stressful process into one that’s not only more manageable, but also more ‘winnable’.

Key Challenge With Recovery of Lost Profits Damages

From challenges by the accused party, to the fact that causation must be established before anything can be done, and that speculation will be part and parcel of the process, the recovery of lost profits is a highly complex and extremely challenging process — one that requires meticulous attention to detail from the outset and throughout. 

If these, and any other issues that come up, are not handled and prepared for correctly, the chance of your claim’s success can be impacted. Ultimately, it’s the understanding of these challenges that marks out the successful navigation of recovery. A selection of the most common key challenges that come with the recovery of damages for lost profits includes the following: 

Causation Must be Established 

One of the major hurdles when it comes to the recovery of damages for lost profits, is the establishment of a direct causal link between the actions of the defendant and the financial loss suffered by the business.

It isn’t just enough to show that profits were, in fact, lost and claim that they were the fault of the defendant. You, as the claimant, will instead need to prove that these losses were a direct result of the actions of the defendant. This will require a careful unravelling of the chain of events leading up to, during, and after the disruption, as well as consideration to other factors that could have affected performance. Examples include:

• Conditions of the market 
• Issues internally 
• Times of economic downturn 
• Shifting consumer interest

Accurate Quantifying is Essential 

Quantifying the damages for lost profits will require a precise and accurate analysis of all the available financial data. Unfortunately, this is much easier said than done as the availability of these historical records can, at times, be scarce, incomplete, inconsistent, or hard to interpret or even read. 

These complications will make it that bit harder to establish a baseline for expected profits. 

Speculation Will be Involved 

The process will always come with some level of uncertainty. This is because, in order to estimate expected and future levels of profit, some speculation will be required, no matter how much preparation you do and data you acquire. 

Courts can be cautious when it comes to awarding damages based on speculation or projections, making it even more important that your estimates are based on as solid evidence as possible, using industry standard methods, and are presented in as clear and compelling a manner as possible.

 

Jurisdiction Questions 

The simplicity of recovery of damages for lost profits can significantly vary depending on the jurisdiction of the case in question. Different courts and different countries will have varying thresholds when it comes to the types of evidence accepted, the level of proof required, and more. 

To navigate these various legal nuances, you will need a professional on your side with a deep understanding of not only financial analysis and loss of profit cases, but also the relevant legal framework.

Right to Challenge 

In lost profit cases, as with virtually all commercial disputes, the accused party is expected to challenge the accusations and calculations of the claimant. This can include questioning the methods used to calculate profits lost or arguing the circumstances behind the loss. Regardless of what aspect is under scrutiny, you need to be prepared to defend your case using legal precedence, knowledge, and if possible, experience. 

How a Forensic Accountant Can Assist With Recovering Damages for Lost Profits 

A forensic accountant can play a key role in the recovery of damages for lost profits. Their expertise when it comes to financial analysis, investigation, and litigation support makes them an invaluable cog in the process of quantifying losses, establishing causation, as well as presenting vital evidence during legal proceedings. 

Here’s how a forensic accountant can assist with the complex process of recovering damages for lost profits: 

Support Quantifying Lost Profits 

One of the primary tasks for a forensic accountant in the recovery of damages for lost profits is to assist in accurately and efficiently quantifying the total damages for lost profits a business has accrued. This will involve a few steps, including: 

• Financial Analysis: Forensic accountants will be able to review a company’s historical financial records in order to establish a baseline of what profits would have been if the inciting incident hadn’t occurred. This analysis should act as a foundation for which the case should be based. 
• Project Future Profits: An expert will be capable of utilising financial modelling techniques in order to also estimate what future profits would have been. In practice, this process will involve the projection of revenue, costs, market conditions, etc. critical for determining profits lost.  
• Utilise Industry Benchmarks: Forensic accountants may look to compare the business’s performance against industry benchmarks for firms of a similar size. This can be incredibly useful in validating projections and ensuring that any and all calculations made are rooted in reality. 

Assistance Establishing Causation

Finding some proof that the defendant’s actions were a direct root cause for the damages is vital in any legal claim. Forensic accountants will be able to help with the following: 

• Tying Losses to the Incident: The best way of demonstrating a clear connection between the disrupting incident and the damages is to isolate the financial harm caused by the actions of the defendant from any other unrelated factors where blame could be apportioned. 
• Eliminate Alternative Explanations: By conducting a thorough, in-depth investigation, experts, such as a forensic accountant, will be able to rule out any other potential causes for the damages: thus keeping the onus on the defendant and strengthening the armament that the loss was a direct result of their actions. 

Experience With Gathering and Presenting Evidence

A key part of the role, forensic accountants are highly skilled at collecting and analysing financial data as well as presenting complex information in a clear, understandable manner. This is a major reason these professionals are so invaluable in supporting claims of recovery of damages for lost profits. Areas forensic accountants can assist to this end include: 

• Compile and Provide Comprehensive Documentation: For a case that covers as many bases as possible, a detailed report will be required. This report should include methodologies utilised to calculate profits lost, relevant financial data, as well as any assumptions or projections used. This documentation will be key in court. 
• Provide Expert Testimony: During the legal process, it may be necessary for a forensic accountant to step up and act as an expert witness. Expert witnesses will present any findings they have in a clear and persuasive manner — one that everybody can understand — so the judge present will be able to more clearly understand the basis and root of the claim.
• Respond to any Challenge: Scrutiny may come during the legal process. The forensic accountant will be able to defend their findings, analysis, and methods against any such scrutiny. This is vital if you want your claim to remain credible.

Offer Assistance in Settlement Negotiations

In addition to offering support in gathering evidence and in court, forensic accountants can also be instrumental in the process of settlement negotiations, should that be necessary. Their financial analysis can do the following: 

• Offer a Base: Without clear and precise information regarding the financial stakes at play and the total damages, the negotiation process can become much more muddled. The work of a forensic accountant can make settlement more productive.
• Support Decision Making: Forensic accountants can advise legal teams on the strengths and weaknesses of their case. This can be excellent in supporting informed decision making at all stages in the process.

Forensic Accounting Support You Can Rely on

At Inquesta Forensic, we understand the complexities and challenges involved in the recovery of damages for lost profits. Our highly experienced team of expert forensic accountants are equipped with the knowledge and tools necessary to help you successfully navigate this intricate and highly stressful process. 

From accurately quantifying losses, to providing expert testimony in court and beyond, we are committed to supporting you every step of the way. If your company is dealing with the financial fallout and damages of lost profits, it’s not recommended that you leave your odds of recovering damages to chance. 

Get in touch with Inquesta Forensic today and let us help you build a strong, evidence-based case to maximise your chances of reaching an outcome that you can consider successful.