There are many ways a business can suffer losses due to illegal activity. Your warehouse could be robbed at gunpoint, your Chief Financial Officer could embezzle funds, or employees could walk your supplies out the door and sell them on eBay. Those are criminal acts, and upon conviction a defendant could be ordered to pay restitution. But there are other types of unlawful acts that are not criminal and produce losses that are not readily ascertainable. For these types of malfeasance, a team of forensic accountants can help you calculate your damages, so you can take legal action to recover completely from your losses.
Let’s take an example of a business tort, which is an illegal act that inflicts harm on a business. Suppose a trusted employee decides to leave your employ and takes some of your company’s vital trade secrets. He takes your client list, your list of suppliers, and your business processes and goes to work for your fiercest competitor. Within months, your sales have plummeted, you’ve lost key accounts, and your supply chain has been interrupted.
Putting two and two together, you conclude your former employee took your proprietary information and disclosed it to your competitor. What your employee did is illegal and if your competitor had reason to believe the information constituted a trade secret, accepting the information is unlawful as well. You have cause to sue, but can you recover damages? If so, what exactly are your damages?
A recent article by Thomson Reuters explained the methods financial experts use to calculate a company’s economic damages. These include:
- Before-and-after calculations — You are entitled to the difference between what your revenues were before the tortious behavior and after. A forensic accountant would look at “the company’s operating trends: and past performance.” The damages would “equal the difference between expected and actual performance.”
- Yardstick approach — This technique compares the damaged company’s performance to “external sources,” such as “publicly traded comparables or industry guidelines.” This method assumes “the company’s performance would have mimicked that of its competitors if not for the tortious act.”
- Sales projection — When a company is a startup or has a “limited operating history,” experts rely on. “forecasts of the company’s expected cash flow.”
The parties to the lawsuit often dispute the choice of valuation method, making their case on the specific circumstances. The damaged company also has a duty to take reasonable steps to mitigate damages. A company that has done nothing to mitigate may find their damage award reduced as a result. Finally, in our example, the damaged company must also sue for injunctive relief, which would be a court order that forbids the defendants from using the stolen trade secrets. Records of that information must be returned to the damaged company or destroyed.
Contact Breon & Associates in Harrisburg and Williamsport
At Breon & Associates, our team often performs forensic accounting services to support civil litigation. We appear as expert witnesses to explain the data and the basis for our conclusions. With offices in Harrisburg and North Central PA, Breon & Associates provides business, accounting and tax services throughout Pennsylvania. Call us at 1-888-516-8476 or 717-273-8626, or contact one of our offices online to schedule an appointment.
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Harrisburg, PA 17101
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Ephrata, PA 17522
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