Financial Forensics and Litigation
Financial Forensics and Litigation tests the use of financial analysis in disputes: quantifying economic damages, establishing causation, and presenting expert evidence that survives admissibility challenges. The focus is the but-for world, not merely historical losses.
Core rules and concepts
- Damages must be tied to a legal claim and measured with reasonable certainty; speculative or unsupported projections are excluded.
- Lost profits equal lost incremental revenue minus avoided costs, adjusted for mitigation and discounted to present value.
- Business interruption claims often use before-and-after or comparable-business models; avoid double counting saved costs and lost revenue.
- Intellectual property disputes require an apportionment analysis so only the contribution of the protected asset is compensated.
- Expert testimony in federal court is governed by FRE 702 and Daubert; some state courts still use Frye. The expert must be qualified, use reliable methods, and apply them to the facts.
- The report should separate facts, assumptions, and opinions; preserve workpapers; and disclose reliance on management representations.
- Litigation support differs from testifying expert work: consulting experts may be protected by privilege, testifying experts generally are not.
Worked example
A supplier breach eliminates expected annual revenue of $1.2 million. Variable costs are 60% of revenue, or $720,000, and incremental fixed costs are $150,000, so but-for profit is $330,000. The plaintiff mitigates $30,000, leaving $300,000 per year for three years. Using a 10% discount rate, the three-year annuity factor is 2.4869, giving damages of about $746,000.
Traps
Awarding lost revenue instead of lost profit; ignoring mitigation or avoided costs; using hindsight not available at the breach date; applying a discount rate inconsistent with the cash-flow basis; and offering legal conclusions rather than financial opinions.