AREcon

LITIGATION

A substantial portion of AREcon's accounting, financial, economic and market-related consulting work is performed directly or indirectly in the context of litigation or other legal/regulatory proceedings. Jason Bass, CPA, CFA, President of AREcon, has been in court, arbitrations, mediations, hearings, negotiations and depositions on many occasions both supporting other experts relying on his work for their opinions or as a designated expert himself. From all of the associated analyses he has performed and all that he has observed and heard from colleagues, attorneys, opposing experts and even jurors, Jason has developed some very strong, experienced-based perspectives on how to be an effective expert. These “rules” or perhaps better referred to as “best practices,” are largely grounded in common sense. However, time and again Jason has seen experts violate them in one way or another to their clients’ detriment.

The following summarizes the highlights of some of these best practices:

Tell a Good Story

Much of the time accounting, finance and economic experts go straight to the math or their answer without telling the underlying story. What is meant by story is not a fireside chat but a comprehensive narrative that logically connects the relevant events to the quantification of monetary damages or other of an expert's opinions. This is critical to success as an accounting, finance or economics expert (and an expert in general) both in terms of thoroughness of analysis and effectiveness of testimony -- technical precision/effectively communicated.

Keep it Simple

Frequently in litigation work the technical analyses required to get to an answer can be quite complicated. One such situation involves lost profit assessments which among its many facets, often requires that the subject enterprise’s historical operating costs be broken down between their fixed and variable components.

• Fixed costs are those costs that do not change regardless of an enterprise’s level of business activity. For example, a retail clothing store operator may pay a set dollar amount of rent per month to lease his/her shop space and must pay this rent regardless of whether the store makes one sale, a hundred sales or one thousand sales in a particular month.
• Variable costs are those costs that vary with the level of an entity’s business activity. Using the same retail store example, the wholesale cost of the clothes that are sold represent variable costs as they depend on the volume of sales generated if the store makes one sale, the cost of clothes incurred by the store may be for a couple of items if it makes 100 sales then the cost of clothes may be for several hundred items, etc.

The above are simple examples of line-item operating costs that may fall neatly into either the fixed or variable categories. However, with many business line-item operating costs the fixed versus variable components are not so easily isolated.

When estimating lost profit damages the calculus typically starts with an assessment of the lost business activity incurred by the claimant, then an estimate of the revenues associated with that lost business activity (i.e., estimated lost revenues) and finally the estimated costs that would have been incurred to generate those revenues (and thus, are avoided), which are subtracted from the estimated lost revenues to derive estimated lost profits. The latter are most often comprised of variable costs alone as the fixed costs of the business would not be expected to be any different absent the actions that allegedly damaged the claimant i.e., they are fixed.

To estimate the fixed/variable cost structure of an enterprise, data permitting, AREcon often uses regression analysis, a statistical method that measures the magnitude and direction of the relationship between different data such as revenues and costs. In fact, Jason Bass, President of AREcon BASS, published a paper on the application of regression analysis for budgeting and to assess lost profits in the lodging sector (see http://www.hotel-online.com/News/PR2011_2nd/Jun11_FixedVariable.html).

Proper application of regression analysis requires a good understanding of the underlying statistical theory and how those theories may be violated. It is not a topic that makes for good copy for juries, arbiters, attorneys and judges. This duly noted, regression is a highly effective and credible analysis tool that in Jason's extensive experience with cost modeling often produces fixed/variable indications for a specific enterprise that are materially different than industry rules-of-thumb. So when AREcon has used regression analysis the methodology is presented in very simple terms focusing on basic examples and illustrations drawn directly from the data that has been analyzed. The approach has proven very effective. The moral of the story is that relatively more complicated methods may be employed if optimal but they must be delivered in a manner that is relatively easily understood and accepted by the intended audience.

What Are You Trying to Prove?

Many experts who feel that their opinions are irreproachable as a matter of course and/or they believe themselves an expert on a range of subject matters, not just the core discipline for which they were asked to offer an opinion. These tend to be the same experts who don’t provide a compelling story to support their opinions and adopt assumptions without real substantiation. In truth, these experts can be relatively easy to challenge since they often have a difficult time providing substantiated evidence to rebut even moderately thorough opposing analyses.

Jason Bass, President of AREcon, is well versed in a number of subject matters other than accounting, economics and finance including construction, property management and environmental compliance, among others. This has greatly facilitated his ability to assist with litigation matters that are multi-disciplinary in scope. That said, Jason would never represent himself to have the knowledge and training in any non-financial/economic disciplines to provide associated expert opinions and certainly would never take it upon himself to unilaterally work outside the scope-of-work requested by AREcon’s clients.

Show Me The Data

Many experts underestimate the value of looking at all the data. When AREcon accepts an assignment, litigation or otherwise, Jason Bass, President of the firm, is adamant that he be provided access to as much data as possible and communicate clearly to his clients that he does not want information filtered before he has an opportunity to consider its relevance. What Jason may feel is relevant to his analysis is not necessarily perceived as relevant by others. Further, Jason not only seeks to firmly support the assumptions and methodologies applied in his analyses with solid data/research but also to anticipate potential alternative theories and/or challenges to his adopted approaches. This can only be achieved if no data stone, so to speak, is left unturned. Too many times Jason has observed experts unable to effectively respond when confronted with data which conflicts with their findings because they were unaware of the data’s very existence until that moment. This speaks to how important it is for experts to thoroughly review what data is available and perform extensive research in support of their work, and not just cherry pick information immediately relevant to their analysis objectives. For any engagement Jason places significant emphasis on the data collection and review process as it is the foundation for a strong and defensible expert opinion and often significantly influences the eventual choice of analysis approach.

The Early Bird Catches The Worm

A significant mistake made by experts and attorneys time and again is the belief that experts can be brought in at the 11^th hour and still be effective. Experts should push to participate in any litigation as early as possible so that they have the opportunity to consider alternative approaches to their analyses and provide associated input to the process of document discovery. All too often AREcon has been provided with documents that the attorneys requested based on their understanding alone of the accounting, economic, financial and market aspects of a case. Accordingly, Jason Bass, President of AREcon, encourages the attorneys with whom he works to include him early on in their case discovery and data management activities. He also tries to provide, as soon as possible, preliminary assessments of the magnitude of potential monetary damage claims and the strengths, weaknesses, opportunities and constraints of the alternative accounting, financial, economic and market-based arguments underlying both the plaintiff’s and defendant’s positions. While potentially more costly to the client on the front end, this allows for a proactive document discovery and relatively more robust research and analysis process. The added cost will likely pay for itself in the form of more effective assessments and better outcomes.