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Forensic accountants preparing commercial litigation damages measurements have to perform reasonable due diligence procedures with respect to the documents and data they rely on.
Construction companies could be involved in commercial litigation disputes as either plaintiffs or defendants. This statement is true for companies participating in all construction industry segments. These commercial litigation disputes could relate to either breach of contract claims or tort claims. One common denominator in these disputes is that one party, usually the plaintiff, claims to have suffered economic damages due to the wrongful actions of the other party, usually the defendant.
The plaintiff can ask the judicial finder of fact to award various types of nonmonetary remedies in the litigation. These nonmonetary remedies could include, among others, an injunction of the wrongful action, a repossession of the taken property, the specific performance of a contract, or a substitutional remedy (e.g., a new contract). However, the plaintiff also typically asks for monetary compensation as a remedy for the amount of economic damages suffered. Therefore, a common question in most commercial litigation disputes is how to appropriately measure of the amount of damages suffered by the claimant damaged party as a result of the wrongful actions of the defendant damaging party.
Forensic accountants are often asked to measure the amount of economic damages related to these construction company commercial litigation matters. A forensic accountant is simply an accountant who specializes in issues related to legal claims, including fraud and misrepresentation, dissipation of corporate assets, and many other accounting-related matters. In fact, the Black's Law Dictionary defines forensic accounting as "the application of accounting principles to monetary issues that arise in courts, as in the apportionment of funds and of financial responsibilities upon a divorce or dissolution of a partnership."1
There are generally accepted forensic accounting methods and procedures related to the measurement of economic damages within a commercial litigation environment. This discussion summarizes these economic damages measurement methods including lost profits, reasonable royalty rate, lost business value, cost to cure, and other damages measurement methods.
However, before the forensic accountant begins the quantitative damages measurement, that accountant should (1) collect relevant data and documents and (2) perform reasonable due diligence procedures. This discussion focuses on the due diligence procedures that the...