Jun 18, 2019 – Baker Tilly
Over the last several months, the American Institute of CPAs (“AICPA”) has issued three new practice aids that provide relevant technical guidance to financial experts who provide damage analyses services. David Duffus, a partner in Baker Tilly’s Global Forensics and Litigation Services Practice, chairs the AICPA’s Economic Damages Task Force, which was responsible for the development of the practice aids.
David was recently interviewed to discuss the content of the practice aids, as well as how the guidance is relevant to both financial experts and the attorneys who retain those experts.
Q: David, what are the three new practice aids that have been published?
Duffus: The three new practice aids are Calculating Lost Profits, Attaining Reasonable Certainty in Economic Damages Calculations: Revenues, Costs and Best Evidence, and Calculating Intellectual Property Infringement Damages.
Q: Why three new practice aids in such a short period of time?
Duffus: Part of the value that the AICPA brings to the membership of the Forensic & Valuation Services Section is the development of technical materials that enhance the expertise of CPAs who perform damage analysis services and provide expert witness testimony.
In the past, the AICPA has published practice aids on all three of the topics that are the subject of the new practice aids, and those practice aids have been valuable resources. However, there was a realization that the practitioner community would benefit from updated and expanded guidance on the issues that are central to many matters involving the calculation of damages. We were lucky enough to have a strong group of volunteers who were all willing at the same time to undertake the effort required to develop the new and updated material.
Q: Tell us a little bit about the first practice aid that you mention, Calculating Lost Profits.
Duffus: In 2006, the AICPA published its initial practice aid on the topic of lost profits damages, which provided a strong foundational perspective on the elements of lost profits analyses. However, with the passage of time, it became apparent that an update was needed to:
- Expand the discussion around the legal principles surrounding the analysis of lost profits damages, including supplementation of the case law previously examined;
- Provide further discussion around the steps that financial experts may want to consider when estimating lost revenues;
- Expand the discussion surrounding techniques used to evaluate incremental/avoided expenses;
- Further explore the concept of taxes in lost profits calculations; and
- Illustrate the concepts discussed through the lens of a case study related to the calculation of lost profits damages.
With the update, the new practice aid addresses these concepts in greater detail, and demonstrates application through the use of a case study that very much mirrors the issues that damage experts face in real life matters.
Q: What should we know about the second practice aid, Attaining Reasonable Certainty in Economic Damages Calculations: Revenues, Costs and Best Evidence?
Duffus: In 2015, the AICPA issued its first practice aid that addressed the concept of reasonable certainty in the analysis of economic damages, which was really quite different than other practice aids in that it focused exclusively on case law surrounding issues that are often faced by damages experts, such as reliance on client supplied information, consideration of causation and lost profits damages for new businesses.
Following the same model, the current practice aid again examines the case law around issues that are, perhaps, a little more granular with respect to damage analyses, including revenue and growth rate estimates, costs and best evidence, including with respect to the use of historical financial data, third-party data sources, pre-litigation projections, statistical sampling and factual information supplied by the parties.
While not a “how to” in the sense that Calculating Lost Profits is, the practice aid does provide practitioners with a sense for the issues that the courts say that they should consider when performing damage analyses.
Q: The last practice aid that you mentioned is Calculating Intellectual Property Infringement Damages. Please tell us about that.
Duffus: CPAs are frequently retained to perform damage analyses in intellectual property infringement matters, such as patent, copyright and trademark infringement, as well as trade secrets matters. Recognizing this, since 1999, the AICPA has published practices aids addressing the calculation of damages in intellectual property infringement matters.
The latest practice aid represents the fourth volume in this series, and continues the approach taken in prior practice aids of examining the relevant case law, and particularly the new case law that has developed since the last volume was published in 2013. The updated practice aid is also more streamlined and focused, while continuing to address the key damage measures in intellectual property infringement matters, including lost profits, reasonable royalty, and unjust enrichment.
Q: If someone wants to learn more about these practice aids what can they do?
Duffus: The practice aids are available through the AICPA’s Forensic & Valuation Services Online Professional Library at https://www.aicpa.org/interestareas/forensicandvaluation/resources/fvs-online-professional-library.html.
Baker Tilly personnel also frequently speak at law firms on a variety of damages, valuation and forensic topics, and we would be happy to speak to any firm that is interested in hearing more about what is addressed in the practice aids.
Great job by my partner David Duffus and the others involved.
Kindly reach out anytime!