When insurance defense attorneys suspect that plaintiffs have inflated their claims, forensic accountants can help identify potential red flags and potentially save Defendants substantial sums.
Given that some plaintiffs may exaggerate the value and ignore information detrimental to their case, it is best to approach each case by focusing on the financial assumptions, the “moving parts,” comprising each claim. Dissecting claims isn’t as difficult as may seem, given the proper background. A skilled expert attacking a single flawed assumption can remove the foundation supporting a lofty demand and push Plaintiff’s counsel to reconsider his or her case.
Most often, Plaintiff’s damages represent starting points for negotiation – Plaintiff’s hope for a settlement before the flaws in their case are identified by defense counsel. Unfortunately, there is an over reliance on quick resolutions. Too often, insurance companies wind up overpaying. Insurers, policyholders and stockholders all lose in this game.
However, inflated damages can be avoided by hiring a credentialed, independent financial expert who can identify the claim’s shortcomings in a cost-effective manner. Rather than viewing forensic accounting fees as a cost, insurance companies have come around to recognize them as a source of savings.
Choosing the Right Expert
In auto insurance cases most plaintiff attorneys use low cost financial experts, who tend to come from academia and may have a doctorate degree. As a result, they tend to be theoretical and do not prepare reports with specific dates pertaining to an individual case.
These low cost financial experts rarely belong to a professional organization with strict standards, such as the American Institute of Certified Professional Accountants (AICPA) and the Certified in Fraud Forensics (CFF) and Certified Fraud Examiner (CFE) designations that most litigation support professionals have.
Low cost financial experts are not typically paid enough to do in-depth research and analysis. As a result, they may use template reports with only a few unique figures or calculations pertaining to the case.
CFFs or CFEs prepare in-depth reports with specific research and analyses pertaining to the particular case. Therefore, it is easy for them to pick apart a theoretical template report with actual facts and conclusions.
Members of the AICPA are held to strict standards:
- They advocate for their opinion, not the client;
- Bound by very strict professional standards;
- Must be completely independent.
When hiring a litigation support professional, make sure they have their CPA and either a CFF or CFE designation. Ask them to provide information about their experience with similar cases, curriculum vitae, number of jury trials they have been involved in, as well as references.
In many lawsuits, the Plaintiff’s attorney is likely to present an aggressive damages calculation prepared by a high-volume, low-cost practitioner. These reports appear comprehensive but are often boilerplate in nature due to tight litigation budgets. This is where the trained eye of a seasoned forensic accountant can identify the shortcomings.
Typical weaknesses in Plaintiff damage reports include:
- Permanency. The report assumes the damage continues forever as opposed to a finite period of time.
- Misrepresented Earnings. “Cherry-picking” an anomaly – using one unusually profitable pre-loss period into years’ worth of post-loss damages.
- External factors. The economy, management problems, and competition are ignored.
- Silence. Information detrimental to the claim is not provided and/or not addressed in the report.
A forensic accountant is specially trained to find errors, inaccuracies, and oversights that can reduce or completely discredit out a claim. Here are a few examples.
In one auto accident claim, the Plaintiff claimed lost income based upon his federal income tax return showing an annual adjusted gross income of $19,000. But the second page of the return showed a tax refund of nearly $8,600, resulting from questionable tax credits totaling $7,000. Once this irregularity was pointed out, Plaintiff dropped the claim for lost income.
Another example is a gasoline station which claimed $170,000 in lost revenues due to an underground gas leak. The Plaintiff’s report based that figure on annual and quarter sales figures. However, after the Defendant’s financial expert requested additional data and examined daily sales, the loss was determined to be only $8,291. A little digging made a huge difference.
In a third case, a doctor injured in an auto accident sought compensation for lost current and future income. Post-accident the doctor was seeing fewer patients each month; that was not in dispute. However, how much money he took home from each patient was contested. The Doctor’s $720,000 claim was predicated on a profit margin from his medical practice of 94 percent. But, financial records revealed that the profit margin was just 34 percent. As a result, the estimate of lost future income shrank to $120,000.
The last example doesn’t even require a calculator. A private school claimed that water damage to a building resulted in substantial enrollment losses. However, a Google search illuminated an alternate cause of the enrollment decline: a local news report revealed a family was suing the school for fraud on its claim that its curriculum matched that of another private school. Alternate causation had not been considered in Plaintiff’s damage report. In this instance, the insurance defense attorney is in a stronger position to question how much lost revenue was from building damage versus negative publicity.
Each Plaintiff report that includes a substantial damages claim deserves scrutiny. With the right expert, lofty “pie in the sky” claims can be brought back to earth through careful forensic accounting.
Martin K. Williams, CPA, CFF, CFE, principal, is a forensic accounting and business valuation expert with South Florida accounting and consulting firm Fiske & Co.
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