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Beware of the Overuse of Formulas and Pre-Packaged Approaches in Damages Measurement and Valuation Engagements

By Steve Roberts, CPA/CFF, CFE, CFA, CCI, CGMA

Principal, Veritas Forensic Accounting & Economics

Mr. Roberts co-authored this article with Dr. Wade Roberts, PhD in Economics, University of Utah.

 

Facts are facts. Numbers don’t lie. Statistics can be powerful and economic databases critical. Formulas and templates exist for a reason. But there is no substitute for giving due consideration to the specifics of each case!

Our experience tells us as economic researchers, damages experts and valuation professionals that we must be careful when we employ formulas, “pre-packaged” valuation report templates, and statistical and economic databases. While important to most every engagement, “rolling out” the same formulas, formats and data cannot and should not be done without first considering the specifics facts of the case. After all, if we were the shareholder, owner, or other the party sustaining a loss, we would demand the specifics and unique elements of our case to be considered. Given this, and our charge as experts to produce for the court reasonably certain findings, we must be duly diligent to consider the specifics of each case.

All too often, we find economists, damages experts and valuation professionals employ formulaic approaches with the outcome of overlooking case-specific critical information. The outcome is not surprising – Overstatement or understatement of damages and values, and the production of unreliable numbers.

There is no substitute for giving due consideration to the specifics of each case

Unreliable figures can arise when due consideration is not given to the specific, often unique, factors among the parties including isolated and more general geographic, economic, resource, reputational, and regulatory business dynamics creating a unique collection of rights, responsibilities, risks and opportunities. Broad-brushing these factors with high-level statistical and “A * B = C” formulas will almost always produce an unreliable and erroneous conclusion. Similarly, using valuation template and high-level statistical databases may neglect facts and suggest a level of precision greater than actual.

Giving due and appropriate case consideration to the specifics of each case is critical in meeting an expert’s charge of producing relevant and reliable findings that help the trier of fact! Of course, reproduceable and accepted formulas, economic statistics and databases, and valuation models play a big role in economic loss measurement and other valuation exercises, but only where the specific, unique elements of the case have first been considered and where their use helps the trier of fact render a just decision.

Our Expert Blog articles have been posted here with permission of the authors.

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