Page 37 - Economic Damage Calculations

Chapter 6

Uncertainty and Consideration of Risk in Calculations of Damages

To date, neither judicial precedent nor professional literature have provided unambiguous guidance
about the preferred and uncontroverted methodology to discount future income streams to present value
in a damages analysis. Similarly, this practice aid does not recommend the universal use of one dis-
counting approach instead of another, but rather that experts should exercise professional judgment on
this issue. It is clear, however, that a damages analysis should be informed by the facts of the matter and
be methodologically consistent. By evaluating facts, such as the underlying lost opportunity and its sub-
stitutability, the availability of data to accurately and precisely estimate value, and the variability of the
income stream(s) in question, one or another methodology may be more appropriate for the particular
subject analysis.

Another factor that affects the analysis performed, as well as how the analysis is received at trial, is how
the matter develops in a courtroom, considering the unique perspective of a trier of fact. For example, an
expert may be limited by the information that has been produced. Or foundational testimony from a fact
witness or other experts may not be allowed. In such circumstances, the ability to support a position,
method, or approach may come into question. In addition, counsel, fact witnesses, and experts’ ability to
effectively convey their positions and rationale can also affect the outcome and the evaluation of the
damages methodology and calculation.

As described previously, there is some debate about how the inherent uncertainty in the components of a
plaintiff’s damage claim should be reflected in the discount rate or in the but for and actual/impaired
cash flow projections. However, the proponents of different positions share common ground; uncertainty
should be understood and considered in a damages analysis. This objective is consistent with Rule 702
of the Federal Rules of Evidence; the Daubert standard; Rule 201, General Standards (ET sec. 201 par.
.01), fn 1 of the AICPA Code of Professional Conduct; Statement on Standards for Forensic Services No.
1 (FS sec. 100); fn 2 and Statement on Standards for Consulting Services No. 1, Consulting Services:
Definitions and Standards (CS sec. 100), fn 3 each of which require CPAs to perform analysis with "suf-
ficient relevant data."

Methods for Addressing Uncertainty and Risk

In a damages model, risks arising due to the defendant’s actions can often be segregated from risks in-
herent in the subject business or investment. If the nondefendant risks are able to be removed, the expert
may attempt to use the damage model to reduce or eliminate remaining uncertainties. Thereafter, the ex-
pert may present the trier of fact a cash flow estimate that reflects the expected outcome.

fn 1 All ET sections can be found in AICPA Professional Standards.

fn 2 All FS sections can be found in AICPA Professional Standards.

fn 3 All CS sections can be found in AICPA Professional Standards.

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