What goes into a fraud damages calculation?

At first glance, calculating restitution for fraud damages may seem relatively simple. If someone steals $10,000 from a company, that person should repay that amount, perhaps with interest, right? Not quite. Financial experts also consider the profits the business lost because of the fraud — and weigh different methods of computing damages.

The appropriate approach

Experts typically use either the benefit-of-the-bargain or out-of-pocket approach to calculate damages. The appropriate method depends to some degree on the location and nature of the fraud. But in most cases, the benefit-of-the-bargain method results in greater restitution for victims.

Take, for example, a property developer who buys a parcel of land that the seller says is worth $1 million but is offering at $900,000. In truth, the seller is lying about the parcel’s value and has even falsified a valuation report. The land is actually worth about $700,000. Putting aside the developer’s failure to perform proper due diligence, how might fraud damages be assessed?

Under the out-of-pocket rule, the company would be awarded $200,000 in damages, or the difference between the land’s real value and the amount paid for it. Using the benefit-of-the-bargain rule, however, damages would be calculated at $300,000 — the difference between the seller’s misrepresented value and the parcel’s true worth.

3 common alternatives

It’s obvious why plaintiffs typically prefer the benefit-of-the-bargain method. But there are three other methods experts commonly use to calculate lost profits.

First, using the benchmark (or yardstick) method, an expert compares the fraud victim’s corporate profits to those of another, similar company that wasn’t defrauded. This method is particularly appropriate for new businesses or franchises.

The hypothetical (or model) method is also generally appropriate for businesses with little history. It requires the expert to gather marketing evidence that demonstrates potential lost sales. After calculating the total, the costs that would have been associated with the lost sales are subtracted to arrive at lost profits.

Finally, the before-and-after method typically is used for longer-established businesses. Experts look at the company’s profits before and after the fraud compared to profits during the time the fraud was being committed. The difference is the lost profits.

Don’t do it yourself

Defrauded business owners shouldn’t attempt to calculate their own fraud damages — or engage a professional who isn’t qualified to do it. To help ensure you receive the highest restitution amount, contact us or have your attorney get in touch.

© 2021 Covenant CPA

At first glance, calculating restitution for fraud damages may seem relatively simple. If someone steals $10,000 from a company, that person should repay that amount, perhaps with interest, right? Not quite. Financial experts also consider the profits the business lost because of the fraud — and weigh different methods of computing damages.

The appropriate approach

Experts typically use either the benefit-of-the-bargain or out-of-pocket approach to calculate damages. The appropriate method depends to some degree on the location and nature of the fraud. But in most cases, the benefit-of-the-bargain method results in greater restitution for victims.

Take, for example, a property developer who buys a parcel of land that the seller says is worth $1 million but is offering at $900,000. In truth, the seller is lying about the parcel’s value and has even falsified a valuation report. The land is actually worth about $700,000. Putting aside the developer’s failure to perform proper due diligence, how might fraud damages be assessed?

Under the out-of-pocket rule, the company would be awarded $200,000 in damages, or the difference between the land’s real value and the amount paid for it. Using the benefit-of-the-bargain rule, however, damages would be calculated at $300,000 — the difference between the seller’s misrepresented value and the parcel’s true worth.

3 common alternatives

It’s obvious why plaintiffs typically prefer the benefit-of-the-bargain method. But there are three other methods experts commonly use to calculate lost profits.

First, using the benchmark (or yardstick) method, an expert compares the fraud victim’s corporate profits to those of another, similar company that wasn’t defrauded. This method is particularly appropriate for new businesses or franchises.

The hypothetical (or model) method is also generally appropriate for businesses with little history. It requires the expert to gather marketing evidence that demonstrates potential lost sales. After calculating the total, the costs that would have been associated with the lost sales are subtracted to arrive at lost profits.

Finally, the before-and-after method typically is used for longer-established businesses. Experts look at the company’s profits before and after the fraud compared to profits during the time the fraud was being committed. The difference is the lost profits.

Don’t do it yourself

Defrauded business owners shouldn’t attempt to calculate their own fraud damages — or engage a professional who isn’t qualified to do it. To help ensure you receive the highest restitution amount, contact us or have your attorney get in touch.

© 2021 Covenant CPA

Can your business become more profitable without venturing out of its comfort zone? Of course! However, adding new products or services may not be the best way for your business — or any company — to boost profits. Bottom-line potential may lie undiscovered in your existing operations. How can you find these “hidden” profits? Dig into every facet of your organization.

Develop a profit plan

You’ve probably written and perhaps even recently revised a business plan. And you’ve no doubt developed sales and marketing plans to present to investors and bankers. But have you taken the extra step of developing a profit plan?

A profit plan outlines your company’s profit potential and sets objectives for realizing those bottom-line improvements. Following traditional profit projections based on a previous quarter’s or previous year’s performance can limit you. Why? Because when your company reaches its budgeted sales goals or exceeds them, you may feel inclined to ease up for the rest of the year. Don’t just coast past your sales goals — roar past them and keep going.

Uncover hidden profit potential by developing a profit plan that includes a continuous incentive to improve. Set your sales goals high. Even if you don’t reach them, you’ll have the incentive to continue pushing for more sales right through year end.

Ask the right questions

Among the most effective techniques for creating such a plan is to consider three critical questions. Answer them with, if necessary, brutal honesty to increase your chances of success. And pose the questions to your employees for their input, too. Their answers may reveal options you never considered. Here are the questions:

1. What does our company do best? Involve top management and brainstorm to answer this question. Identifying your core competencies should result in strategies that boost operations and uncover hidden profits.

2. What products or services should we eliminate? Nearly everyone in management has an answer to this question, but usually no one asks for it. When you lay out the tough answers on the table, you can often eliminate unprofitable activities and improve profits by adding or improving profitable ones.

3. Exactly who are our customers? You may be wasting time and money on marketing that doesn’t reach your most profitable customers. Analyzing your customers and prospects to better focus your marketing activities is a powerful way to cut waste and increase profits.

Get that shovel ready

Every business owner wishes his or her company could be more profitable, but how many undertake a concerted effort to uncover hidden profits? By pulling out that figurative shovel and digging into every aspect of your company, you may very well unearth profit opportunities your competitors are missing. We can help you conduct this self-examination, gather the data and crunch the resulting numbers. 205-345-9898 and info@covenantcpa.com.

© 2019 CovenantCPA