Forensic and Investigative Accounting
Chapter 11
Litigation Support in
Special Situations
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Antitrust Laws
Antitrust laws are an outgrowth of the early
years of the Industrial Age in the United
States when a small number of powerful
businessmen used any tactic at their disposal
to force competitors out of business. Because
such business practices were not in the best
interest of the country, federal legislation was
passed that prohibits the formation and
continuation of monopolies except when in
the best interest of the public.
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Role of Accountants in
Antitrust Litigation
Accountants may be called upon to
determine whether there is liability under
the antitrust laws. The primary issue that
forensic accountants address is whether the
defendant has engaged in predatory pricing.
 After liability is proved in an antitrust case,
then the forensic accountant will be asked to
estimate damages.

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Predatory Pricing
Predatory pricing is the act of pricing a
product so low that the only logical
explanation is that the pricing is designed to
drive competitors out of business.
 The operational definition is whether a
company prices its products or services
below “average variable cost” and, if so,
predatory pricing is present.

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Cost Behavior Defined
In its simplest form, cost behavior is
the way that cost(s) change with respect
to changes in the volume of activity.
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Common Types of Cost Behavior
Fixed costs
 Variable costs
 Mixed costs
 Semivariable costs
 Semifixed costs
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Cost Behavior Assumptions
Basis of cost behavior estimates
– Relevant range assumption
– Time assumption
 Ways of estimating cost behavior
– Account analysis method
– High-low method
– Regression analysis
– Engineering or work-measurement
method
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Reasons Why Managers Want to Know
About Cost Behavior Patterns
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To use in many different types of cost-volume-profit
(CVP) analyses.
For use in flexible (dynamic) budgeting activities.
For use in standard costing, in particular, MOH variance
analysis.
For use in determining Manufacturing Overhead (MOH)
application rates.
For use in litigating or defending a wide variety of costrelated legal issues:
– Federal antitrust cases - predatory pricing.
– Alleged contractual violations.
– Measurements of damages for lost sales/profits/etc.
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Common Types Of Cost Behavior
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FIXED COSTS: Costs that fundamentally are
not driven by changes in volume.
Y = Total Cost
Y = a, where a is the amount of fixed cost
Common examples of fixed costs - Depreciation,
Property taxes, Supervisor salaries
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Common Types Of Cost Behavior
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VARIABLE COSTS: Costs that change directly
and proportionately with the volume of activity.
Y = bX, where b is the slope of the line (the
increase in cost relating to the increase in volume)
and X is the measure of the volume of activity.
Common examples of variable costs - Direct
materials, Direct Labor, Sales Commissions
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Common Types Of Cost Behavior
MIXED COSTS: Costs that contain both a
fixed and a variable component.
 Y = a + bX, Where a equals the fixed
component and bX is the variable
component.
 Common examples of mixed costs - Some
lease agreements, some utility costs, many
overhead costs.
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Common Types Of Cost Behavior
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SEMI-VARIABLE COSTS: Costs that change
but not proportionately with the volume of
activity.
Learning curve costs - are costs that increase at a
decreasing rate with the volume of activity.
When graphed, learning curve costs slope upward
and to the right but not in a straight line; Instead
they curve downward.
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Common Types Of Cost Behavior
SEMI-FIXED COSTS: Costs that
increase in steps or jumps.
 Also called set function costs
 Some argue that all fixed costs are step
function costs over the long run
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Cost Behavior Assumptions
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Relevant Range: Cost behavior estimates are
usually based on historical cost observations and
analyses. If cost behavior characteristics are
projected outside of the observed range of
activities, the projections may not be accurate.
Time assumption: As time passes, the business
environment changes, and cost behavior may
change as well.
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Cost Behavior Estimation Methods

Most organizations have very little cost information that is
captured and reported by type of cost behavior pattern. In
order to determine cost behavior characteristics,
accountants must use a variety of methods to estimate cost
behavior patterns.
– EXPERIENCE: Often a working knowledge of a firm’s
accounting system will provide some knowledge of the nature of
cost behavior in the firm’s accounting system.
– Merely trying to separate all current cost accounts into fixed and
variable costs is usually not a very accurate method of estimating
cost behavior.
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Cost Behavior Estimation Methods
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PLOTTING COST DATA: “A picture is worth
a 1,000 words”, is an old saying that has some
merit in describing cost behavior patterns.
– It is really easy now to take accounting cost data and
use many different software packages to plot data.
– The resulting graphs can provide a good idea of the
general nature of the cost volume relationships,
although precise descriptive cost models are not
provided.
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Cost Behavior Estimation Methods
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HIGH-LOW METHOD:
The highest and lowest costs are identified along
with their related volume levels. These are used to
estimate fixed and variable costs:
Example:
Variable cost = $300,000 - $280,000
100,000 un. - 90,000 un.
= $20,000 = $2.00 / unit
10,000 un.
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Cost Behavior Estimation Methods
HIGH-LOW METHOD (cont.)
Fixed cost = $300,000 - (100,000 units x
$2.00 unit)
= $100,000
Total cost = $100,000 + $2.00 X
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Cost Behavior Estimation Methods
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REGRESSION/CORRELATION ANALYSIS
– An analytical tool for measuring the degree of
association between two or more variables.

It is a two-step process:
– Regression measures the nature of the association
between the variables.
– Correlation measures the strength of the association
between the variables.
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Regression/Correlation Analysis
TYPES OF REGRESSION:
 Simple Linear Regression or Bi-Variate
Regression
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– Two variables:
» A dependent variable which is usually cost in our
analyses.
» An independent variable or predictor variable which
is usually the measure of the volume of activity in
our analyses.
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Regression/Correlation Analysis
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A positive (+) value for b indicates that the dependent and
the independent variables are positively correlated (moving
in the same direction). A negative (-) b value indicates that
the dependent and the independent variables are moving in
opposite directions. (Example, and increase in interest
rates is related to a decrease in construction costs.)
The a value indicates point where the regression line
crosses the “Y” axis. What does a negative? positive?
value for a indicate?
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Regression/Correlation Analysis
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The coefficient of determination measures the amount of
explained variance (i.e. Of the total variance of the
dependent variable about its mean (average) value, the
amount of that variance that can be explained by changes
in the volume of activity is measured by the coefficient of
determination.) For example, a coefficient of
determination of .84 or 84% means that 84% of the
dependent variable’s total variance can be explained by
changes in the volume of activity.
Association vs. Causation - Regression/correlation analysis
shows the degree of association between variables, but it
does not prove causation.
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Regression/Correlation Analysis

Standard Error of the Estimate:
Indicates the variability of the data used in
the regression calculations. The greater the
variability of the data, the less precision that
results from estimates made from the
regression data.
– Point estimates are made and confidence
intervals are used to achieve desired levels of
precision.
– t-tables and z tables: Used to provide desired
precision levels.
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Using Regression Analysis for
Damages in General
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Virtually all cases in which liability is found
has a damages phase to the case.
Most scenarios require an analysis of what
would have happened absent the act that
caused the liability.
– Regression analysis gives an expert a foundation
from which to develop and support costs behavior
assertions.
– There is a solid analysis approach which describes
the nature of the analysis so the expert can present
his/her findings clearly to the jury/judge in order to
gain support of the expert’s opinions.
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Regression/Correlation Analysis
USING REGRESSION/CORRELATION
ANALYSIS
 MULTIPLE REGRESSION
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– More than one independent variable.
– Most medical research uses multiple regression.
– Still one “a” value and “r” value.
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Reasons for the Unexpected
Some of the accounting reasons that regressions
may yield unexpected or perplexing results
include:
– When and how allocations are made.
– The nature of transfer prices in an organization.
– Entity concept: what part of the business is
involved in the case?
– Accounting policies can make a big difference
in cost behavior analysis.
Forensic accountants must be adequately informed
about the nature and operation of the accounting
system for each and every business that they are
evaluating.
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Federal False Claims Act
The Federal False Claims Act was passed to
protect the government from the unscrupulous
acts of a few government contractors that
intentionally or carelessly overcharge the
government for goods or services.
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Federal False Claims Act Litigation
Fraud allegations
 Whistleblower allegations
– Qui tam suits

» Origin
» Current application
» The role of the US Justice Department in Qui Tam
suits
– Reasons for bringing action
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Accountant’s Role in Federal False
Claims Act Litigation
Accountants may act as an expert witness
for the defense, the government, or a
whistleblower litigating the qui tam parts of
the case.
 The dynamics of FFCA cases can be quite
different than typical cases.
 Accountants have a unique role to play in
FFCA cases.

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Accountant’s Role in Federal False
Claims Act Litigation
Typical questions that accountants help courts to answer
are:
– What costs should be included in the contract?
– How should costs be measured under the contract?
– What is the correct timing of the costs and/or
revenues under the contract?
– What accounting concepts, rules, etc., apply under
this contract?
– What is the magnitude of the damages that occurred
because of the fraud that took place?
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Accountant’s Role in Federal False
Claims Act Litigation
Under the Federal False Claims Act, a person
acts knowingly with respect to information if the
person has:
– Actual knowledge of information.
– Acts in deliberate ignorance of the truth or
falsity of the information.
– Acts in reckless disregard of the truth or
falsity of the information.
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