Reasonable Certainty and the AICPA
Practice Aid
Background
 August 5th 2015 – AICPA Forensics & Litigation Services
Task Force releases 107 page “Practice Aid”
 Task Force is composed of 7 CPAs and 3 Attorneys.
 The stated intent of the Practice Aid is to “help
practitioners understand the expectations courts impose
upon experts as a result of, for example, Rule 702 of the
Federal Rules of Evidence or comparable tests applied at
the state level.”
 The Task Force studied numerous cases, judicial opinions
and various scholarly writings and relied heavily on federal
cases.
 Not announcement of any new legal or accounting standard.
AICPA Code of Professional Conduct
Rule 102—Integrity and objectivity In the
performance of any professional service, a
member shall maintain objectivity and
integrity, shall be free of conflicts of interest,
and shall not knowingly misrepresent facts
or subordinate his or her judgment to
others.
AICPA Code of Professional Conduct
Rule 201 - A member shall comply with the following
standards and with any interpretations thereof by
bodies designated by Council.
***
 Sufficient
Relevant Data. Obtain sufficient
relevant data to afford a reasonable basis
for conclusions or recommendations in
relation to any professional services
performed.
Certainty/Speculation Spectrum
Speculative
Lottery ticket
($1 to win $1.5
billion)
Hopes and
dreams
The Middle
Lost profits
Valuations
Royalties
Property damage
Certain
100 shares of
Apple stock on
February 9,
2016 at 12:30
pm CST
What is Reasonable Certainty?
*Reasonable certainty is simply code for - Does the court think that,
given all of the circumstances, this plaintiff has presented sufficient
evidence to make it fair to award it the damages in question?
*Richard Posner U.S. Court of Appeals 7th Circuit (Chicago) – quoted from his book How Judges Think
2008
“A venture that has a 40-percent chance of earning
$1,000, with an expected value of $400, is not
worthless even though the probability of achieving
the earnings in question is less than 50 percent.”
Why Should You Care?
 Resource/Primer
 Designed for use by CPA/damages expert
 Roadmap
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Expert reports
Expert challenges
Cross-examination of experts
Cross-examination of fact witnesses
 Claim assessment (pre- and post-filing)
Topics Addressed
 Introduction/General Principles
 Reliance on Client-Supplied
Information
 Causation Considerations
 New Business Rule
Take Away
Backstop With Other
Testimony/Experts
Anchor With Real World
Consider Alternative
Causes
Test the Damages
Model
Client Supplied Information
 An expert’s use of client supplied data has
historically been at issue:

Projections of financial performance—including lost revenues,
associated costs, loss of value, out-of-pocket costs, and so on;

Assumptions regarding growth rates, pricing, financing
opportunities, and cost structure;

Business information—such as markets served, competitors,
market share, and industry trends; or

Technical information—such as product features and
specifications, and how those features and specifications
contribute to the operation of a product.
Client Supplied Information
Court’s acceptance of the use of client supplied information by the
expert relies heavily on FRE 702 but there is no set formula for
what constitutes sufficient relevant data.
 In using client supplied data, the courts have focused on:


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Whether the data was prepared in the normal course of
business;
Who at the client prepared the data – management vs. those
who are qualified w/ day-to-day responsibilities;
Extent of evidence that corroborates the data;
Realistic assumptions;
Whether the opposing side previously saw the projections;
Whether the expert tested the data, assumptions and
linkage to the business.
Causation Considerations
 Damages experts who testify as to causation will
generally face vigorous challenges including:
 Extent
of industry experience;
 Lack
of evidence that business lost because of
misconduct;
 Identifying
specific customers or transactions lost
as a result of misconduct;
 Alternative
reasons for the plaintiff’s loss.
Causation Considerations
 Damages experts must consider alternative factors such as:

Generally prevailing economic conditions;

Product quality issues unrelated to the defendant’s alleged conduct;

Technology changes such as the loss of intellectual property;

Market changes such as the development or acquisition of IP by a
competitor;

Reputational harm for any reason other than the conduct of the
defendant;

Loss of key personnel;

Environmental issues such as hurricanes, earthquakes, freezes, and
the like.
New Business Rule?

Historically, many jurisdictions have had various versions of the “new
business rule” limiting recovery for lost profits.

Mullen and Kinesoft Development Corp. decisions illustrate what
is often referred to as a per se version of the new business rule, with
the award of lost profits hinging on whether or not the business in
question is "new" or "unestablished”.

In MindGames, Inc. v. W Publ’g Co., Judge Posner, applying
Arkansas law distinguishes between a rule and a standard:
“ … States that have rejected the ‘new business’ rule are content to control the
award of damages for lost profits by means of a standard—damages may not
be awarded on the basis of wild conjecture, they must be proved to a
reasonable certainty ... The "new business" rule is an attempt now widely
regarded as failed to control the award of such damages by means of a rule.”

The “new business rule” is no longer a Rule in all jurisdictions.
Newly Established Businesses
 The Practice Aid cites the following cases for guidance in what
is a “New” v. an “Established Business”:
Delahanty v. First Pa. Bank, N.A. 318 Pa. Super. 90 (Pa. Super.
Ct. 1983).
 Clark v. Scott, 520 S.E.2d 366 (Va. 1999).
 Gorjuice Wrap, Inc. v. Okin, Hollander & De Luca, LLP, 2011 N.J.
Super. Unpub. LEXIS 93, *3–4 (App. Div. Jan. 12, 2011).

 The trend toward allowing recovery of lost profits for a new
business is to focus on "evidentiary sufficiency" to calculate
damages.
Newly Established Businesses
 In allowing new businesses to recover future lost profits, courts
focus on whether or not the expert has provided the necessary
evidence, with the quantum of evidence required different than
that required of an established business seeking recovery of
lost profits.

In MindGames, Inc. v. Western Publishing Co., Judge Posner
called for consideration of all information available that is
relevant in evaluating whether the expert has met the threshold
to prove the lost profits of a new business—a rule of evidence.

In Kids' Universe v. In2Labs, the Court of Appeals of California
(Second Appellate District) relied in part on the Restatement
(Second) of Torts as support for its finding that recovery for future
lost profits of a new business was an evidentiary inquiry.
Newly Established Businesses
 Success in recovering lost profits for newly established businesses
can be achieved through:
 Using multiple sources of evidence to establish sufficiency of
analysis;
 Using multiple experts such as a CPA and an Economist or a CPA
and an industry Expert, etc.;
 Using other similar businesses as a “yardstick”;
 The expert should demonstrate "a substantial similarity
between the facts forming the basis of the profit projections
and the business opportunity that was destroyed;"
 There should be evidence of objectively verifiable dimensions
of similarity including size, profits, investors, management,
cost structures, etc.;
 Expert should consider and adjust for slight differences in
clientele and geographic location.
Newly Established Businesses
 Pre-litigation projections have been successfully used.
 As previously discussed, courts have been more accepting of
projections when:

The projections were made in the normal course of business;

The expert knew who constructed the projections;

The person constructing the projections had the requisite
experience;

The expert had the background and expertise (was properly
qualified) to make appropriate adjustments to the projections.
Newly Established Businesses

The chances of recovering lost profits for newly established businesses
has been improved when the expert has considered:

The nature of the market for the business in question;

The existence of management’s expertise in the business in
question;
and/or

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The damages expert has relied on the opinions of other qualified
experts.
Even in states with per se new business rules, the Practice Aid cites
examples of achieving successful recovery of lost profits.
Summary

Courts’ articulation of what reasonable certainty means appears to
recognize that the profits that form the basis for an economic
damages calculation need not be certain in order to adduce a
calculation of damages that has a reasonable basis.

Courts generally seem to focus on:

Whether the damages calculation has been made such that there
is reasonable certainty that the damages amount has been
properly calculated;

The amount has been proven with a reasonable basis and sound
methodology;

Having multiple sources of evidence (and experts) supporting the
calculation;

Whether the expert has tested and adjusted the calculation to
consider other causes.
Larry Kanter CPA, CFF, CFE
3102 Maple Ave, Suite 400
Dallas, Texas 75201
214 207-5238