As a valuation specialist, I am frequently retained to review valuation reports prepared by other experts. The reasons for these engagements are varied. For example, accounting firms that do not offer valuation services may engage us to review a valuation report in connection with an audit. In other cases, I am retained to review an opposing expert’s valuation in litigation matters, including shareholder disputes and marital dissolutions.

In these engagements, I typically issue a Valuation Review Report. It is important to clarify what a valuation review is. I do not arrive at a conclusion of value. Rather, my role is to evaluate whether the valuation analyst:

• Followed applicable professional standards
• Used reasonable assumptions, methods, and data
• Selected appropriate valuation approaches and methods
• Reached a conclusion that is credible and supportable

The quality of the valuation reports I review varies widely, ranging from well done and professional to very flawed. Unfortunately, over the past year, I have encountered several valuation reports that, in my professional opinion, should never have been undertaken by the CPA who prepared them.

CPAs must be acutely aware of the ramifications of accepting valuation engagements, particularly when litigation is a possibility. CPAs are often the first clients or attorneys contact when a financial issue arises. In some cases, the significance of the engagement is downplayed, and the work is framed as routine or low-risk. That is a dangerous misconception.

If there is any possibility, however remote, that an engagement could lead to litigation, the CPA must treat it as a litigation engagement from the outset. If the CPA has never testified, has never been admitted as an expert witness, or lacks formal valuation training and credentials, serious consideration should be given to declining the engagement or engaging a qualified valuation specialist.

Recently, I was retained to review a valuation prepared for a litigation matter and participated in the deposition of the CPA who authored the report. During the deposition, it became clear that the CPA was unfamiliar with basic valuation concepts. He could not identify the recognized methods used to value a business, did not understand the applicable standards of value, and did not even know what the Statements on Standards for Valuation Services were. This lack of knowledge alone could support disqualification of the CPA as an expert witness.

More concerning, however, are the potential ethical violations implicated by such conduct. Under the AICPA Code of Professional Conduct, CPAs are required to perform services only within their professional competence and to obtain adequate training before accepting an engagement. Engaging in a valuation, especially in litigation, without the requisite education, experience, or understanding of professional standards may expose the CPA not only to exclusion by the court, but also to professional discipline and liability.

There is reason valuation professionals are referred to as experts. Expertise is not conferred by a license alone; it is earned through specialized education, experience, adherence to professional standards, and the ability to defend one’s work under oath. In litigation settings, courts, attorneys, and opposing experts will quickly expose the absence of that expertise.

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When calculating the lost self-employment earnings for an individual, the date the individual “returned to work” is often treated as the end of their lost earnings claim. However, for many self-employed individuals, they do not return to work full-time after their accidents and may have a loss after they return to work.

Unlike salaried employees, self-employed individuals do not have a set schedule or guaranteed paycheck, which can make their income difficult to project. Their income depends directly on productivity, availability, and consistency. As a result, even if someone is officially back at work, they may still be losing money if they cannot work at the same level as before.

One common situation is reduced work capacity. An individual may physically be at work but can only handle fewer hours, fewer types of tasks, or a smaller amount of work overall. These limits usually lead to lower income and result in a loss of self-employment income. We calculate this loss by taking the difference of what an individual is expected to make and what they are actually making during their partial return to work.

In some cases, people try to restart their business, then have to cut back due to continuing physical problems. Ultimately, these self-employed individuals can still have a loss of earnings despite returning to work. However, once an individual is cleared by their doctor and returns to work full-time, they cannot claim lost self-employment earnings past that date.

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In the business of publicly funded construction projects, accurate reporting of economic benefits is crucial to ensuring compliance with the requirements outlined by funding agencies. Whether it’s a federal, state, or local government entity, these agencies often require an independent Certified Public Accountant (CPA) to review and verify the economic benefits of a project. This process is essential for confirming that claimed expenses align with the funding agency’s guidelines for eligible economic benefits.

What is an Economic Benefit Report?

An economic benefit report is a document that outlines the financial impact of a construction project, specifically identifying how the project has contributed to the local or broader economy in terms of job creation, wages, and other quantifiable benefits. When a project is funded by public money, there is a need for transparency and accountability to ensure that funds are used as intended, and that the project is providing the promised economic benefits.

The agreement between the funding agency and the contractor will often include specific provisions that define what constitutes an eligible economic benefit. These benefits may include direct spending on materials, wages, and subcontracted services, as well as indirect impacts such as local employment.

The Role of the Independent CPA

A significant part of ensuring that a construction project meets the requirements of the funding agency is the independent review of claimed economic benefits by a CPA. As a third-party entity, the CPA’s role is to objectively assess whether the claimed expenses are consistent with the contractual definitions of eligible economic benefits. This independent review is not only a requirement but also a safeguard to ensure that taxpayer dollars are being used responsibly.

To perform this review, the CPA follows specific guidelines outlined in the agreement between the funding agency and the contractor. The independent CPA must review a sample of the expenses that have been submitted, ensuring the sample is statistically significant to efficiently test the data provided. The CPA also adheres to AICPA (American Institute of Certified Public Accountants) standards for performing such reviews, ensuring that the testing is thorough, appropriate, and compliant with best practices.

Eligible Economic Benefits and Testing Requirements

The eligible economic benefits of a project are clearly defined in the agreement between the funding agency and the contractor. These typically include the direct financial impacts such as wages paid to workers, local business spending, and other measurable aspects of the project. The CPA must ensure that these claims are backed by sufficient documentation and that all expenses classified as economic benefits fall within the guidelines of the funding agreement.

The CPA will generally use sampling techniques to select a statistically significant sample of expenses for review. They will then verify whether these expenses are supported by adequate documentation such as invoices, payroll records, and other relevant financial statements. The goal is to determine if the claimed expenses align with the definitions and requirements outlined in the agreement, ensuring that only eligible economic benefits are considered.

How FAZ Forensics Can Help

At FAZ Forensics, we specialize in providing independent CPA reviews for publicly funded construction projects. This specialization is demonstrated by our team’s experience supporting the project owner of a multi-billion-dollar renewable energy project in New York State. In this case, we helped the project owner meet the compliance requirements set forth in the project owner’s agreement with the New York State Energy Research and Development Authority’s (NYSERDA).  Our team of experts is well-versed in the complexities of economic benefit reporting and other compliance requirements, such as prevailing wage compliance, set by public funding agencies. We work closely with contractors, government agencies, and other stakeholders to ensure that all expenses related to economic benefits are accurately documented, tested, and compliant with contractual agreements.

With our extensive experience in forensic accounting and compliance reviews, we provide the necessary assurances that the claimed economic benefits are valid, and that public funds are being used as intended.

Conclusion

The completion of an economic benefit report is a critical component of publicly funded construction projects. By hiring an independent CPA firm, contractors and funding agencies can ensure that all claimed economic benefits are properly accounted for and in line with the requirements of the funding agreement. At FAZ Forensics, we pride ourselves on our ability to deliver thorough, unbiased, and reliable reviews that meet the high standards set by public funding agencies. Contact us today to learn more about how we can assist you with your economic benefit reporting needs.

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When a self-employed individual experiences an interruption to their business due to an accident, calculating their lost self-employment earnings becomes an important part of the claims process. In order to calculate lost self-employment earnings, two documents are frequently relied upon; the personal income tax return and the IRS tax return transcript. Although closely related, they serve different purposes and provide different levels of detail. Understanding their differences is important when determining an individual’s lost self-employment earnings.

A personal income tax return contains the full breakdown of self-employment revenue, expenses, and the resulting net earnings. When several years of returns are reviewed together, they reveal patterns, trends, and seasonality in earnings; which provide a better understanding of what an individual would have earned had the accident not occurred.

In contrast, an IRS tax return transcript is a summary of what the IRS has on file for the taxpayer. Although it mirrors certain line items from the tax return, it does not include the detailed schedules or supporting documents necessary to calculate lost self-employment earnings. Rather than serving as a substitute for the tax return, the transcript functions more as a verification tool. 

In practice, the two documents work best together. The tax return provides the information necessary for calculating lost earnings, while the transcript, while not sufficient on its own for performing these calculations, provides confidence that the figures used from the tax return are accurate and can be relied upon. 

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In this case, we were engaged to analyze the Insured’s claim for lost earnings resulting from an automobile accident that occurred in late 2024. The Insured is a medical doctor specializing in women’s healthcare. 

To analyze the Insured’s claim for lost earnings and calculate average daily gross earnings prior to the date of loss, we were provided with their 2022 and 2023 personal and business income tax returns, as well as monthly business bank statements from the beginning of 2024 through the loss period and the Insured’s return to work on a full-time basis. Our review of the 2022 and 2023 business income tax returns indicated that the Insured possesses a 100% ownership interest in a medical practice and reports their income on a cash basis of accounting. The 2022 and 2023 returns reflect marginal growth in gross income; however, the 2024 business bank statements from the beginning of the year through the day prior to the loss reflected a decrease in the average daily gross income relative to 2022 and 2023. Accordingly, the average daily gross earnings were calculated using the 2024 earnings, as they more accurately reflected the practice’s earnings capacity prior to the date of loss. 

The Insured’s average daily gross earnings by dividing actual gross earnings reflected in the business back statements from the beginning of the year through the day prior to the loss event by the number of days in that period. Expected gross earnings for the loss period were then calculated by multiplying the average gross earnings by the number of days the Insured reported being unable to work. 

In addition to the earnings deposited prior to the date of loss, the statements continued to reflect deposits during the loss period. Given that the practice operates on a cash basis of accounting, the practice continued to operate on a part-time basis during the Insured’s absence. Our analysis further indicated that the actual gross earnings received during the loss period exceeded the calculated expected gross earnings. 

Accordingly, we issued a report stating our opinion that the Insured did not suffer a loss of earnings, as actual gross earnings exceeded expected gross earnings during the loss period. 

In response to our report, the Insured stated that they did not pay themselves wages during the loss period due to their inability to work. Despite the new information received, we maintained our opinion, as the Insured is the sole owner of the practice and the documentation shows that the practice continued to receive income exceeding the calculated expected gross earnings during the loss period.

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When a business suffers a covered loss that interrupts its operations—such as a fire, storm, or other insured peril—business interruption insurance (often called business income insurance) is designed to reimburse the insured for lost income and continuing expenses during the period their operations are suspended. A central issue in preparing and evaluating these claims is how revenue and expenses are recognized, and this is where cash basis vs. accrual basis accounting becomes critically important.

What Are Cash and Accrual Accounting?

Cash basis accounting records revenue when cash is received and expenses when cash is paid out. This method reflects actual cash flows but can give a distorted picture of economic activity because it ignores amounts earned but not yet collected and costs incurred but not yet paid. 

Accrual basis accounting records revenue when it is earned and expenses when they are incurred, regardless of the timing of cash flows. It adheres to the matching principle, aligning costs with the associated revenues in the same reporting period, and provides a more accurate picture of a company’s financial performance. 

Why Accrual Accounting Matters in Business Interruption Claims

For business interruption claims, the objective is to estimate what a business’s income and expenses would have been “but for” the interruption. Simply tallying cash receipts and payments during the loss period often yields misleading results, because businesses frequently perform services or make sales that are paid weeks or months later. Similarly, expenses may be incurred before they are actually paid. 

Further, lost income in business interruption claims needs to be calculated using the accrual basis of accounting rather than the cash basis—so that sales/receipts and expenses/disbursements are matched and reflect the true economic activity of the business. Cash-basis calculations often produce improper and unjust results because they fail to capture receivables and payables associated with the period of loss. 

In practical terms, accrual accounting ensures:

• Revenue reflects earned income during the period the business was forced to suspend operations, even if the cash was collected later.
• Expenses reflect obligations incurred to generate revenue, even if cash payments occur outside the interruption period.
• The “but-for” scenario (what revenue would have been) is measured on a consistent basis with how normal operations were conducted historically. 

Insurance Policy and Accounting Method

While policy language typically defines the scope of recoverable losses (e.g., net income before taxes plus continuing normal operating expenses), the method of accounting becomes central when quantifying those items. Insurers and courts generally expect lost profits and continuing expenses to be quantified on an accrual basis, because it more closely aligns with economic performance and historical financial reporting.

Carriers sometimes begin with financial statements prepared by the insured, which may be on a cash basis. However, a claimant’s expert can demonstrate that an accrual basis more accurately reflects the business’s damages, and insurers often adjust accordingly. 

Common Challenges and Adjustments

Some of the key issues that arise when applying cash vs. accrual accounting in business interruption claims include:

• Receivables and payables: Cash statements ignore uncollected revenues and unpaid costs, potentially understating both lost income and continuing expenses.
• Saved expenses: During a shutdown, a business may avoid certain variable costs (e.g., cost of goods sold). These saved expenses need to be deducted from lost revenues using accrual figures to avoid double-counting. 
• Period of restoration: The chosen accounting basis affects how the period of loss is defined and measured; the accrual basis matches activities within that defined period. 

Role of Forensic Accountants

Given these complexities, business interruption claims frequently involve forensic accountants who:

• Convert cash-basis records to accrual figures.
• Reconstruct historical performance on an accrual basis.
• Estimate “but-for” revenues and expenses using consistent accounting treatment.
• Identify continuing vs. non-continuing costs under policy terms. 

Summary

Accrual accounting is generally the appropriate method for analyzing business interruption claims because it aligns revenues and expenses with the periods in which they are earned and incurred. Cash basis accounting, while simpler, can distort the measurement of lost profits and continuing expenses because it fails to recognize receivables and payables connected with the period of loss. Insurers, experts, and courts tend to favor accrual-based measures when quantifying damages, offering a more accurate and equitable basis for settlement. 

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Guest(s): Attorney Kathleen P. Ryder, managing partner of Ryder and Phelps, P.C.

This webinar explores key considerations for attorneys and advisors when engaging a business valuation expert, with a focus on experience, credentials, and specialization. It also highlights real-world insights from a valuation professional on navigating complex matters like divorce, litigation, and making strategic career decisions in a niche practice.

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About NY-Sun

The NY-Sun Program, administered by NYSERDA, is New York State’s statewide initiative to expand solar energy adoption and move the state toward a clean-energy future. NY-Sun provides incentives to encourage commercial, industrial, and community solar development across the state. The program aims to make solar more accessible, accelerate project development, and ensure high-quality installation standards.

For projects 1 MW AC and larger, NY-Sun now incorporates strict prevailing wage requirements, making labor compliance a core component of receiving and retaining program incentives.

Prevailing Wage Requirements

Under Section 1.4.8.3 of the NY-Sun Program Manual, covered projects must:

• Pay New York State Prevailing Wage or enter a Project Labor Agreement (PLA)
• Apply the requirement to all on-site construction labor, including subcontractors
• Submit quarterly prevailing wage certifications prepared by an independent NYS-licensed CPA throughout construction
• Maintain complete records for NYSERDA review or potential audit

Failure to comply with these requirements can result in loss of NY-Sun incentives and potential suspension from the program.

How FAZ Forensics can help

FAZ Forensics is an independent New York State-licensed CPA firm specializing in:

• Prevailing Wage CPA Certifications (required by NY-Sun)
• Verification of wage rates, fringe benefits, job classifications, and subcontractor compliance
• Pre-construction compliance reviews
• Ongoing payroll monitoring and audit support

We help ensure contractors and subcontractors meet NY-Sun requirements, protect your project’s eligibility, and reduce the risk of incentive loss.

Work With a CPA Team Focused on Compliance

If your NY-Sun project requires prevailing wage certification, or you want assurance that your wage and payroll practices meet program standards, FAZ Forensics is here to help.

Let’s support your project from construction through commercial operation.

Sources: 

https://www.nyserda.ny.gov/All-Programs/NY-Sun/Contractors/Resources-for-Contractors

https://dol.ny.gov/bureau-public-work-and-prevailing-wage-enforcement

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FAZ Forensics was retained to calculate economic damages in the aeronautical industry arising from an alleged breach of warranty by an aircraft manufacturer. The damages stemmed from the client’s aircraft being out of service for approximately ten months—significantly longer than initially represented—resulting in lost charter revenue and other consequential costs.

Pertinent Facts

According to the plaintiff, the aircraft was operated in accordance with applicable maintenance manuals, and all inspections and maintenance were performed exclusively by the manufacturer. During a routine 12-year inspection, the manufacturer proposed remediation work related to excessive structural deterioration and component wear.

The plaintiff alleged that the manufacturer’s initial estimates regarding repair costs and return-to-service timelines constituted material misrepresentations. What was initially represented as a four-month repair period ultimately extended to approximately ten months. The plaintiff further alleged that the manufacturer should have identified the need for additional repairs earlier and completed the work during a prior maintenance cycle, thereby avoiding the prolonged delay.

FAZ Work Performed

In performing its analysis, FAZ Forensics relied on the expert report of an aviation maintenance professional retained by the plaintiff. That expert concluded that the manufacturer failed to meet the reasonably expected standard of care of a competent and experienced aircraft maintenance, repair, and operations provider.

Forensic accountants routinely rely on other technical experts when matters extend beyond accounting, finance, or economic analysis and require specialized expertise. Such reliance is appropriate where causation, technical compliance, or operational performance must be established before economic damages can be quantified. This approach is consistent with professional standards, preserves appropriate expert boundaries, and supports the reliability and admissibility of the resulting financial analysis.

Other Technical Expert Report

The technical expert concluded that the manufacturer failed to meet the applicable standard of care in the planning, execution, and management of the aircraft inspection and repair process. The report identified multiple deficiencies, including inadequate pre-inspection planning, proposal deficiencies, workforce and project management failures, and substandard corrosion management practices. According to the expert, these failures were the proximate cause of the extended delays and increased costs incurred by the plaintiff.

Damages Analysis

FAZ’s damages analysis included an evaluation of variable operating costs, such as fuel handling fees, landing fees, overflight and landing permits, aircraft parking charges, and other miscellaneous expenses. These costs were analyzed to determine which expenses were variable in nature and directly tied to aircraft utilization.  A notable aspect of the analysis involved aircraft engine maintenance costs. While typically classified separately from direct operating expenses, engine maintenance represents a significant operating cost. In this matter, the engine maintenance contract was structured on a fixed rate per flight hour, making it a predictable and usage-based expense. This structure aligns the interests of the aircraft owner and the original equipment manufacturer by incentivizing reliable engine performance.

FAZ also analyzed consequential costs resulting directly from the aircraft’s unavailability. These included expenses for alternate aircraft charter, commercial air travel, lodging, ground transportation, and other travel-related costs incurred as a direct substitute for the unavailable aircraft.

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Lost profits claims are among the most complex—and often contentious—components of economic damages litigation. Attorneys rely heavily on forensic accountants to quantify damages that are defensible, grounded in sound methodology, and capable of withstanding rigorous scrutiny from opposing experts and the court. However, the path from alleged harm to an evidence-based damages calculation is far from straightforward. Each assignment carries its own mix of factual uncertainty, data limitations, and methodological pitfalls.

Below are some of the most significant challenges forensic accountants face when assessing lost profits in litigation, along with best practices to help ensure reliable and credible results.

1. Establishing Causation vs. Correlation

One of the most fundamental hurdles in lost profits cases is distinguishing the impact of the alleged wrongful act from other factors that may have influenced financial performance. Courts expect that damages experts demonstrate a clear, causal link between the defendant’s actions and the plaintiff’s lost profits.

Key Challenges

• External market forces: Economic downturns, supply chain issues, regulatory changes, or industry-wide shifts may independently affect sales and profitability.
• Company-specific variables: Management decisions, pricing changes, internal inefficiencies, or unrelated operational disruptions may confound the analysis.

Best Practices

• Conduct a but-for analysis that isolates the impact of the alleged harmful event.
• Evaluate industry benchmarks, competitor performance, and macroeconomic data to contextualize the plaintiff’s historical performance.

2. Reliance on Imperfect or Incomplete Data

A common challenge for forensic accountants is the quality, availability, and reliability of the data provided. Lost profits calculations depend heavily on accurate historical financials, operating records, sales data, and industry metrics. In some cases, these records are incomplete or inaccurate—or simply never existed.

Key Challenges

• Missing historical sales or cost data.
• Poorly maintained accounting systems.
• Lack of documentation supporting key assumptions.
• Overly optimistic or speculative projections prepared by management.

Best Practices

• Perform data reasonableness checks to validate the reliability of information.
• Leverage third-party sources (industry databases, government statistics, market reports) to corroborate internal data.
• Clearly disclose data limitations and explain how they impact the certainty of your conclusions.

3. Determining the Appropriate “But-For” Revenue Stream

Lost profits analyses typically begin with estimating the revenue the business would have earned absent the wrongful act. This requires developing a but-for scenario that reflects realistic, supportable expectations—without drifting into conjecture.

Key Challenges

• Volatile revenue streams or cyclical business models.
• New or rapidly growing companies with limited operating history.
• Disputes involving start-ups, early-stage ventures, or product launches.
• Economically unsustainable past trends (e.g., unusually high growth periods).

Best Practices

• Use multiple approaches (historical trends, customer attrition, market share analysis) to triangulate a reliable estimate.
• Avoid simple extrapolations when historical trends are not representative of future expectations.
• Incorporate capacity constraints, pricing changes, and market conditions into the but-for scenario.

4. Capturing Incremental Costs and Avoiding Overstatement of Damages

Lost profits calculations require not only estimating lost revenue but also adjusting for costs that would have been incurred to generate that revenue. Misclassifying fixed versus variable costs is a frequent source of error and dispute.

Key Challenges

• Incorrectly treating fixed costs as variable, or vice versa.
• Difficulty determining the incremental cost structure of multi-product companies.
• Overlooking avoided costs or alternative revenue streams.

Best Practices

• Perform a detailed cost structure analysis to determine true incremental profitability.
• Consider contribution margin rather than gross profit when possible.
• Review cost accounting records, budgets, and interviews with management to validate cost behavior.

5. Forecasting the Duration of the Loss Period

The length of the loss period can significantly influence the damages amount. Determining a reasonable duration often requires careful judgment supported by facts and evidence.

Key Challenges

• Disputes about how quickly the business could mitigate damages.
• Identifying when operations or market conditions returned to normal.
• Evaluating long-term damage claims versus short-term disruptions.

Best Practices

• Support the loss period with contemporaneous documentation (emails, production logs, customer communications).
• Analyze customer churn, re-acquisition timelines, and sales cycles.
• In cases of permanent loss of business opportunity, carefully evaluate longevity, market share, and competitive factors.

Conclusion

Lost profits analyses require a disciplined balance of financial expertise, investigative rigor, and professional skepticism. Each case presents its own mix of uncertainties, analytical challenges, and factual disputes. Forensic accountants play a critical role in guiding the trier of fact through these complexities by presenting clear, well-supported opinions rooted in reliable data and sound economic principles.

A carefully executed lost profits analysis not only withstands scrutiny—it strengthens the overall credibility of the case.

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