Litigation support, damages and expert witness work

Many forensic engagements end in a dispute: a claim to recover stolen money, an insurance claim, a breach of contract action, a shareholder dispute, a matrimonial case or a personal injury claim. Forensic accountants support these disputes in two main ways. As consulting experts, they help counsel understand the financial issues, analyse the other side's evidence and prepare questions. As testifying or expert witnesses, they give independent opinion evidence to a court or tribunal in a written report and, if required, in oral testimony. This lesson covers the legal setting, the rules that govern expert evidence in each country, the main methods for quantifying damages, and the practical work of reports and testimony.

The legal setting

Criminal cases are brought by the state and require proof beyond a reasonable doubt; civil cases are brought by private parties and are decided on the balance of probabilities, or preponderance of the evidence. The same conduct can lead to both. In the Saltmarsh Industrial Supply Ltd. matter, the company sues R. Calloway and G. Pellerin in a civil action to recover the 458,940 dollars paid to Northfield, plus interest and costs, and reports the matter to the RCMP or the local police service, which will decide independently whether to lay charges. The company also files a claim under its commercial crime policy with Harrow Mutual Insurance. If the insurer pays, it may take over the company's right to recover from Calloway and Pellerin, a principle called subrogation.

Recovery often depends on preserving assets before the defendants can move them. Courts can grant urgent orders, sometimes without notice to the defendant, freezing assets pending trial, if the plaintiff shows a strong case and a real risk that assets will be dissipated. Forensic accountants support such applications with evidence of the scheme and of the assets traced to it, like the analysis in lesson 9.

In Canada, freezing orders are known as Mareva injunctions, and orders requiring third parties such as banks to disclose information about a defendant's accounts are often sought alongside them, known as Norwich orders.

Expert evidence: duties and admissibility

An expert witness is allowed to give opinions, which ordinary witnesses generally cannot, because the expert has specialized knowledge that the court needs. That privilege comes with duties. In both countries, the expert's overriding duty is to the court, not to the party that retained and pays them: the expert must be independent, impartial and objective, must stay within their expertise, and must disclose the facts and assumptions relied on.

In Canada, the Supreme Court in R. v. Mohan (1994) set four threshold requirements for expert evidence: relevance, necessity in assisting the trier of fact, the absence of any exclusionary rule, and a properly qualified expert. In White Burgess Langille Inman v. Abbott and Haliburton Co. (2015), the Court confirmed that an expert who is unable or unwilling to fulfil the duty to give fair, objective and non-partisan evidence should be excluded at the threshold stage, and that judges have a further gatekeeping role weighing benefits against risks. Provincial rules of civil procedure require experts to acknowledge their duty to the court in writing and set out the contents of expert reports. Experts in civil cases in Canada generally give evidence through their reports and at trial, and are not usually examined before trial in the way parties are at examination for discovery.

For forensic accountants, the practical lessons are the same in both countries. Methods should be recognized in the profession and applied consistently; data and assumptions should be sourced and tested; alternative explanations should be considered and addressed; and the report should not stray into legal conclusions or into fields outside the expert's competence. An expert who appears to advocate for the client, who ignores contrary evidence or whose fee depends on the outcome will be attacked, and may be excluded.

Quantifying damages

Damages in commercial disputes aim to put the injured party in the position it would have been in but for the wrongful act. The core question is therefore always the comparison of the actual situation with a but-for scenario. Establishing the but-for scenario requires evidence and judgment, and most disputes between damages experts are about the but-for assumptions rather than the arithmetic.

Lost profits are the most common measure. Three methods are widely used. The before-and-after method projects the plaintiff's own performance before the damaging event into the damage period. The yardstick method uses comparable businesses, markets or locations unaffected by the event as the benchmark. The sales projection method builds the but-for scenario from forecasts, contracts or market data. Lost revenue is converted to lost profit by deducting the costs that would have been incurred to earn it, the incremental or variable costs, but not fixed costs that continued regardless. The analysis then considers mitigation (whether the plaintiff reduced its loss, or should have), causation (whether other factors, such as a recession, explain part of the decline), the treatment of past and future losses (past losses often attract prejudgment interest, future losses are discounted to present value), and taxes where relevant.

The program below applies the before-and-after method to an invented claim. Wexford Marine Electronics, a different client of Corbett Lane Forensic LLP, alleges that its main component supplier breached an exclusive supply agreement at the end of 2023, forcing it to source from more expensive and slower suppliers. Counsel asks for an estimate of lost profits for 2024 to 2026.

# Lost profits from a supplier's breach, before-and-after method (invented figures, thousands).
# But-for sales come from the trend before the breach; lost profit = lost sales x incremental margin.
hist = {2021: 6420, 2022: 6890, 2023: 7310}            # sales before the breach (actual)
actual_after = {2024: 5980, 2025: 6450, 2026: 7020}    # sales during the damage period (actual)
incremental_margin = 0.31        # contribution margin after variable costs saved on lost sales
rate = 0.09                      # discount rate for past losses is often zero (or prejudgment interest);
                                 # applied here only to the future year 2026, from the valuation date

# Linear trend fitted to the three pre-breach years.
xs, ys = list(hist), list(hist.values())
n = len(xs); mx = sum(xs) / n; my = sum(ys) / n
slope = sum((x - mx) * (y - my) for x, y in zip(xs, ys)) / sum((x - mx) ** 2 for x in xs)
butfor = {y: my + slope * (y - mx) for y in actual_after}
total = 0
print(f"Trend: {slope:,.0f} per year")
print(f"{'Year':<6}{'but-for':>9}{'actual':>9}{'lost sales':>12}{'lost profit':>13}{'present value':>15}")
for y in actual_after:
    lost = butfor[y] - actual_after[y]
    lp = lost * incremental_margin
    pv = lp / (1 + rate) if y == 2026 else lp
    total += pv
    print(f"{y:<6}{butfor[y]:>9,.0f}{actual_after[y]:>9,.0f}{lost:>12,.0f}{lp:>13,.0f}{pv:>15,.0f}")
print(f"\nLost profits claimed: {total:,.0f} thousand")
# Sensitivity: the margin assumption drives the answer.
for mgn in (0.25, 0.31, 0.37):
    t = sum((butfor[y] - actual_after[y]) * mgn / ((1 + rate) if y == 2026 else 1) for y in actual_after)
    print(f"  incremental margin {mgn:.0%}: {t:,.0f}")

Trend: 445 per year
Year    but-for   actual  lost sales  lost profit  present value
2024      7,763    5,980       1,783          553            553
2025      8,208    6,450       1,758          545            545
2026      8,653    7,020       1,633          506            465

Lost profits claimed: 1,562 thousand
  incremental margin 25%: 1,260
  incremental margin 31%: 1,562
  incremental margin 37%: 1,865

The trend in the three years before the breach implies but-for sales growing by about 445 thousand a year. Comparing that trend with actual sales gives lost sales of about 1.6 to 1.8 million a year, and applying an incremental margin of 31 per cent gives lost profits of about 1.56 million, with the 2026 amount discounted because part of that year was still in the future at the valuation date. The sensitivity lines show how much the answer depends on the margin: a range from 25 to 37 per cent moves the result from about 1.26 to 1.87 million. The opposing expert will test every assumption: whether three years is enough history to set a trend, whether the market grew as fast after 2023, whether Wexford mitigated its loss quickly enough, and whether part of the decline came from other causes. A well-prepared report addresses these questions before cross-examination does.

Other common engagements

Business interruption claims under property insurance use similar but-for analysis, measured over the period of restoration defined in the policy. Fidelity and crime claims, like Saltmarsh Industrial Supply Ltd.'s claim to Harrow Mutual, require the insured to prove the loss caused by employee dishonesty, usually with a proof of loss supported by the investigation; policies often have deductibles, limits and exclusions, and may not cover the cost of the investigation itself unless a specific extension applies. In shareholder and partnership disputes, forensic accountants value interests and analyse whether controlling parties diverted value. In matrimonial cases, they determine income for support purposes, value businesses and pensions, and trace assets that one spouse may have hidden; support is calculated under guidelines that differ between the two countries and among provinces and states. Business valuation methods are covered in the finance courses (FIN-301); in disputes, the valuation date, the standard of value and the treatment of minority and marketability discounts are frequent sources of disagreement.

Economic loss in personal injury and fatality claims

Claims for injury or death include the present value of lost earnings, the cost of future care and other financial losses. The forensic accountant projects the earnings the person would have had but for the injury, deducts the earnings they can still achieve, applies contingencies for life events such as illness, unemployment and early retirement, and discounts the future losses to the present. The discount rate has an enormous effect over long periods, as the program below shows for an invented claimant.

# Present value of future lost earnings in a personal injury claim (invented figures).
# The result depends heavily on the discount rate, which some jurisdictions set by rule.
earnings = 58000          # annual pre-injury earnings in today's dollars
residual = 21000          # earnings capacity after the injury
years = 22                # working years remaining
contingency = 0.12        # deduction for ordinary life contingencies (illustrative)
def pv(rate):
    return sum((earnings - residual) / (1 + rate) ** t for t in range(1, years + 1)) * (1 - contingency)
print(f"Annual loss {earnings - residual:,} for {years} years, less {contingency:.0%} contingencies")
for r in (0.0, 0.015, 0.025, 0.035):
    print(f"  real discount rate {r:>5.1%}: present value {pv(r):>11,.0f}")

Annual loss 37,000 for 22 years, less 12% contingencies
  real discount rate  0.0%: present value     716,320
  real discount rate  1.5%: present value     606,294
  real discount rate  2.5%: present value     545,882
  real discount rate  3.5%: present value     493,842

Moving the real discount rate from zero to 3.5 per cent reduces the present value of the same loss from about 716 thousand to about 494 thousand. Because the rate matters so much and is hard to predict, some jurisdictions set it by rule.

In Canada, several provinces prescribe discount rates for future pecuniary losses in legislation or rules of court, so that experts in those provinces apply the prescribed rates rather than debating them; for example, British Columbia's regulation under the Law and Equity Act has set separate rates for future earnings and future care costs, and Ontario's Rules of Civil Procedure set rates linked to bond yields. The rates change from time to time, so the expert must confirm the rule in force at the date of the report.

Reports and testimony

An expert report should state the expert's qualifications, the instructions received, the questions addressed, the documents and information relied on, the facts and assumptions, the methods used, the analysis and the opinions, with the reasons for each, and any limitations. It should acknowledge the duty to the court where rules require it. It should be written for a judge who is not an accountant: plain language, clear schedules that tie to sources, and charts that summarize without exaggerating. Drafts and communications with counsel may be disclosable, so the expert should keep communications professional and should not let counsel write or edit the substance of the opinions.

Testimony follows a pattern. In direct examination, the expert explains qualifications, methods and opinions in response to questions from the retaining counsel. In cross-examination, opposing counsel tests the expert's independence, qualifications, assumptions, data and consistency, often with documents the expert has not seen or with the expert's earlier writings. Good expert witnesses prepare thoroughly, listen to each question, answer only what is asked, concede valid points, explain without arguing, and never guess. Judges and juries tend to trust experts who are candid about the limits of their analysis.