Jeffrey T. Willoughby, CPA, CFF, CFE, Forensic Accounting Expert
James A. Stavros, CPA, MBA, Forensic Accounting Expert
Case Synopsis: A commercial painting and cleaning contractor was hired as the general contractor to clean, repair and paint several bridges along a section of interstate highway lasting several months. The contractor hired another company to be the primary subcontractor performing painting and cleaning work. Part of the compensation for the primary subcontractor was to include a portion of the profit earned on the contract based upon the work completed. The agreement between the primary contractor and the primary subcontractor was oral.
The cleaning and painting work slowed during the winter months due to the cold weather. The subcontractor left the job site and did not return. The general contractor completed the remaining portion of the contract, working through the winter months and hiring additional workers to replace the labor expected to be performed by the primary subcontractor. The general contractor completed the work outlined in the contract at a profit, and, because of provisions in the contract, earned performance bonuses for early completion of certain portions of the contract.
Jeffrey T. Willoughby, CPA, CFF, CFE, Forensic Accounting Consultant ::::
Description: A physician operating a specialty medical practice was allegedly forced to reduce the number of hours he spent working in his practice as a result of injuring himself at a local health club. The plaintiff argued a fall at a health club caused injuries which resulted in physical limitations requiring him to scale back his medical practice. Plaintiff claimed lost profits for a period of up to 20 years with calculated loss amounts ranging from $4,000,000 to $25,000,000.
Expert Analysis: An analysis of the Plaintiff’s calculation of lost earnings was presented in 30 different scenarios indicating lower gross sales and, by default, lower salary and business income. Calculations also included provisions for full and part-time losses as the doctor was currently working but was expected to be required to cut back hours and eventually close the practice.
Tax returns for the practice indicated a decrease in gross revenue in the year in which the accident occurred and subsequent decreases in the months following. Comparing the revenues pre- and post-injury, there was a definite decrease in gross revenue and the resulting net profit available to pay to the owner. It appears to be clear cut; injury occurs, revenues drop, lower profits result, one causes the other. The loss of net income or earnings is the difference between pre- and post-injury net income calculated out to a worklife expectancy.