THE ESSENTIAL TASKS in assessing loss of earnings are to determine:
- Actual post accident earnings
- Likely future earnings
- The level of earnings that it appears the claimant would have enjoyed but for the accident.
This involves understanding the claimant’s sources of pre and post accident income, how profitable these were and what was required to achieve these levels of profitability.
This is simple in principle, and for relatively straightforward cases such as those involving employed persons with stable past and fairly predictable future career paths and earnings patterns, it is also simple in practice. However, there are the other, more interesting, cases on which this article focuses.
Factors that can make assessing loss of earnings difficult include:
- Relatively short pre-accident track records
- Incomplete financial records
- Unusual financial arrangements and accounting practices
- Businesses operating in rapidly changing sectors of the economy
- The affects of other significant events unconnected to the accident
Short track records or volatile economic sectors require one to look at such factors as the industry in general, how other firms fared over the relevant period, what the business plans and budgets had been and how the individuals controlling the business had performed (or not!) against budgets in the past.
Incomplete financial records may require accounts reconstruction work in order to determine past performance (pre and post accident).
Some individuals combine self-employment with trading through limited companies and joint ventures with third parties. They may involve other ‘partners’ who may or may not contribute to how the income is earned or how profitable the businesses actually are. It is important to separate such things as profit sharing arrangements put in place for reasons of tax planning from the real operating revenues and costs of the business, which may have been affected by the incapacity of the claimant.
Assessing loss in difficult cases tends to require a combination of detailed investigative and analytical work and the ability to stand back and ‘see the wood for the trees’. A thorough understanding is required of how the business works and what the limiting factors are, and thus what the necessary cost structure would be for a given level of activity.
My term ‘more interesting’ is that of a forensic accountant who enjoys distilling relevant financial data and trends from the often incomplete and chaotic jumble of documentation and assertions that some claimants, and defendants, produce.
To help with the simpler quantum issues Baker Tilly’s Forensic Services team has developed a PC-based toolbox with numerous pages of facts, statistics, calculators and other tools, including Gross to Net Earnings and Ogden Interactive for multiplier calculations. Registration is free at www.bakertilly.co.uk/forensictoolbox.