Project Nature: Lost Profits Litigation (Defense)
SIC: 3053, 5085 (Rubber Gaskets, Seals and Industrial Supplies)
Company Size: $4.3 million in sales
Assignment Issues: Working with defense attorneys for a major aircraft company and selected suppliers, we were engaged to examine lost profits damage claims by the business whose owner/operators were injured in a private plane accident, causation of which was claimed / attributed to failure of a component part of the downed plane.
Plaintiff’s CPA-produced financial statements clearly showed multiple years’ sub-standard results, including losses, immediately following the accident, with eventual return to pre-accident profit levels. However, by digging through past contract documents boxed away in plaintiff’s office basement, we discovered a non-disclosed accounting aberration.
Plaintiff’s major income source was not commercial sales as originally represented. Instead, they had turned to pursuit of large government contracts. These were accounted for on a completed contract basis. That is, start-up and production costs were expensed as incurred, but income was paid and recognized only upon final contract deliveries, which were often made very long after costs were incurred.
We found that the plaintiff had been awarded a new, large government contract just prior to the accident, but the actual start-up of the contract’s actual funding advances and related product deliveries had been delayed for a year or so. Plaintiff had decided to gear-up and produce in anticipation of the formal contract start-up, thus incurring large amounts of costs, without matching revenues. These pre-delivery costs showed as” losses” initially, but were eventually recovered (plus profit and overhead reimbursements) when the major deliveries were made in subsequent years at the end of the contract. In fact, the injuries to plaintiff’s owner/employees had not had a measurable negative effect on profits.
After our preliminary report of findings and conclusion, a total settlement of about 20% of the initially-claimed $multi-million total damages amount was agreed upon, with virtually no amounts allocated to business lost profits.