Case Study 12—Further Considerations in the Determination of Lost Profits
In addition to considering what standard methodologies to apply in the calculation of lost profits, a concurrent concern is how to include other qualitative variables that could be important to avoid overstating the loss. The combination of elements of the fraud triangle along with professional skepticism can make a difference in the effort to properly restore a claimant to the position they would have otherwise been in.
It is well known in fraud and forensic accounting that the fraud triangle embodies three components: pressure, opportunity, and rationalization. Pressure is derived from a financial issue that generally cannot be resolved by the fraudster in a lawful manner. Frequently, to a fraudster this problem must be fixed by concealment. When it relates to matters of business, an array of items can be viewed as causing pressure: eroding sales, excess debt, and/or fierce competition are some examples that could point an individual's behavior in this direction.
Opportunity surfaces when a fraudster recognizes a way to use their position to commit fraud. In occupational fraud, opportunity is usually created by weak internal controls. However, from a broad perspective, fraud opportunity can also arise within the framework of preparing a business interruption insurance claim for lost profits. The possibility of “cooking the books” in order to profit from a loss is an aspect of the process that ...