If your organization suffers losses due to fraud, you may decide to pursue legal action, possibly to be compensated for damages. But, quantifying fraud loss can be difficult. Typically, the assistance of a financial advisor is necessary. They’ll look at the facts of the case and assess the harm caused from fraud loss by your organization. Let’s see how to do it!

Benefit-Of-The-Bargain Vs. Out-Of-Pocket 

Damages advisors typically use either the benefit-of-the-bargain or out-of-pocket approach to make estimates. The appropriate method depends to some degree on the location and nature of the fraud. But in most cases, the benefit-of-the-bargain method results in greater restitution for victims.

Take, for example, a real estate developer who buys a parcel of land that the seller says is worth $2 million but is being offered at $1.5 million. In reality, the seller is lying about the parcel’s value and has falsified the valuation report. The land is actually worth about $800,000. Putting aside the developer’s failure to perform proper due diligence, how might fraud damages be assessed?

Using the out-of-pocket rule, the buyer would be awarded $700,000 in damages, or the difference between the land’s real value and the amount paid for it. Using the benefit-of-the-bargain rule, however, damages would be calculated at $1.2 million — the difference between the seller’s misrepresented value and the parcel’s actual worth.

Other Approaches To Quantifying Fraud Loss

Plaintiffs typically prefer the benefit-of-the-bargain method, for obvious reasons. But there are other methods advisors might use to calculate lost profits — for example, the benchmark (or yardstick) method. Here, the advisor compares a fraud victim’s corporate profits to those of another, similar company that wasn’t defrauded. This method is particularly appropriate for new businesses or franchises.

The hypothetical (or model) method is also generally appropriate for organizations with little history. It requires the advisor to gather marketing evidence that demonstrates potential lost sales. After calculating the total, the costs that would have been associated with the lost sales are subtracted to arrive at lost profits.

For longer-established organizations, the before-and-after method typically is preferred. Advisors look at the organization’s profits before and after the fraud compared to profits during the time the fraud was being committed. The difference is the organization’s lost profits.

Help Improve the Odds

To help improve your chances of receiving adequate restitution in court, you or your attorney should engage an experienced damages advisor early in the litigation process. KPM can help with this process, contact us to learn more.