Having spent 25 years investigating quantum in civil claims, my experience has shown the need for a careful examination. In many instances this may be completed quickly, but in others there may more to the situation than meets the eye. This of course is true whether instructed by defendant, by claimant or as single joint expert. Otherwise, entirely the wrong outcome could result......

One late summer morning, Michael, aged 40, was tucking into his bacon & eggs in a roadside café. Suddenly a car ploughed into the building from the nearby dual carriageway. Michael suffered very serious multiple injuries and was airlifted to hospital.

Until that moment, things had being going well for Michael. He and his wife had set up a small manufacturing business 3 years earlier. They worked in partnership, sharing profits equally. His wife managed the business and supervised the employees. Michael maintained and repaired the machinery and undertook the sales and delivery functions. He had been driving all over the UK and also to Europe, where export customers had been developed. The business was continuing to grow.

Following the accident, Michael spent more than 2 weeks in intensive care, with his wife at his bedside. Initially there were concerns that he would not survive. He was discharged home after 4 weeks, but had suffered a head injury and epilepsy was diagnosed. Much later it transpired that he would never be able to return to work (indeed, he was found to be unable to manage his own affairs).

Some 7 months after the accident, the business failed and the Official Receiver was appointed. Michael and his wife were declared bankrupt. The failure was attributed by Michael’s wife to the constant care she had to provide for her husband following the accident, and her inability to attend to the business.

In the meantime, she had consulted local solicitors. She was told that Michael should be entitled to substantial damages and a preliminary evaluation was made. She was advised the amount that Michael should recover, which she regarded as inadequate. In view of the serious nature of her husband’s injuries she changed solicitors. I was instructed by the new solicitors to carry out an investigation of Michael’s financial losses.

The matter was hampered somewhat by the fact that many of the business records had been destroyed in a fire at the Official Receiver’s office.

In the usual way, I summarised the business results from the available financial accounts. Because of the accident, no accounts had been prepared for a period of almost 12 months before the Official Receiver was appointed.

Nevertheless, I was able to examine information from the sales records. My report showed that even after the accident, sales had continued to increase at an annual rate of 70%. This was notwithstanding the severe disruption to the business occasioned by the accident, only one third of the way through the financial year. The increase was of the same order as in the previous year and suggests that steps were taken to mitigate the loss of business.

I provided the usual projections of the claimant’s past and future losses of earnings, i.e. excluding his wife’s half-share of the losses, based upon the assumptions described in my report.

In the light of the trading results pre-accident, as alternative (a) I projected further increases in sales, but for the accident, at the rate of 40% per annum for each of the first two years, with no further real increases (i.e. after allowing for monetary inflation) thereafter. As alternative (b) I allowed for a further increase in sales, but for the accident, of 40% in the first year only, i.e. with no further real increases thereafter. I considered the projections to be conservative.

I was instructed to address various heads of claim in my report, but for the purpose of this article I shall summarise only the projected past and future losses of earnings (in round £’000):-

Alternative (a)
Pre-trial loss £46,000
Future loss £231,000

Alternative (b)
Pre-trial loss £39,000
Future loss £176,000

Subsequently, forensic accountants were instructed by the defendants. They did not accept my contentions. Their report argued that the business was already in a precarious financial state at the time of the accident and that given the vulnerable financial position it was not surprising that the business had ceased to trade a few months later. They projected an almost negligible loss of earnings.

In so doing, the defendants’ accountants prepared financial accounts for the business, covering the period of 4 months from the date of the last accounts up to the date of the accident.

In that exercise they made an assumption that the value of closing stocks and work in progress at the end of the 4 month period would have been the same as shown at the beginning of the 4 month period. They in fact stated that they were giving the Claimant “the benefit of the doubt”, pointing out that the value of opening stocks had been higher than at the end of previous financial years. They commented that their assumption “means we may slightly overstate the Claimant’s pre-accident profit”.

Thus the accounts they prepared showed a gross profit percentage of only 18% (against the previous history over 3 years of 32%) and a net profit percentage of only 3% (15% historically).

It was therefore necessary for me to undertake a more extensive investigation. Fortunately it transpired that, despite the loss of most of the business records in the fire at Official Receiver’s office a couple of years earlier, a substantial proportion had already been photocopied at some stage.

I was able to analyse in detail the raw material purchases in the 4 months immediately before the accident. It was found that such purchases had a significant seasonal element. Purchases had been much higher during the months of July and August and very high in the last few days in August (shortly before the accident).

With the assistance of wages records it proved possible readily to evaluate the level of stocks and work in progress on hand at the time of the accident. This was clearly preferable to the simplistic assumption that they would have been of the same monetary value as at the end of the previous April.

Inevitably, an entirely different picture emerged. I was able to show that during the 4 months immediately before the accident the gross and net profit percentages, had financial accounts been prepared by the business owners, would have been the same as those shown by the accounts for the previous 3 years. (N.B. had the business records not been photocopied before the fire it would not have been possible for me to undertake this exercise, thereby making it more difficult to refute the defendants’ accountants’ contentions).

The outcome demonstrated once again that it is often insufficient simply to rely on financial accounts which have been presented.

A few months later, settlement of the claim was achieved with damages for the claimant of £850,000. This was a global figure, to include costs of care, etc. Whilst there was no analysis to show the amount in respect of loss of earnings, this must have been substantial. Furthermore, the settlement was comfortably in excess of Michael’s original solicitor’s estimate of £20,000 (sic).

It should be borne in mind that I have necessarily had to condense for the purpose of this article what was a complex case. Nevertheless, from my long experience there have been very many instances in which a proper forensic examination of the facts has proved essential in achieving access to justice.

Stephen Harris has specialised in the provision of forensic accountancy and litigation support services since 1979. He can be contacted at Stephen Harris & Co, Chartered Accountants, Belgrave Place, 8 Manchester Road, Bury, BL9 0ED (Tel. 0845 458 6680: e-mail: info@stephen-harris.co.uk).