Episode 94: Economic Damages with Michelle Barton, CPA, ABV, CFF, ASA, CVA
In this season of The Data Sleuth Podcast, titled "Conversations about Fraud," guest host Justin Burns, managing partner of Space Coast Forensics in Brevard County, Florida, tackles topics including embezzlement, collaborative divorce, economic damages, construction fraud, and more. In each episode, Justin is joined by an industry expert to help tell the story behind the numbers and explore the latest in fraud detection and prevention.
In today’s episode we discuss economic damages with Michelle Barton, CPA, ABV, CFF, ASA, CVA. Our conversation includes:
What economic damages calculations entail
The nuances of educating jurors on accounting details during trial
The importance of reading and understanding your insurance policy coverage as a business owner
Cases involving differences in international standards and breach of contract instances
GUEST BIO
Michelle Barton joined HM&M in 2021 as a Senior Manager. She has a Bachelor of Business Administration in Accounting, and a Master of Science in Organization, Learning and Technology, both from Texas A&M University – Commerce. She is a licensed Certified Public Accountant (CPA) in state of Texas and has worked in public accounting since 1993. Michelle has been actively appraising business interests since 1997.
Michelle is accredited in business valuation (ABV designation) as well as certified in financial forensics (CFF designation) through the American Institute of Certified Public Accountants, and the American Society of Appraisers (ASA designation). During her time with HM&M, Michelle has continued her professional education and earned the designation of Certified Valuation Analyst (CVA) through the National Association of Certified Valuators and Analysts, where she is currently serving as a director on the Valuation Credentialing Board. She has performed valuations of closely held entities in conjunction with shareholder disputes, divorce proceedings, estate, gift and income tax planning and compliance, corporate reorganizations, stock-based compensation arrangements, buy/sell agreements, transactions, and compensation, as well as assisted legal counsel in the determination of lost profits, economic damages, and wrongful termination.
Email: mbarton@hmpc.com
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Transcript
Leah Wietholter:
Hi, I'm Leah Wietholter, CEO and founder of Workman Forensics, and this is The Data Sleuth Podcast. For the 2024 season, we are changing it up a bit. I've invited Justin Burns, a forensic accounting professional and fraud fighter to guest host the episodes. He's one of the friendliest and most personable professionals I've met in this space, and I'm excited for you all to meet him and his guests.
Justin Burns:
Hi everyone. As Leah mentioned, I'm Justin Burns, managing partner of Space Coast Forensics in Brevard County, Florida. And I'm your host for this season of The Data Sleuth Podcast. I'm excited to host this season titled, Conversations about Fraud, where we'll tackle topics including embezzlement, collaborative divorce, economic damages, construction fraud, and more. In each episode, I'll be joined by an expert to help tell the story behind the numbers.
On today's episode of The Data Sleuth Podcast, Michelle Barton and I will be speaking about economic damages. Michelle is a CPA, ABV, CFF, CVA and ASA. She works as a senior manager at Huselton, Morgan & Maultsby. She's a licensed CPA in Texas and has worked in public accounting since 1993. Michelle has been actively appraising business interests since 1997. In her role, she has worked with legal counsel in the determination of lost profits, economic damages, and wrongful termination. She also performs valuations in shareholder disputes, divorce proceedings, estate gift and income tax planning, and many, many others.
Hi Michelle. Thank you for joining us today for this recording of our podcast.
Michelle Barton:
Good morning.
Justin Burns:
Michelle, I know you've done all sorts of valuations work throughout your career, including valuations for shareholder disputes, divorces and stock-based compensation arrangements. But today I want to talk with you specifically about your work on cases involving economic damages and the calculations of those. Is there anything about economic damages, cases that you find especially interesting or maybe that you enjoy more than your other types of work?
Michelle Barton:
There is. Economic damages is a broad category for a lot of different types of damages and if you like puzzles and mysteries, that's really what I like about the economic damages cases because you can have the same type of company doing the exact same thing and the facts are always different. It's always a different set of facts and circumstances and the people involved and figuring out those puzzle pieces and putting them together so they make a logical sense so that you can explain it to somebody else who maybe doesn't have an accounting background or even if they do, explain it in a way that they understand it because they don't have access to all the pieces that you have, because you've got to be able to present it, like, "Here's the picture." I really find that challenging and enjoy digging into that data like that.
Justin Burns:
I do feel like a big part of our job is sometimes just having to explain the accounting to people who maybe don't understand accounting or maybe just don't even like numbers.
Michelle Barton:
You know what? I really don't like numbers, to be honest. It's a joke at the office. I'll say, "I'm bad at math," I'm not bad at math, but digging into it and explaining it so the regular person, just anybody off the street can understand it can be such a challenge. And when you're dealing with a jury in particular, being able to present very succinctly what you've looked at in a way that doesn't lose them. Because a lot of times they just hear it's something about money and that's what they hear, and they know that they're sitting there and they're stuck all day and they have to listen to boring lawyers and accountants. Sometimes being able to spice it up and connect with the jury a little bit helps. But really just being able to take it and break it down into simple steps so that they can follow that. Then that's part of the challenge. It's not just the puzzle of finding out what happened and what was lost or damaged, but then the explanation of it. I like that. That's fun.
Justin Burns:
I had an attorney from the state attorney's office tell me one time, "I need you to explain accounting like you're talking to sixth graders. In other words, don't let it sound like accounting or you're going to lose them." And then talking about the puzzle thing, "You'd be bad at math, but great at puzzles."
Michelle Barton:
Exactly. And a lot of times we use the lemonade stand story to help explain, "I have my lemonade stand and the guy came over here and was competing with me and he took away my customers." And when you break it down like that and tell that story to the sixth graders, then people get involved in it. And that's what you want us to get them invested in the story and how it happened and make them realize or understand what happened to your client and why they were damaged. Sometimes we're talking about numbers that are so far, they're not attainable for people. We're talking millions of dollars. People don't grasp that concept, and being able to break it down to a lemonade stand helps bring it back down to reality a lot of times.
Justin Burns:
And talking about the lemonade stand, you talked about the example of somebody's stealing customers, what is the loss related to that? And I know if you're working an embezzlement case, you get to the loss of they took X amount of dollars and then how does that just very easy calculation of they took this amount of dollars differ from a calculation of economic damages?
Michelle Barton:
With embezzlement, they're taking cash, they're taking capital, sometimes they use resources that weren't otherwise available. We had a case where the general contractor was using employees equipment out of his personal house, and that equipment would get damaged there and couldn't be used elsewhere, an embezzlement of the equipment. But it differs from economic damages in that with the embezzlement, yes, you can claim that they don't have the capital to do things in the future. And that has created a damage, but it's not necessarily reasonably foreseeable that that's what happened. It's not something that you could reasonably predict. With economic damages you can look at, we've lost customers and because we lost so many customers, we can attach a value to what a normal customer would bring to the table, that kind of thing.
Justin Burns:
When you're doing these calculations, what are the sorts of things that you are looking at? Is it if not for this, then this could have happened? Is it more of that deal and how do you go about proving that out?
Michelle Barton:
A lot of times it is a lot of that. If this bad thing hadn't happened, what would we look like now? If we hadn't lost these customers or if this contract hadn't gone away, what would've happened? If we didn't have this fire, how would we have continued? And you have to look at the past, history repeats itself or we should expect to be able to predict the future from the history. And we will go back and look at trends that they've had, revenue growth, expense growth, economic trends in the marketplace, housing developments, that kind of thing, and use that to project the future. You have to make sure you have reasonable certainty in what you're projecting.
A lot of times we'll go up against an expert and they'll say, "They're going to have 50% growth for the next 20 years. And that's what they've lost." We have to be reasonable about it. They haven't grown more than 2% a year in the last 20 years, what do you think is going to be different now? And you get these two different sides and you have to present both sides and it's the side that's most reasonable that should prevail. Although sometimes juries can do anything they want it seems like.
Justin Burns:
An economic damages calculation sounds like it can also just be maybe just an add-on to like I used embezzlement as an example earlier, it can be an add-on to just a regular forensic accounting case, fraud case of just saying, "They lost this, but their total loss is actually much, much higher due to lost business, lost contracts, things like that." Does that sound right? I don't do any economic damages calculations. I don't do any evaluations at all. You're teaching me about this right now.
Michelle Barton:
You can have the loss of the business, say a fire destroyed your building and you've completely lost the business. If you owned a grocery store and your grocery store burned down, then you could say, "I made 10 million a year and I've lost $10 million." That's not really the case. At the end of the day, you might've only made $1 million, but you didn't lose just one, you lost the ability to go forward after that. You could have been in business for another 20 years making the same million dollars every year. And it's a matter of projecting what you would've lost had the fire not occurred, what would set you back to where you were before it happened. In that case, that's actually physical damages, economic damages houses a bunch of different types of damages, lost profits and compensatory damages, that kind of thing. But it's a matter of looking at not just what was there, but what could have been there had it not happened, had the bad thing not happened, where would you be basically?
Justin Burns:
The types of economic damages cases that you work, what's the most typical example of the most frequent type of case that you work?
Michelle Barton:
A lot of times it's breach of contract. Lawyers will throw up, attorneys will throw up breach of contract, breach of fiduciary duty in almost every case we see, but they attach a lot to the pleadings. And usually it's breach of contract, breach of fiduciary duty where an employee has left and taken customers or they left and stole the customer away nullifying that contract, if that makes sense.
We've had cases where insurance agents leave an insurance company and go to another insurance company and take them with them or bank officers, loan officers will call all their clients, all their customers at the bank and have them move all their deposits to another bank kind of thing. It's obviously breach of fiduciary duty because they stole from the bank or stole from the insurance company. Contracts, if you've contracted with the company to manufacture a certain number of soda bottles and then the company says, "No, we're not interested, never mind," then you have that damage as well. And it's a matter of did we purchase what we needed to purchase? Are we out that money? What did we lose by you saying, "Never mind. We're not interested in the contract?" That seems to be the most typical, I think.
Justin Burns:
And in our prep phone call before this, you also talked about insurance coverage gap cases. Can you talk about those a little bit more?
Michelle Barton:
We've had a few cases where the company thought they had purchased a certain level of insurance and it turns out they didn't. And if they had a damage to the building, they weren't covered for as much as they thought they were. And their claim is, "We would've been fine. We didn't know that we weren't covered. And now you're telling us we're not, and what you're giving us is not enough for us to continue." And then of course, it drags out in court and that takes 10, 15 months, two years to get any money. And at that point, they haven't had any money to keep going forward and virtually destroyed the business. And it's a matter of proving, "If I'd had that coverage, could I had continued and if I had gotten the payout quicker, could I have continued?" That kind of thing. Whether it is a gap or just a misunderstanding in what was covered and a lot of that is up to the attorneys to tell you what they believe the answer is and then us to find out what the damage would be as a result.
Justin Burns:
That specific example, insurance coverage gap that we talked about on the pre-recording phone call, I was thinking about it, we're recording this episode on October 2nd. I know it's not going to come out until October 22nd, but last week I'm in Florida, I watched Helene roll through the other coast of Florida, and I'm thinking about, "These are those insurance coverage gap cases that Michelle was talking about. There's going to be a lot of people who thought maybe they were covered that maybe aren't." And those were really coming to mind businesses over on the west coast of Florida and all the way up through Atlanta and to the Carolinas and beyond.
Michelle Barton:
That's definitely something that people might need to look into is I don't know what damage hurricane might cover, but if they thought they had a certain level and it turns out they didn't or they were specifically excluded from something that was damaged, then that's definitely something to consider, especially for businesses.
Justin Burns:
And working an insurance coverage gap case, what can you really do if it says in their policy, "Hey, you're covered for X amount," and then the policy holder comes back and they say, "I thought we were covered for a lot more," what can you do at that point?
Michelle Barton:
In this case, it was a misrepresentation from the broker allegedly. And they thought that they were covered. And really all we can do is say, "This is what we lost," and hope that the jury agrees that you had the right to believe that you were covered for this specific thing and you were misled basically. It is just a matter of, "Here's where we were and then here's where we should be and here's what we lost."
Justin Burns:
Just attaching a number to it.
Michelle Barton:
Just attaching a number to it and seeing if you can... Because a lot of it comes down to who do they believe? The policy's there, the policy says what it says, and if you didn't read it, whose fault is that? It's buyer beware. But it's a matter of, but it was represented that that's what it said. We didn't realize that there were things in the policy that we needed to do specifically that the broker maybe knew that we didn't have and didn't inform us that we needed to get it. Of course, this is all allegedly, and it's a matter of who can prove what's happened.
Justin Burns:
It's really a case of, I imagine sometimes it's, "I've got this warehouse or this building and I've represented to my broker, it's this size, it holds this much. We've got X number of dollars of inventory in there at any given time, I want to get coverage for it." And the broker comes back with, "I can get you a really good price on it, but it's not actually the level of coverage that you need." Is that the right path?
Michelle Barton:
Yes. I think it's exactly what you're saying that say we are looking for something to cover our $5 million worth of inventory. And the broker says, "Sure, I can get you that," but it turns out we actually have 10, or the broker actually goes out and gets 2.5 million instead of 5 million of coverage then you have that gap there. And a lot of insurance companies will be like, "We only said 2.5. That's what this price was for for the policy." That's the gap.
Justin Burns:
I think that's going to lead us into our ad break and we'll be right back.
Speaker 4:
Did you know that The Investigation Game isn't just for professional continuing education? The Investigation Game Education Edition is for university teachers to provide their students with a hands-on experience to work with sample evidence, replicating an actual fraud investigation. The games will reinforce the steps to basing the investigation findings on data analysis and best evidence, not opinions. To order The Case of The Cashflow Fiasco or The Case of The Man Cave for your students, visit workmanforensics.com/tig-educators or check out the link in the show notes.
Justin Burns:
And we're back with Michelle Barton talking about economic damages cases. Michelle, in preparation for this podcast, you were telling me some case stories and you actually got to work one overseas. Can you tell us a little bit more about that?
Michelle Barton:
We did. We got to go to Tokyo in, I think, it was 2015 on a case that started off a normal case, although we knew this in the back of our mind that we might have to go. It was in front of an arbitration panel in Tokyo. We had a client that upgraded the PTACs, which are the air conditioning units inside the hotels that sit in the windows. And he had made them better and he ended up entering into a contract with a very large Japanese company and he was going to manufacture these PTACs for them. And they had ordered so many, or he had provided so many or it ended up they didn't take possession of them and they just sat on the lot. And we had to go through, and that was a big forensic exercise because we had to go through the whole inventory list and everything from the little capacitors to the wires and everything that made this unit and figure out, calculate what his loss was for them canceling the contract basically.
And there was a clause, there was this little tiny clause in the contract that if they had any disagreements, it had to be tried in front of the arbitration panel in Japan. We did a lot of work. I learned so much more about access than I wanted to and Excel formulas kind of thing. And we flew to Japan and got to present in front of their arbitration panel. And one interesting thing about Japan different than the US is they don't use regular size paper. We use eight and a half by 11 and they use what I think is called A4 paper, which is basically half size. You take a regular sheet of paper and fold it in half and they print on that. A lot of time was spent trying to figure out how to print on our printers this particular paper, and then finding the paper.
We had to order it specialty, a special order to get that size paper in. And I went to a lot of trouble. We figured out how to print it off. We had a book that was maybe three, four inches thick that was only the size of a paperback novel. And we got there and I was so proud of it that I'd been able to bind it and everything and I had forgotten to print on the back side of the paper and they were just astonished that we didn't use the back side of the paper because it was so wasteful. And I'm like, "We were lucky to be able to print at all."
But that was interesting with the different customs and the different things that we had learned for that case. And really just the analysis of going in, like I said, and finding the capacitors that he had used for each one and when they had been used and what set out on the lot and what got damaged and that kind of thing. That was a lot of fun. And then we were in Japan for a week, I think we came in on a Sunday. We were in front of the panel on Monday through Wednesday, and then we were done Wednesday afternoon. And we had Thursday and Friday to walk around Japan. That was fun.
Justin Burns:
I would've never thought about a different size of paper.
Michelle Barton:
We were all ready to go and we had our size in front of us, but what they wanted us to present as part of the evidence was that size paper. And I just remember them looking at it like, "Why didn't she print on the back of the paper?" All I could think was, "I was just lucky to get it in the printer and get it to print anyway."
Justin Burns:
It's strange.
Michelle Barton:
Just finding it. You'd think it'd be easy to find really. We could just cut paper in half, but it wasn't quite the right size.
Justin Burns:
A strange little speed bump in the case. You're talking about doing this massive forensic case as well as getting to the damages. Were you actually over there digging through the inventory?
Michelle Barton:
No, we flew to his location. His office was in West Texas and we flew out to him to see some of his records, but really it was all just data transfer from his accounting system that we would then take and manipulate so we could figure out what had happened exactly.
Justin Burns:
That's good. I didn't catch that he was located here, you could at least get that part done here.
Michelle Barton:
That was nice. We've had cases where I've flown out. There was a case in Houston several years ago that I went out to and it was a chemical engineering plant, and I had to don the hard hat and we had to ride the bicycles out to the plant and walk around and see how the chemicals were made just so we understood the process. That was fun, but on this case it was just manipulating the numbers.
Justin Burns:
And then earlier you touched on cases where an employee might leave a company and take some clients with them. You told me about a case story you've got involving a bank where that happened.
Michelle Barton:
We had a case with a fairly large bank, regional probably, and they had some employees that were client contact, customer service, and there was a new bank opening up in town, if you will. And this new bank recruited three or four of their current employees who then on the downside contacted their clients with their large deposits because banks get paid on the deposits they have that they hold for people. And they contacted these people and convinced them to go to the new bank, "We can give you better interest rate, we can give you better terms," whatever. And we had to go through about 50 or 60 different client accounts to see what the typical balance was and what the bank had earned and then what they lost and trace them to the new bank and what the bank had earned. And it was a matter of, "Here's what we lost, here's what you earned, we want that back," kind of thing.
That was a big exercise. Your Excel spreadsheet has 50 or 60 different tabs, one for each employee or one for each client, customer, different interest rates, different terms, time periods. Some were only a year's worth of deposits, another would be five years worth of deposits. It was a matter of going through each one. Each tab was individualized for each customer. And tracing that and getting all that fact pattern down was a challenge. But that seems to happen a lot, that it's the breach of fiduciary duty where they will take customers with them because we all want to build our book of business and that's one way to do it. But it's not fair to the company that you left that you were working for, that you stole their source of income from them.
Justin Burns:
Go out and get new clients all you can, that's fine. Don't take mine with you when you go.
Michelle Barton:
Exactly. And they don't belong to anybody. You do have a relationship with them, but the relationship is it with the employee or is it with the bank and the employee in that case?
Justin Burns:
That's interesting. Do you have to prove that the banker reached out to these customers and enticed them to go, or I'm sure there was some possibly where the client was just like, "I just like this guy, so he moved."
Michelle Barton:
"I just like Johnny, I'll go with them." We didn't so much. We had to go with the evidence of they had an account here and now they have an account here, or they've been here at this bank for so long and now randomly they've just left, seems fishy. And it looks like they have the same officer, same employee dealing with their account. In that case, a lot of times you take what the attorneys are telling you or the fact pattern of the case and you have to assume those. You can question, "Does this make sense?" But really it was just the facts of they were here, now they're not. And they're over at this bank. They didn't go to some random bank, they just happened to go to the new one down the street where the new employee was.
Justin Burns:
That's really interesting. I think we're running out of time. Thank you for joining me on the podcast. And if our listeners want to get in touch with you, what's the best way of doing that?
Michelle Barton:
Probably the best way, either email and I think you'll have that on the podcast, but it's MBarton@hnpc.com. Our number is (972) 404-1010. I work with Huselton, Morgan & Maultsby in Dallas, Texas and would love to hear from anybody.
Justin Burns:
And we'll include that in the show notes so that people can reach out to you if they want. And again, thank you so much for joining me.
Michelle Barton:
Thank you for having me. I appreciate it.
Leah Wietholter:
Thank you for listening to The Data Sleuth Podcast. If you enjoyed this episode, please leave us a review wherever you listen. The Data Sleuth Podcast is a production of Workman Forensics. To learn more about our investigation services and resources, please visit workmanforensics.com.