When Disaster Strikes, Call a Forensic Accountant

At a glance:

• The main takeaway: Recovering from a disaster can be a lengthy process involving complex insurance claims that rely on quantifying the damages and extra expenses – a process that can be difficult to manage without professional help.
• Why call a forensic accountant? An unbiased, objective, and experienced forensic accountant can more accurately calculate lost profits and expedite the recovery process.
• Next steps: Companies just starting the road to recovery from disasters should evaluate whether a forensic accountant could help.

Contact Aprio’s Litigation Support and Forensic Accounting team to learn how we can help your business recover after a disaster.

The full story:

Natural disasters, building collapses, global pandemics, and other catastrophes all have one thing in common: there’s nothing you can do to stop them from occurring. No matter how hard your company tries to plan for the unexpected, disasters happen, and the impact they have on your business is usually beyond your control.

Sometimes, the recovery process can feel equally disempowering. Impacted companies must wade through complex insurance claim processes to recover the damages necessary to start rebuilding. These processes rely on accurately quantifying a company’s lost profits, which is no easy task. That’s why many businesses and insurance agencies turn to forensic accountants who have professional expertise in accurately calculating damages for a wide variety of companies and disaster scenarios.

Calculating Lost Profits

The typical first step to recovery after a disaster involves filing a business interruption and/or extra expense claim with your insurance agency, which often requires calculating lost profits using one of these three common methods:

1. Before-and-After Method – calculates what a company’s profits would have been during the business interruption period “but-for” the disaster. Comparing this amount to a company’s actual profits after the disaster accurately quantifies a company’s lost profits.

2. Sales Projection Method – leverages a company’s forecasts and budgets for the business interruption period to calculate lost profits, based on an analysis of the company’s past accuracy for these metrics.

3. Yardstick Method – analyzes the profits by comparing to a similarly situated business to create a baseline for calculating lost profits. This method is useful for new businesses with little history before the disaster.

It is important to calculate your lost profits using the method that best suits your company’s fact pattern, which is why a forensic accountant can be so invaluable to this process. Leveraging the expertise of a skilled, unbiased party means you can quantify your lost profits faster and with more accuracy, leading to a quicker recovery.

Many insurance agencies also rely on forensic accountants to verify this type of information, so utilizing a forensic accountant from the start means your calculation will be more defensible and more easily approved.

How a Forensic Accountant Can Help

To better understand why accurately quantifying damages is important, let’s explore some of the common post-disaster scenarios that may require a lost profits calculation:

• Business Interruption: Although commonly associated with natural disasters, business interruption claims are not exclusively reserved for hurricanes and floods. Physical damage can occur at a business at any time. Regardless of the cause of the business disturbance, a forensic accountant is equipped to calculate losses and coordinate with insurers to streamline the recovery process.
• Policy Claims: Insurance policy claims are always complicated, and natural disaster claims can be some of the most complex. The wide variety of possible coverage policies related to the different types of damage could tie up a company in paperwork for years. A forensic accountant can expedite that process by helping to calculate, document, and audit the information required for quantifying recovery costs.
• Understanding Policy Terms: Business Interruption policies typically include language as to how the lost profit calculation should be performed for making a claim. Engaging a forensic accountant who understands how to navigate and apply the appropriate policy language will expedite your claims process.

Related Resources

• Want to learn more about calculating lost profits? Read our introductory guide
• Fraud can also lead to lost profits. Avoid disaster by building an effective compliance program
• Understand the risks of a remote workforce

The road to recovery after a disaster can be long, but you don’t have to walk it alone. Minimize the complexity and recover faster by working with a forensic accountant. Aprio’s Litigation Support and Forensic Accounting professionals have the expertise to thoroughly assess your damages, calculate your losses, and streamline your recovery process. Contact us and move on to what’s next.