The Generally Accepted Accounting Principles (“GAAP”) Sometimes Don’t Fit the Glove – Understanding Business Interruption Claims, Part 98

“If the gloves don’t fit, you must acquit” – Johnny Cochran

Many forensic accountants have noted that the Generally Accepted Accounting Principles (“GAPP”) focus on business valuation formulas that are more suited for commercial transactions than for determining the amount of business income loss. Businesses also have different styles of bookkeeping, which can create challenges in finding the necessary data to support a claim.

Forensic accountants can learn a few tricks from Johnny Cochran. It is very easy for scientists to give an opinion by applying the same set of rules to produce an “either, or” outcome. But without departing from the generally accepted principles in their field, forensic experts should strive to employ more holistic approaches that can put the facts in perspective, numerically speaking.

In Bemo USA Corp. v. Jake’s Crane, Rigging & Transp. Int’l, Inc., 10-16663, 2011 WL 5438584 (9th Cir. Nov. 10, 2011), the trial court relied on the opinions of the plaintiff’s three experts, including one forensic accountant, in granting summary judgment in favor of Bemo USA for property damage, business income losses and extra expenses in the amount of $2,996,611.00.

Bemo is an Arizona corporation in the business of manufacturing taper mills, which are portable machines used to install metal roofs. Taper mills are approximately 40 feet long and weigh approximately 48,000 pounds. Jake’s Crane is in the business of rigging and heavy transportation. Bemo hired Jake’s Crane to mount a taper mill on a structure, but on September 7, 2005, the crane operator dropped the taper mill and destroyed the sophisticated machine.

Bemo ordered a replacement taper mill on an expedited basis to mitigate its losses, but it takes 12-15 months to manufacture and deliver. As a result, Bemo sustained more losses than Jake’s Crane was willing to pay and litigation ensued.

During the lawsuit, Jake’s Crane admitted liability. In support of its Motion for Summary Judgment, Bemo presented the Affidavit of Martha Zehnder, CPA. The trial court entertained written and oral arguments from both sides and ruled in favor of Bemo. Jake’s Crane appealed, alleging that the trial court abused its discretion when it accepted Marthan Zehnder’s Affidavit to support the summary judgment ruling.

Without entertaining oral arguments, the Ninth Circuit Court of Appeals affirmed the lower court’s ruling and stated in an unpublished opinion:

The contention that the district court erred because the report failed to affirm explicitly that it was based on generally accepted accounting principles (“GAAP”) fails for at least two reasons. First, the district court could reasonably conclude from the phrasing of Zehnder’s disclaimer that she did use GAAP except to the extent that she capped damages according to the requirements of the insurance policy. See Fed.R.Evid. 104(a). Second, there was no evidence that GAAP even addresses the question how damages for business interruption should be computed, much less that Ms. Zehnder failed to adhere to GAAP.

While the opinion does not have any precedential value, it certainly should give forensic accountants courage to test the parameters calculating business interruption losses.