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Dec 11

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Rules of Thumb & Formulaic Software Models Are Dangerous for Damage Calculations

Plaintiffs often desire short cuts to damage measurements. Given the cost of using experts employing proper methods and data, the temptation is obvious. For example, business valuation programs are commonly available that will spit out a result once the user inputs a few financial statistics for the subject company. Why pay thousands of dollars for a business valuation that follows valuation standards, when the program can be purchased for less than a thousand dollars, and the result can be obtained shortly after the program is loaded?

In McGinty vs. Hennen, 372 S.W.3d 625 (Tex. June 29, 2012), the Texas Supreme Court overturned a damages award using this type of software. This particular case involves the use of a commonly-used insurance-industry software program, but the principle is much broader. Damages cannot be calculated properly using rules of thumb or automated valuation models. This article describes the details and the Court’s decision.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2012/12/rules-of-thumb-formulaic-software-models-are-dangerous-for-damage-calculations/

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