Future earnings are not certain. Companies start up and companies fail, economic cycles take place with expansion and contraction, and on a personal level, individuals become ill, get displaced or injured, die, or simply become unemployed via layoff. There are risks that certain events can happen in the future even if the event leading to the lawsuit never took place. Forensic accountants who estimate damages need to take these risks into account. One solution is to assume some fixed date. For example, age 65 for retirement, perhaps on a defined benefit program, Social Security retirement age, or similar argument. Another method is to use published work-life tables originally developed by the US Department of Labor, Bureau of Labor Statistics and subsequently updated in a number of journal articles published after BLS published its last work life expectancy tables in 1986. A common feature in these studies is the analysis of entry and exits from the labor market, including “increment-decrement” and Markov transition probability models. In general, these models use actuarial methods to consider the risk of non-work by age, gender, race, and work status (active or inactive at time of death or accident). Data studied in these models is individual specific data on labor market status obtained from the Current Population Survey, a monthly household survey conducted by the U.S. Census Bureau for the BLS. To use this approach, the forensic accountant simply looks up the appropriate future work life period in a published table and uses that number as a future loss period. Variations within this approach include different ways to adjust for periods of non-work during the individual’s work life before the individual is expected to finally leave the labor force.
About The AuthorCharles Amodio is a partner with FAZ Forensics (Ferraro, Amodio & Zarecki CPAs), based in Saratoga Springs, NY. FAZ is a boutique forensic accounting firm committed to supporting the legal community and others in the successful resolution of financial disputes, fraud & financial investigations, economic damage quantification and business valuation matters by delivering valuable forensic accounting expertise and related expert services at an appropriate cost. FAZ is a recognized leader in the forensic accounting profession serving clients in Albany and the Capital Region, Boston, New York City and the surrounding Metropolitan Areas. If you are interested in more information, please contact them at (518) 288-2160.
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