The Role of an Accounting Expert in RWI Claims: Analyzing Breaches and Quantifying Losses

Potential RWI claims are not always identified immediately after closing. Accounting issues may emerge through post-acquisition financial reporting, audits, integration activities or changes in management. When an issue arises, an accounting expert can assist in evaluating whether the underlying financial information suggests a potential breach, estimating its financial impact and identifying areas that may warrant further investigation. Early involvement can also help preserve relevant accounting records and focus the analysis before a claim is fully developed.

Many accounting-related RWI claims involve representations that the target’s financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP). Financial statement breaches are a significant driver of RWI claims and recoveries. Claims studies from major RWI brokers report financial statement breaches as a leading source of paid transactional risk losses globally. One study reported that financial statement breaches accounted for approximately 40% of losses paid on North American R&W policies placed since 2019.³

An accounting expert may evaluate the underlying accounting records, relevant accounting policies and supporting documentation to assess whether revenue, expenses, assets and liabilities were recorded appropriately. The analysis may also address how any identified misstatements affected historical earnings, working capital or other financial measures relevant to the transaction.

Three examples illustrate where these issues commonly arise.

Revenue Recognition

Assume a company records $500,000 of revenue from a customer project in its pre-closing financial statements. A subsequent accounting review concludes that only $100,000 should have been recognized in the relevant period under GAAP. The resulting revenue overstatement would be $400,000.

An accounting expert may review customer contracts, invoices, project records and the company’s revenue recognition practices to assess whether revenue was recorded appropriately and quantify the resulting financial impact.

A $400,000 revenue overstatement does not necessarily result in a $400,000 earnings overstatement. The accounting expert may also need to consider the treatment of associated costs, including whether those costs should be recognized in a different period than they were in the pre-closing financial statements.

Accruals and Undisclosed Liabilities

Assume a company owes a vendor $2 million for services provided before closing but fails to record the liability. After closing, the buyer discovers the obligation and the acquired company pays the vendor.

The issue may implicate the financial statements representation, the no undisclosed liabilities representation or both.

The accounting expert may assess whether the company should have recorded the $2 million liability before closing, which financial statement periods were affected and whether the related expense was appropriately recognized. The analysis may also consider whether the liability affected net working capital or another component of the purchase price. Depending on the nature of the expense and the periods affected, its omission could have overstated historical earnings and / or impacted the company’s value.

Material Contracts

Accounting experts can also assist with claims involving representations over material customer or supplier contracts.

Assume a company generates $10 million of annual revenue from a significant customer. Before closing, the customer notifies the seller that it intends to terminate its contract, but the notice is not disclosed to the buyer. The purchase agreement includes a representation addressing notices of contract termination.

Counsel would evaluate whether the representation was breached. The accounting expert may assist in assessing the financial impact.

If the company would have earned $2 million annually from the customer after deducting costs it would avoid following termination, that profit stream may be relevant to the loss analysis. An accounting expert may assess the historical profitability of the relationship, the expected duration of the customer relationship, the company’s ability to replace the lost revenue and whether the potential termination was reflected in the transaction valuation. Depending on the circumstances, the financial analysis could involve lost profits, diminution in value or another measure.

The Importance of Disclosure

Identifying an accounting error does not necessarily establish a covered breach. The relevant representations, disclosure schedules, diligence materials and policy provisions may affect the analysis.

For example, a general discussion of potential customer rebates conveys different financial information than a schedule identifying $3 million of unpaid rebates.

An accounting expert may assist counsel in evaluating the financial information made available before closing, including whether the information identified the nature and potential magnitude of an issue. Counsel evaluates the legal significance of the disclosures and the applicable policy terms.

Once a potential accounting breach has been identified, the financial analysis may turn to how the issue affected the buyer.

Potential measures of loss may include diminution in value, dollar-for-dollar, or lost profits. The appropriate analysis depends on the financial circumstances, relevant contractual provisions and applicable damages framework.

The financial loss calculated by an accounting expert may differ from the amount ultimately recoverable under the RWI policy. The policy’s definition of “Loss,” retention, limits, exclusions and other relevant terms may affect the amount an insurer ultimately pays.

When Is an EBITDA Multiple Used to Calculate RWI Losses?

Many M&A transactions are valued using a multiple of EBITDA. Where an accounting error overstates recurring earnings, the resulting loss may significantly exceed the underlying adjustment. Multiple-based losses now account for most of the dollars paid on North American R&W claims. One major RWI broker reported that 68% of total dollars paid on North American R&W claims in 2025 related to losses calculated using a multiple.⁴

Consider a simplified example.

Assume a buyer acquires a company for an enterprise value of $100 million, using EBITDA of $10 million and an implied valuation multiple of 10x.

After closing, the buyer discovers that $1 million of recurring annual expenses was omitted from the earnings used in the valuation. For purposes of this example, correcting the omission reduces EBITDA to $9 million.

Applying the original 10x multiple to that corrected figure implies a value of $90 million, or $10 million less than the original valuation.⁵

An EBITDA error does not automatically establish the amount of any loss. An accounting expert may assess whether the adjustment affected recurring earnings, how the buyer valued the business and whether the original transaction multiple is appropriate to the corrected financial information. Historical financial statements, quality of earnings reports, financial projections and transaction valuation materials may provide relevant evidence. Depending on the facts of the claim and the applicable loss framework, the analysis may also consider whether the buyer would have paid a different price had the correct information been available.

When Is a Dollar-for-Dollar Loss the Right Measure in an RWI Claim?

Not every accounting error affects ongoing earnings or business valuation.

Return to the $2 million vendor liability described above, which the company failed to record before closing and the acquired company later paid. A dollar-for-dollar loss calculation may be appropriate if the liability represents an economic burden that was not reflected in the purchase price or otherwise recovered. The analysis may also consider whether the liability relates to a one-time expense or an ongoing operating cost.

A one-time expense and a recurring operating cost can have different implications for business value, even when the accounting adjustments are identical.

The same accounting issue can sometimes affect both the post-closing purchase price adjustment and an RWI claim.

Now suppose the buyer recovered the $2 million vendor liability through a net working capital adjustment. A subsequent RWI claim involving the same accounting issue may raise questions about potential overlapping recovery.

An accounting expert may analyze whether the purchase price adjustment and RWI claim reflect the same financial impact or address distinct economic consequences. This may require reconciling the closing statement, the underlying accounting adjustments and the asserted loss. RWI policies may limit recovery for amounts already recovered through a purchase price adjustment, and the final treatment of any overlap depends on the purchase agreement and policy language.

The analysis becomes more nuanced if the expense also affected historical earnings. The buyer may have recovered the closing balance sheet liability while separately asserting that recurring EBITDA was overstated and the business was overvalued.

For additional discussion, see Lincoln International’s article on working capital adjustments and mitigating M&A disputes.