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D. Petitioner’s Expert Testimony
1. Introduction
Petitioner relies on expert testimony to demonstrate that
the retailers' shrinkage method clearly reflects income. In
particular, petitioner relies on such testimony to demonstrate a
strong correlation between sales and shrinkage, which correlation
underlies the retailers’ shrinkage accruals. Petitioner presents
the expert testimony of Charles E. Bates, Ph.D. Dr. Bates is the
director of economic litigation services for the Economic
Consulting Services Group at KPMG Peat Marwick LLP. He is
experienced in statistics, econometric modeling, and economic
analysis.
2. Correlation Between Sales and Shrinkage
Statistical correlation is a measure of the degree to which
two variable quantities tend to change with respect to each
other. Correlations are expressed in a range between positive
one and negative one. A correlation of positive one indicates
that the two quantities change in exact proportion and in the
same direction, whether up or down. A correlation of zero
indicates that the two quantities change without reference to
each other. A correlation of negative one indicates that the two
quantities change in exact proportion, but in opposite
directions: When one goes up, the other goes down.
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