To achieve a fair and equitable resolution in a divorce case, it may be necessary to trace assets and income that a spouse has hidden to reduce child support, alimony liability or the final settlement amount. You don’t have to go it alone, however. Forensic accountants can sift through the data to help reveal hidden assets and income.
A popular tool for finding hidden personal assets and income is lifestyle analysis. This method starts with financial profiling. Forensic accountants develop a financial profile by examining three key sources:
1. Bank deposits. The expert reconstructs income by analyzing bank deposits, canceled checks and currency transactions, as well as accounts for cash payments from undeposited receipts and non-income cash sources, such as gifts and insurance proceeds.
2. Expenditures. Here, the expert analyzes the sources and uses of cash during a given time period. If more is spent than is taken in, the excess likely is unreported income.
3. Assets. Experts assume that unsubstantiated increases in net worth reflect unreported income. To estimate net worth, an expert reviews bank and brokerage statements, real estate records, and loan and credit card applications.
Once the financial profile has been developed, the expert looks for mismatches between known resources and lifestyle. Tracing unreported income to assets or accounts that can be used to support a legal claim or enforce a judgment can be challenging. To do this, forensic accountants may scrutinize the assets noted above, as well as insurance policies, court filings, employment applications, credit reports and tax returns.
The Business Angle
When a marital estate includes a closely held business interest — particularly if the business is controlled by one spouse — the opportunities to hide assets and income abound. Forensic accountants usually deploy the same asset-tracing techniques they use to detect occupational fraud.
The starting point is typically a search for suspicious payments that could indicate a business is stashing assets for its owner. These payments ostensibly represent business expenses. But they could actually represent money transferred into the owner’s pocket and away from disclosed bank accounts. To find these payments, the expert collects various financial documents from the business, such as bank statements, purchase orders, invoices and payment records.
A business owner also might recruit third parties, such as vendors or fictitious “ghost” employees, to assist in asset-hiding schemes. For example, the company could issue a check to a vendor in an amount greater than actually owed, with the vendor returning the excess as cash. Vendor accounts with no tangible deliverables — for consultants, commissions and advertising, for example — receive special attention, as do multiple vendors with the same address. Ghost employees may be found by reviewing payroll lists, current and former employee lists, personnel files, and employment applications.
In addition, spouses attempting to hide assets may fraudulently drive down their business’s income to reduce the company’s net income — and value as a marital asset. For example, a business owner might purchase personal assets (such as cars and real estate) or cover expenses (like cell phone bills and insurance premiums) with business funds.
To find hidden income, an expert scrutinizes the business’s actual expenses and expected sales associated with that level of expenses, accounts receivable and journal entry writeoffs. He or she also examines the business’s internal controls and the spouse’s ability to override them, the company’s markup structure, and the associated expected profitability. Large or unusual accounts receivable credits or sales returns usually merit further investigation.
Out of the Darkness, into the Light
In a divorce, you must shine a light on every financial corner — particularly when a spouse has had limited access to the couple’s financial information during the marriage. Uncovering hidden income and assets is likely to help your clients receive the settlement and support they deserve.
theKFORDgroup litigation team holds extensive knowledge and experience in expert witness engagements, forensic accounting, and business valuations. Our experts are trained and experienced in the litigation process. We can shine a light into those dark financial corners for you or your client. For more information, please call us at 210-340-8351.
Additional information included in this report was provided by PDI Global/Thomson Reuters © 2021
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