These days, marriage can be a complex venture, and when it dissolves, sorting out the finances can be difficult.
Even in amicable divorces, the financial entanglements can be complicated. And when divorces turn acrimonious, emotions generally run high over property and finances. In these cases, a forensic accountant is often called upon by a family law attorney to help determine an appropriate settlement.
Uncovering Hidden Assets in a Divorce
A forensic CPA who specializes in divorce cases is experienced in investigating the financial reporting and recordkeeping of families and closely held businesses. That experience is critical because in divorces, forensic accountants can provide services including:
- Review financial data on both sides.
- Assess the fairness of a proposed settlement.
- Search for hidden assets that one spouse is shielding from another.
- Determine the value of properties, businesses and professional practices;
- Assess the marital standard of living;
- Evaluate the tax consequences of potential divorce settlements.
- Testify in court to support or refute the financial claims made by one or the other spouse.
- Tracking Down Financial Records
The more emotionally charged a divorce is, the more important the role of the forensic accountant becomes. And in some cases, one spouse firmly controls the marital assets while the other knows little about financial details.
In cases where one spouse is suspected of understating assets, income and property values, forensic accountants act as detectives, tracking down financial records from banks, brokerages and mortgage companies. As part of the investigation, they compare reported income on tax returns to verifiable personal expenditures and often compare the net worth of the spouse in question at the beginning and end of each year.
These techniques give an indication of whether or not an individual is hiding assets. Sometimes, a spouse who anticipates a divorce transfers or redistributes assets. If he or she is a business owner or sole practitioner, the business records are carefully examined to determine if income is being accurately represented.
A thorough investigation may be necessary because income may have been underreported to the IRS as well. In some cases, court orders are necessary to examine financial documents on the premises of the business in question. (See right-hand box for some ways a spouse can hide or disguise assets.)
Business Valuation and Property Assessments
Even in cases where the assets of an underlying business or practice are fully and accurately represented, a forensic accountant or other associate of the CPA firm may conduct a business valuation to help ensure the assets are divided equitably.
The market value of the business is determined by examining the cash flow, as well as the tax returns and other related financial statements. Once a business valuation is complete, an evaluation must be made as to the spouse’s fair share.
A similar assessment is conducted to determine whether other assets are marital property or separate property. In some instances, a prenuptial agreement specifies separately owned pre-marital assets and property, and spells out who retains ownership in the event of a divorce. However, assets and property not covered in a prenuptial agreement often requires a careful analysis before reaching a settlement.
In Many States, a Lifestyle Analysis Is an Important Factor
While states have varying precedents when it comes to the impact a lifestyle analysis plays in a divorce settlement, most consider the standard of living during the marriage to be an important determinant.
So even in the most amicable divorces, a forensic accountant can be consulted to deliver a detailed snapshot of the couple’s finances. The accountant does this by tracing cash flows during the marriage and then evaluating how much income is necessary to sustain that lifestyle after the divorce.
There are a myriad of ways that a forensic accountant can help determine an equitable distribution of marital assets in a divorce. By analyzing financial documents and transactions, the end result can be a much larger settlement for either spouse.
Bonfiglio & Asterita. Divorce Lawyers in New York and New Jersey.