The Role Of Forensic Accountants In Matrimonial Law

 

The Role Of Forensic Accountants In Matrimonial Law

It is no surprise that financial issues are among the most contentious in family law matters. The financial aspects associated with marital disputes and dissolution are often complex and consume most of the effort and attention of the parties. Forensic accountants possess unique skills that allow them to provide valuable support to divorcing spouses and their legal representatives. While lawyers have traditionally engaged accountants to assist with general financial issues related to divorce, they are increasingly relying upon forensic accountants to provide more in-depth forensic services.

A forensic investigation is advisable and should be considered in situations where one spouse is suspected of concealing income or assets or when it is the only means for procuring financial information. It may also be beneficial when there is a closely held business or a highly compensated spouse.

Detecting hidden, transferred or deferred income is complicated, however forensic accountants have several effective techniques for uncovering such income. These techniques include the analysis of the family’s … income (determining it) is sufficient to support the family’s expenditures; an examination of the couple’s net worth at two or more points in time; … and an analysis of bank deposits.

Closely held business is often a prime vehicle for hiding assets or income. A forensic examination of the business can be worthwhile where the opposing spouse is actively involved in the day-to-day operations and is suspected of using business assets or income for his or her personal benefit in excess of reported income. Often, the owner of a closely held business will take advantage of his position of control over the company’s finances in order to extract additional compensation by either the payment of personal obligations using corporate funds, engaging in non-arm’s length transactions with related entities, or through the payment of excessive perquisites such as homes, cars, airplanes, etc.

The investigation typically yields a financial road map to the hidden value of the business. Undertaking such an investigation on the client’s behalf can also protect the attorney from a future malpractice claim.

Since a closely held business is often the largest asset subject to equitable distribution in a marital dissolution, obtaining an accurate business valuation is essential. The business appraiser typically prepares a valuation for the entity based upon the “normalized” income for the business. That is, the appraiser’s valuation should be based upon the earnings that a third-party purchaser could theoretically expect to receive upon acquiring the business. However, an accurate valuation is unattainable if the income and expenses of the business are misstated and commingled with personal business activity. The work-product prepared by the forensic accountant can be provided to the appraiser and prove invaluable for obtaining a realistic value for the business.

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