THE ROLE OF FORENSIC ACCOUNTANTS IN DIVORCE
Is
Divorce About Liberty, Law Or Money?
What do you think drives divorce, Is
it Unfettered Liberty, Law or Money?
Some people think divorce is all
about the law. And this makes sense because the divorce process legally
dissolves the union of marriage.
Unfortunately, more than 20 couples
this writer interviewed about their knowledge of the Marriage Act confirmed no
knowledge of this law before getting married. This means that none of the
couples realized the responsibilities that go along with marriage. All they
know is right, right and rights that they are entitled to in marriage!
Other people think divorce is all
about money. After all, three of the four main topics addressed in divorce are
related to financial matters:
- child
support
- spousal
support or maintenance
- equitable
distribution of marital assets and
- liabilities
During a divorce, it is necessary to divide the marital assets between
the two parties. This is known as equitable distribution. As part of a
typical divorce case, a court will review the income and assets of the husband
and wife and create an equitable, but not necessarily even, distribution of the
marital property.
Equitable Distribution
Most courts use a three-step process
to determine an equitable distribution.
·
The
court must first decide the specific property of each spouse that is eligible
or subject to distribution.
·
Then,
it must determine its value for purposes of the distribution.
·
Thirdly,
it must decide how such allocation can most equitably be made.
The guideline factors that courts
look to when determining an equitable distribution include:
- respective age, background and earning ability of the
parties
- duration of the marriage
- the standard of living of the parties during the
marriage
- what money or property each brought into the marriage
- the present income of the parties
- the property acquired during the marriage by either or
both parties
- the source of acquisition
- the current value and income producing capacity of the
property
- the debts and liabilities of the parties to the
marriage
- the present mental and physical health of the parties
- the probability of continuing present employment at
present earnings or better in the future
- effect of distribution of assets on the ability to pay
alimony and support
- gifts from one spouse to the other during marriage
The court is also allowed to
consider “any other factors it may deem relevant.” In most cases, the equitable
distribution can be accomplished by examining the bank accounts and property
records of the parties.
In some cases, however, this is not
enough. In cases involving high net worth business owners, the process can
become much more complex.
The Role of Forensic Accountants
In these cases, it is necessary to
engage Forensic Accountants to ascertain all of the assets and income streams
before one can determine what the equitable division will be. Assets may be
hidden or missing, income may not be reflected accurately and bank records may
appear incomplete.
In closely held businesses, family
businesses and professional partnerships, an objective valuation may be
difficult except an expert is called upon.
Record keeping can be “informal,” incomplete
or practically nonexistent. Corporate or other formalities may not be observed.
The books may be deficient or missing from year to year. There may be
unreported income (i.e. cash) that is not reflected in bank
The failure to reflect or account
for this cash causes an incomplete or incorrect reflection of lifestyle income,
and valuation of assets, in particular, for the very business that generated the
cash income.
A Forensic Accountant is an expert who
produces accounting reports that are used for litigation purposes and as part
of their creed they “follow the money.” They will look at income, assets,
property records, transactions, loans and any other aspect of the financial
affairs of a party and their business to attempt to construct a true picture of the economic situation. They may
have to:
- analyze a large volume of transactions
- trace assets
- present value calculations
- perform a “lifestyle audit
- determine the “true” income stream of the spouse for
support purposes
- value a closely-held business
Why Forensic Accountants
During a divorce, it is imperative
that the true financial data be used to perform the equitable distribution, as
well as support the analysis.
While you can modify a support
amount upon a showing of “changed circumstance,” once the distribution is
finalized, it is virtually impossible to change it.
Thus, when a lifestyle does not seem
to be supported by the reported income and assets, it is necessary to attempt
to find out where the money is coming from.
Sometimes, this may indicate illegal
activity. Other times, it may be a conscious effort by a divorce litigant to
hide income from their spouse, the court or other relevant authorities.
When valuing an asset that is
difficult to value, a court looks at the reasonableness of the valuation method
in determining whether the valuation is adequate.
How to Value an Asset with No Market
In the case of a closely-held
business, valuation is particularly difficult because the entities stock is not
available on the public market.
In certain instances, to compute the
value, experts and courts may look towards the guidelines found in various
stock valuation models as enunciated by the experts. The goal is to arrive at a
fair market value for a stock for which there is no market.
Among the factors listed as
fundamental and requiring careful analysis are:
- the history of the firm
- the nature of the company
- the outlook for the industry
- the book value of the stock
- the size of the block to be valued
- the market price of stock in the same or similar line
of business
- the earnings and dividend-paying capacities of the
company
- the existence of goodwill or other intangible assets
Because of the difficulty in dealing
with these issues, you will certainly need a Forensic Accountant to work with
your legal counsel to discover the assets and, in the case of a business, to
determine their value.
Your divorce attorney can help you
obtain the services of a Forensic Accountant to properly value the assets
involved in your divorce and analyze the income reported by your spouse in an
effort to validate or dispute the levels of income claimed.
Richard Mayungbe
Certified Professional Forensic Accountant
Tel: +234 8033467639
