DIVORCE AND THE ROLE OF FORENSIC ACCOUNTANTS

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

E-mail: forensicrichard@gmail.com

 Tel: +234 8033467639