Forensic Accounting in Divorce Matters

February 1, 2012

Divorce is unique in that the motivations to be less than honest are often more complicated than the typical financial crime motivated purely by financial gain. In a divorce, a spouse may have the desire to “cheat” his or her spouse out of their “fair share” of the marital property or humiliate, emotionally overwhelm or otherwise damage their spouse.

The most common cheating by divorcing spouses is to understate assets and income in a closely held business. An owner has the ability to manipulate situations in ways limited only by their imagination. However, there are recurring patterns of activity in the understatement of income and assets. They involve personal use of business assets (automobile, club dues, payment of personal living expenses by the business, petty cash abuse, inventory abuse) self-dealing with related parties (relatives of business partners), sudden decrease in revenues, revenue deferment, new or hidden bank accounts, unnecessary bad debt reserves or write-offs and unreported cash transactions.

In order to successfully uncover the actions of a dishonest spouse requires a level of tenacity and “thick skin”, not only by the forensic accountant, but also by the entire litigation team.

When a divorce requires a business valuation it is a good idea to engage a practitioner who is not only skilled in business valuation, but forensic accounting as well. The hiding of income and assets not only impacts the amount of alimony and child support ultimately paid to the “out spouse” but may also have a material impact on the value of the business. Though such engagements are distinct and separate, an expert with experience in both business valuation and forensic accounting is the most cost-effective method of dealing with a business valuation and related fraudulent activity.

In the normal course of the preparation of a business valuation ABA had uncovered numerous instances of cheating schemes, even when the “out spouse” had no idea “something was wrong”. A business valuation professional without forensic expertise might not have discovered the systematic looting of the company by the “in spouse”.

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