Complicated financial issues often come into play during a divorce settlement, and even more so in high net worth cases. It’s common for one spouse to assume the money management role in a marriage, and rarely do both spouses have equal knowledge of their financial affairs. So when a spouse is suspicious of unreported income or hidden assets, it can be critical for legal counsel to work with a qualified forensic accountant to aid in a divorce settlement. The forensic accountant will perform an in-depth forensic analysis to detect hidden, transferred or deferred income.
Some Warning Signs of Suspicious Financial Activity
- Uncovering previously unknown assets. This could include a cash account, an investment portfolio or a piece of real estate that was unknown to the other spouse.
- Discovering signs of unexplained transactions. These include checks written to people who are unknown, or wire transfers to accounts that cannot be identified.
- Noticing a sudden drop in purchasing power. When one spouse suddenly cannot spend as much as he or she used to, there is a question of where did the assets disappear to?
While the forensic analysis is often a complex process, experienced forensic accountants are adept at discovering concealed financial property. They are all too familiar with the illicit behaviors and techniques that individuals may use to move assets into the hands of third parties, as well as behind false documents. Not only can a forensic accountant uncover hidden assets and unreported income, but he or she can document the findings to make the case stronger and potentially more favorable for the client.
Forensic accountants can use several techniques to conduct a forensic analysis, though some have limitations and are not appropriate in all scenarios. Before digging into the analysis, the forensic expert will evaluate all circumstances of the case to develop a customized plan. For instance, while discovery of unreported income can be extremely beneficial to the dependent spouse, it can also lead to adverse tax consequences, which should be considered when deciding how to utilize the information obtained through the investigation.
Strategies Used To Discover Hidden Assets and Income
- Analyzing Lifestyle. By carefully analyzing the family’s lifestyle, a forensic expert can determine if the level of reported income is sufficient to support the family’s expenditures. To obtain a clear picture of funds required to maintain the standard of living enjoyed during the marriage, the forensic expert must review bank, brokerage and credit card statements, as well as any other detailed financial records that substantiate the family’s spending.
- Reviewing Financial Information. It’s important to examine individual, fiduciary and business tax returns, as well as examine personal and business financial statements, loan applications and public records searches. Experienced forensic accountants will review financial data for accuracy and reasonableness, as well as identify any questionable financial activities.
- Computer Imaging. Forensic accountants often make use of specialized software that allows the hard drive of a computer to be imaged. This image reveals deleted files, memos and emails that cannot be accessed by ordinary means. This allows for a search for evidence of hidden assets including bank statements, settlement sheets and email correspondence.
- Investigating Closely Held Businesses. A closely held business is often a major channel for hiding assets or income, and it happens when the business owner takes advantage of his/her position of control over the company’s finances in order to extract additional compensation through either the payment of personal obligations using corporate funds, or through the purchase of extreme perquisites (“perks”). An investigation will include a detailed review of business records and practices and will often yield a financial road map to the hidden value of the business.
Retaining the services of a qualified forensic accountant provides a higher degree of confidence that the financial aspects of a divorce will be handled thoroughly and skillfully. A forensic accountant is an invaluable resource to attorneys in divorce litigation, and, when utilized properly, their examinations can help attorneys secure an equitable settlement for their clients.
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For more information on this topic, please contact a member of Withum’s Forensic and Valuation Services Team.
