Divorce is an emotional event for those involved. And because the emotions are typically negative—anxiety, anger, mistrust—it is common for one spouse to suspect that the other is hiding or undervaluing significant assets in an attempt to keep them out of the divorce settlement. This suspicion often arises when a family-owned business is at stake. In these cases, it is often necessary to hire a forensic accountant to investigate the financial records and documents of the business. The forensic accountant investigates the location of assets, tracks significant changes in spending habits of either spouse prior to the date of separation, and looks for patterns of data (or transactions) or breaks in patterns that may point to suspicious activity.
Know the Company
A key reason for understanding the location of assets is to help identify whether any have been removed. The first step in making this determination is to thoroughly understand the company. Knowing the company makes it easier to spot changes in business patterns—changes that might indicate whether assets have been shifted out of the business.
Some Questions an Investigator May Ask about the Company Include:
- Who are its customers?
- Has the level of business from these customers remained steady?
- What types of products or services does it provide?
- How do trends in other industries affect its income?
- Have key clients been leaving the company for a single competitor or a new company?
- Have there been changes from year to year in key areas of its balance sheet or income statements?
The answers to these questions will provide the forensic accountant insights into possible paths to explore. For example, a review of customer activity logs may show a sudden decrease in revenues from a major client. Further investigation may show several other customers have switched their business to a new competitor in the market. One possibility for the decline in revenue is that one spouse set up a competing business for the express purpose of siphoning off key customers from the existing business. The effect of declining income would be a reduction in the business value in the divorce settlement.
Know the Industry
Just as an understanding of the company in question can help a forensic accountant unearth unusual patterns or trends in its business, so can a thorough knowledge of the industry. Trends within the industry as a whole, as well as with the business’s competitors in particular, affect the business.
Questions an Investigator May Ask Include:
- Is the industry in a growth phase?
- What are common earnings for other companies in the industry?
- What are common levels of expenses?
- What other industry trends affect the company?
- What is happening with the competition?
- Is the company using a higher level of supplies to produce the same amount of goods as other businesses in the industry?
- Has the company experienced a decrease in income while similar companies are experiencing growth?
A forensic accountant that suspects a business owner is siphoning off assets from the company by cooking the books would look at statistics from similar companies. As a general rule, two companies within the same industry with similar sales volume will likely have similar levels of expenses. But if one company spends twice what the other does for certain expenses, the excess expense may be a red flag.
Make Sense of Emerging Trends
Unearthing hidden assets or identifying unusual transactions can be a painstaking process because the spouse involved in the business may have taken steps to cover his or her tracks in anticipation of the increased level of scrutiny. Careful investigation of the company and the industry (as well as consideration of other factors, such as the individuals involved) can often reveal trends that show a forensic accountant how and where assets have been moved.
Local Case Study
In one divorce action filed in Florida, the physician/spouse had several business entities, but before the divorce, some were sold to another partner/“friend” in the business. To make sure these assets were included in the marital estate, our consulting team that was engaged to support the other spouse proposed the date of valuation be moved to the date before the sale.
We Can Help
Keep in mind there are many proven methods of finding hidden assets that may be helpful in a divorce proceeding. The consulting team at Elliott Davis Decosimo is highly experienced in providing litigation support, forensic accounting and valuation services related to marital dissolution. To discuss your unique situation, contact your Elliott Davis Decosimo advisor or email Mike Costello.
 Such as in the Robert Morris & Associates databases.