Family law cases often focus heavily on financial issues. Whether the parties to a case are of modest means or great wealth, both sides want their own version of what is fair. Unfortunately, this can lead one or both parties to hide income and assets. With the help of a financial expert, counsel can identify income and assets that might otherwise go undiscovered, and hopefully reach an equitable end to a divorce or child support case.
Sources of income and assets owned can be identified with the right documentation. Attorneys need to be familiar with some of the most common financial documents so they know what to request. Attorneys with financial knowledge can also help identify issues that may need further analysis in a family law case.
When attempting to determine if there are hidden assets or undisclosed sources of income, the basic investigative process involves tracing funds. The income tax returns of an individual (and a business, if it is owned by one or both of the parties to the family law case) are the most basic documents needed to analyze the finances. While tax returns are not always accurate, they still give us a starting point, and may later be used to impeach the credibility of the opposing party if found to be inaccurate.
Further analysis of the financial situation requires statements from bank accounts, brokerage accounts, and credit cards. These third party records are generally deemed to be a reliable source of information. Barring any unusual opportunity to influence the recordkeeping process of banks or brokerage firms, these statements will be proof positive of the flow of funds.
If money is being hidden, how will you know if you have all the relevant account statements? The starting point will be all known accounts. Both parties should be asked to disclose all bank, brokerage, and credit card accounts. As those records are analyzed, other accounts may come to light. A transfer between accounts, a check written from one account to another, or other transaction could provide a clue that other accounts exist.
For example, a check written out to a municipality could point to real estate owned. A transaction with a marina or boat storage company may suggest a boat is owned. Even when trying to hide income or assets, parties are not always careful and may engage in a transaction that helps identify a previously unknown bank account or valuable asset. The financial investigator must track down all of these leads to determine whether additional accounts exist.
There is a reasonable chance that one of the parties to a divorce or child support matter is going to obscure income through and intricate web of accounts, transactions, and misinformation. A forensic accountant is the logical choice to help reconstruct financial records, estimate earnings, and analyze fine details of financial documents to prove or disprove income claims.
Tracing money into and out of bank accounts and brokerage accounts helps determine the source and use of funds. This type of analysis may be called a cash analysis, a cash in / cash out analysis, a source and use of funds analysis, or a cash flow analysis. Whatever it is called, the attorney should be clear about what information is sought so the analysis is completed correctly.
During a cash analysis, we may become aware of additional sources of funds, and must analyze them to determine whether they constitute income or something else. We may also discover clues to assets that were previously undisclosed, such as real estate or vehicles. The details in a cash analysis can provide many clues to the larger financial picture, and that is why it is so important.
A closely related analysis is the lifestyle analysis, which is sometimes called the “expenditures method” for calculating income. This type of financial examination is used to prove an individual’s income, particularly when there are allegations of unreported income. It focuses on a person’s spending patterns relative to known sources of income. Differences between apparent living expenses and the person’s known or reported income can be attributed to concealed income.
The basic methodology for a lifestyle analysis includes adding known expenses such as a mortgage, groceries, automobile expenses, insurance, dining out, income taxes, vacations, and the like. We carefully consider all spending, making reasonable estimates where documentation is not available.
The total spending is then compared to known sources of funds including wages, bonuses, interest, dividends, loan proceeds, gifts received, and the like. Again, we must carefully consider all sources of income, including estimates when hard numbers are not available.
If spending during the period under analysis exceeds known sources of funds, then it is likely that there is another source of income that has been concealed. The logic behind this analysis is simple. The money being spent has to come from somewhere. The forensic accountant may continue to search for documented sources of income that could explain the difference. Any remaining unexplained difference likely represents unreported income.
Winning in Court
There are very often no winners in family law cases. It is usually more about limiting the pain or the perception of loss. Without a competent analysis it will be very difficult to know if a settlement in a family divorce matter is fair or in the best interest of the client.
As important as the analysis itself is the presentation of the findings. Non-accountants must be able to understand the numbers, so the financial investigator must tell a story that is easy to understand. It should include charts, graphs, and exhibits when they are helpful to understanding the conclusions. After all, a complex analysis and conclusion that is helpful to your case is not worth anything if the trier of fact can’t understand the opinions and how they were reached.
Tracy L. Coenen, CPA, CFF, is a forensic accountant and fraud investigator with Sequence Inc. She specializes in cases of embezzlement, financial statement fraud, white collar crime, securities fraud, and family law. She can be reached at 312.498.3661 or firstname.lastname@example.org.