When there are suspicions of hidden income or secret investments or bank accounts, an analysis of known bank accounts can reveal helpful details. Tracy Coenen explains how bank statements and credit card statements can be used by a forensic accountant in a divorce case.
Fire drill training in grade school always included the mantra, “Stop, drop and roll.” This was the prescribed course of action if you were on fire. Professionals sometimes refer to tragedies in companies as fire drills. When a major internal theft occurs, it is akin to catching on fire, and needs to be met with swift action.
Where there is smoke, there might be fire. There are numerous potential red flags that might point to internal theft – things like missing or altered documentation, numerous unexplained accounting entries, excessive customer complaints about account balances, and disregard or override of procedures.
While one red flag alone does not necessarily mean a fraud has occurred, the presence of numerous red flags increases the suspicion of internal fraud. It is important to quickly identify the red flags, determine who might be responsible, and take quick action to extinguish the problem.
When a closely-held business is part of a divorce, the income of the business must be examined. It is not unusual for a business like this to suddenly see a decline in revenue, and increase in expenses, or both shortly after divorce is filed. It is often not a coincidence that the financial health of the business appears to suffer when a divorce is pending.
It is particularly difficult to examine the income of a business that transacts with its customers primarily in cash. However, there are ways to verify whether the income being reported is reasonable. Some of the techniques to examine and verify the income of cash businesses include:
If you think your spouse may be attempting to hide income or assets during your divorce proceeding, your first step should be to tell your divorce attorney. Your attorney should know how to handle situations such as this, and the sooner he or she can act, the more likely you are to see results.
You should also quickly gather and secure any documentation that might prove your allegations. Financial documents that you can legally access should be copied and turned over to your attorney. This might include tax returns, pay stubs, credit card statements, bank statements, brokerage statements, contracts, or any other documents which might prove the existence of assets or streams of income.
A financial expert with experience in the divorce arena can be invaluable in searching for hidden income and assets. The expert can help you identify the financial documents that will be needed for analysis, and can assist your attorney in determining which documents to subpoena.
It is not unusual for the “out” spouse (the one who is not the major breadwinner in the family and who does not have control over the family’s finances) to suspect that income and assets are being hidden during a divorce. When one party is accused of hiding income, how can a forensic accountant find it?
Below are a few techniques that I may use to uncover hidden income. A more in-depth discussion of this topic appears in Chapter 9 of my book, Lifestyle Analysis in Divorce, published by the American Bar Association.
It is not uncommon for one spouse to hide assets during a divorce. Everyone is in love until they’re not, and then they may not feel much like splitting everything with a soon-to-be e-spouse. If hidden assets and streams of income remain hidden, it may be impossible to get a fair divorce settlement.
Women are very often in the lesser position when it comes to the finances of the family. The money earner in the family is most often the husband. Even when both spouses work, most often the husband earns more than the wife.
Assets are hidden in divorce more often than you would expect, and women are disproportionately affected by this due to their tendency to be in the less powerful financial position.
When completing a lifestyle analysis in a divorce or child support case, I am often asked whether my work is simply data entry. Why does a forensic accountant need to do the lifestyle analysis? Can’t anyone with a bit of accounting training do it?
As Tracy discusses in the video below, a lifestyle analysis is much more than a data entry exercise. There is a high level of quality control needed to ensure that all transactions are included in the analysis, and that none are duplicated. In larger cases, this gets complicated because of the high volume of data to manage. The divorce client needs an expert who can handle this volume of data AND maintain the integrity of the data.
Internal fraud is a huge risk to companies. Experts estimate that on average it costs companies 3% to 5% of revenue each year. When profit margins are thin, internal fraud can literally put some companies out of business. Executives are prone to underestimating the amount of fraud that exists within their companies. They want to believe that their internal controls are better, their employees are more honest, and their ability to stop fraud is more effective than that of executives at other companies.
The truth is, they are often unaware of all the frauds committed within their company’s walls. Indeed, fraud is often hard to find and may be hidden among the seemingly more trustworthy employees, those who are necessary for keeping the business running. They are the ones putting companies at risk; they have access to assets and information and the opportunity to steal and cover up fraud.
The vast majority of family law cases are settled without trials. However, a client should not enter into a voluntary settlement if there are significant concerns about the truth of the financial disclosures and indications that assets or income may be hidden. The first step in determining whether a forensic accountant is needed to evaluate the finances of the parties is the identification of “red flags” of fraud. A red flag is simply a warning sign or an unusual item or circumstance.
Attorneys often use their instinct to determine when a forensic accountant is needed in a family law case. If something does not feel right, it probably should be investigated. A client is often suspicious of the spouse even before they are separated. The spouse may even be known to manipulate the money.
Beyond using intuition to determine if something is wrong, there are plenty of warning signs that indicate the finances should be evaluated carefully. These red flags by themselves do not mean that money has disappeared or the finances are being manipulated. But they are signs that an investigation is warranted. Because divorce is so adversarial, it is likely that one or both of the spouses will conceal or manipulate financial facts.
Forensic accountants and Certified Divorce Financial Analysts often use Quicken personal financial software to complete the lifestyle analysis in divorce cases. Unfortunately, Quicken is not the best option for accurately and thoroughly analyzing a couple’s finances before and during divorce.
Why is it used so often? For years, Quicken was one of the better options available for compiling and analyzing personal finances. Also, since a fair number of consumers use Quicken to manage their finances, divorcing spouses sometimes provide a Quicken file to the attorney, which may be used as a starting point for the lifestyle analysis. The drawback to this is that clients don’t always keep accurate records, and the Quicken file is often incomplete or just plain wrong.
Quicken software should not be confused with QuickBooks software, which is a software package used for small business accounting. QuickBooks can be used effectively in divorce financial analysis, while Quicken is much more limited and does not produce as good a result in terms of accuracy or usability. Note, however, that even QuickBooks may not be the best option for litigation purposes.