Family Lawyer Magazine: Digging Deeper Into Lifestyle Analysis

family-lawyer-magazineWritten by Tracy L. Coenen, CPA, CFF

Family Lawyer Magazine
2013 Print Edition

A thorough lifestyle analysis can help discover undisclosed income and assets.

digging-deeper-lifestyle-analysisIn an ordinary lifestyle analysis, the divorce financial analyst extracts all of the transactions from bank, brokerage and credit card statements, categorizes them and calculates totals for each category for the period under analysis. This is an important exercise to assess what the parties to a divorce have historically spent and determining an appropriate level of support. It can also be used to determine whether a spouse was wasting or dissipating marital assets.

More importantly, the lifestyle analysis can also be used to uncover hidden income and assets, or help prove that one spouse is living a lifestyle that exceeds the reported sources of income. The typical lifestyle analysis may only scratch the surface of the financial facts of the case, leaving behind important clues about the finances of the parties. Diving deeper can uncover hidden finances that may have otherwise been overlooked.

Uncovering Hidden Assets

A thorough lifestyle analysis can help discover assets that may have been undisclosed in the divorce. Each and every transaction from the bank, brokerage and credit card accounts must be traced to determine where the funds went. It is important to ensure that all statements have been received and analyzed, as one missing statement could hold the key to a hidden asset.

The key to discovering hidden income and assets is finding transactions with an unidentified or unusual origin or destination. Large checks made out to cash, significant cash withdrawals, substantial payments to unknown entities, and transfers to previously undisclosed accounts are warning signs of hidden assets. Large cash transactions must be explained, and absent proof of an asset purchase, it is possible that cash was being hidden or used for non-marital purposes.

The purpose behind substantial payments to unknown entities must be verified. It is possible that such a payment may have been for a house, a vehicle, jewelry, or other valuable assets. Even small payments can yield important clues to hidden income or assets.  In one case, a relatively small check was issued to a utility company. On its face, this did not appear unusual, and the small value of the check could have caused it to be overlooked. However, it was investigated, and it was determined that the husband secretly purchased a home several years before and did not disclose this asset during the divorce.

Payments to unknown entities must also be verified to determine if they are related to investments in income-producing opportunities, or simply the transfer of assets with an intent to deprive the spouse of a share. Even payments to legitimate entities, such as the Internal Revenue Service or a credit card company should be verified to determine whether a balance was actually due, or whether the payments were intentional overpayments that the spouse hoped would not be refunded until after the divorce was settled.

The most common kind of discovery in this portion of the lifestyle analysis is an undisclosed bank or brokerage account. Many times this account was opened during the marriage. Transfers were occasionally made, and one or both spouses forgot about the existence of the account. Once one account is discovered, it can create a domino effect in which several others are discovered as well. The hidden account may have been used to fund other hidden accounts, and carefully tracing all movements of funds will lead to their discovery.

Finding Sources of Income

A properly performed lifestyle analysis can also uncover undisclosed income, either through direct or circumstantial evidence. The analysis of the bank and brokerage statements by the forensic accountant may find deposits that are clearly from a source of income that was not disclosed.

It is more likely, however, that the discovery of income will require an indirect approach. The lifestyle analysis, also called the “expenditures method” of income analysis, focuses on a spouse’s spending patterns relative to the known sources of income and funds.

Is the spouse’s spending in line with the known and reported sources of income?  Is the reported income sufficient to fund the lifestyle? If spending exceeds the disclosed income and assets, and is not explained through other cash sources such as loan proceeds, gifts, or inheritance, it is likely that the spending is funded through undisclosed income or assets.

Examination of Expenditures

The lifestyle analysis is based on a detailed examination of expenditures, but it must go beyond a simple summation of expenses. The expenses must be evaluated to determine if anything is missing. Is the monthly mortgage payment accounted for? Have all car payments been included? If some of these items are missing, it may be due to an error in classification during data entry, or it may be due to missing account statements.

It is often necessary to divide expenses between family members to determine which spouse or child benefited from the expenditure. Such an analysis can get complicated, so an experienced analyst is necessary to ensure completeness and uniformity in the analysis and calculations.

Expenditures must also be analyzed to determine if any are unusual or non-recurring, or if any adjustment is needed to normalize the expenses.

Assumptions may need to be made when information is missing from the analysis. For example, the spouse may know that $50,000 of improvements were made to the residence during the period being analyzed. If that expenditure isn’t shown in the records, it may signify missing documents.  Certain cash expenditures may not be reflected in the bank statements, and these will have to be considered as well.

All told, a thorough lifestyle analysis must include an accurate tabulation of transactions in the records, reasonable estimates for items that may be missing from the records, and an overall evaluation of the quality and completeness of the records.

Using the Lifestyle Analysis

An often unintended consequence of a lifestyle analysis is damaged credibility of the spouse. As the financial lies begin to unravel and generate momentum, the spouse may quickly lose credibility in the eyes of the court. Even if the spouse’s income and assets cannot be determined down to the penny, there is often plenty of circumstantial evidence that will allow the forensic accountant to draw reasonable conclusions about the truth behind the finances.

Download a PDF of the article here.

Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. She specializes in cases of divorce, embezzlement, financial statement fraud and white collar crime. Her website is:

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