Working as a forensic accounting expert in a divorce case starts well before anyone begins analyzing bank statements or looking for hidden money. The first step is figuring out exactly what the attorney needs, what work should be performed, and what can realistically be accomplished with the time and money available. There are different specialties within forensic accounting, so it’s important to be clear on exactly which services are needed and to find the right expert.
Every divorce engagement has limitations. There may be a tight deadline, a limited budget, missing financial records, or uncertainty about what information will become available during discovery. The forensic accountant needs to understand these limitations and help the attorney prioritize the work that is most likely to produce useful results.
Most forensic accounting engagements in divorce cases follow a general process:
1. Secure the engagement
Before accepting a case, the forensic accountant needs to understand the nature of the dispute, identify the parties involved, and check for potential conflicts of interest. The expert must also determine whether the assignment falls within his or her area of expertise and whether the work can be completed within the required timeframe.
Deadlines deserve particular attention. An expert who cannot realistically complete the work before discovery closes or expert reports are due should address that problem before accepting the engagement. I’ve seen too many experts miss deadlines and it puts the attorney and the client in a bind.
2. Define the scope of the engagement
The attorney and forensic accountant should agree on what the expert will accomplish. This typically includes:
- Which financial documents to analyze
- The level of detail involved in the analysis
- Which financial issues are the highest priorities
- The investigative procedures to be performed
- Staff members performing the work
- What will be included in the final report
- Deadlines for reports, both interim and final
You can’t always determine the entire scope of work at the beginning of a case. Sometimes the parties have not exchanged financial documents, and no one knows exactly what will be available or what those records might reveal. In these situations, it makes sense to use a phased approach. The forensic accountant can begin with a limited review and recommend additional procedures once the initial findings provide some direction.
For example, an expert might start by reviewing several years of business income tax returns and financial statements. That preliminary analysis may identify unusual expenses, questionable transactions, inconsistencies in reported income, or other issues that deserve closer examination. The expert can identify the additional work, what it might accomplish, and what the potential findings may be. This will help a client evaluate whether the cost of additional work may be worthwhile.
3. Determine fees and payment arrangements
The engagement letter should clearly explain the fees and payment terms, whether the expert charges hourly or uses a fixed fee. It should also address additional work that falls outside the original scope. The attorney may retain the forensic accountant directly and handle payment of the fees to ensure that the expert’s work is protected as work product. Clear expectations about fees, deliverables, and deadlines help prevent disputes later in the engagement.
4. Perform background work
Before conducting the detailed financial analysis, the forensic accountant needs to understand the people, businesses, and transactions involved in the case. This preliminary work may include interviewing the client and other people with relevant financial knowledge, assisting the attorney with financial discovery requests, and researching businesses, ownership interests, and other background information. This initial stage of work can help identify missing documents and clarify the scope of work.
5. Analyze the financial information
This is where the forensic accountant performs the substantive work. Depending on the assignment, the analysis may involve tracing funds, identifying undisclosed assets, evaluating income, reviewing business transactions, analyzing spending, or investigating allegations of financial misconduct. The expert should focus on the financial questions that the attorney needs answered. Finding an unusual transaction is only useful if the investigator can determine what happened and explain its significance to the case.
6. Report the findings
The forensic accountant communicates the results to the attorney. The format depends on the purpose of the engagement and the requirements of the case. Some cases only need a discussion or an informal write-up of findings. Most cases, however, require a detailed expert report with supporting schedules, exhibits, and explanations of the procedures performed. Whatever the format, the findings should be clear enough that the attorney can understand the analysis and use the information effectively in negotiations, mediation, or litigation.
7. Provide testimony
The forensic accountant may be called to testify at a deposition, hearing, or trial. The expert has tot be prepared to explain his or her analysis, support the conclusions, and answer questions about the documents and methods used. A good expert will take complicated financial information and explain it in terms that a judge can understand.
Not every divorce engagement requires all seven steps. Some cases end after a preliminary financial review, while others involve months of analysis and ultimately require testimony. The important thing is to establish a reasonable scope at the beginning, adjust it when necessary, and keep the work focused on the financial issues that can help the attorney resolve the case.
