Do You Need a Forensic Accountant for Your Divorce?
It sounds scary, given the word “forensic” in the title, but now isn’t the time to shy away from learning who you need on your divorce team. And when it comes to money and assets, now is definitely the time when you want to know exactly what you’re dealing with and what you’re entitled to. So let’s start with, what is a Forensic Accountant and what does he/she do? Generally speaking, a forensic accountant investigates money and people. In the context of a divorce, the forensic accountant’s services might include, but not be limited to:
- Value an interest in a business owned by one or both spouses for equitable distribution purposes.
- Investigate allegations that a spouse has hidden assets. This would involve tracing what has happened to the couple’s income over a specified number of years. Money leaves a trail. A forensic accountant follows the trail.
- Establishes what the marital lifestyle was as an intact family over a specified number of years, usually 3 to 5. This is important in the determination of child and spousal maintenance/support. It includes not only what was spent on lifestyle costs, but what was the annual marital cash flow from employment and/or a closely-held business? When a closely held business is involved, it is important for this analysis so that the personal perks that may have been paid from the business be discovered, in order to accurately establish the marital lifestyle.
- There may be allegations of divorce planning by a spouse. The forensic accountant would analyze the marital income and lifestyle expenses over a certain number of years to spot any anomalies in the figures that might be an indicator that something is amiss.
- In some divorces, there may be assets that might be considered exempt from equitable distribution. This could arise if the parties brought assets into the marriage or were gifted or inherited assets during the marriage. Without getting into the legal arguments, the forensic accountant would analyze any claims of co-mingling and/or the original source that created certain assets. The couple’s attorneys need the facts in order to negotiate a settlement or litigate this issue, as it relates to equitable distribution.
- The forensic accountant can be very helpful in negotiating a settlement. There are many ways to skin a cat, so to speak. There are numerous ways to divide assets, plus there are tax implications, as well. An experienced forensic accountant can suggest different ways to split up assets to achieve both parties’ objectives.
- Taxes are always an issue to divorcing parties. As an intact family, there is usually a single tax return filed as “married filing jointly”. Once divorced, the parties’ tax status changes. Understanding the parties’ ongoing tax obligations are a must. The forensic accountant can run projected income tax returns for the parties to understand what each party’s tax obligations will be in the future.
How do I know if I need a forensic accountant?
Every divorce needs to have a forensic accountant involved. This could be a neutral accountant who is retained jointly to establish the facts and is not biased to either parties’ arguments. If one party is financially illiterate, he/she might want to retain a forensic accountant to advise them, even if there is a neutral accountant on the team. People might think that it’s a waste of money to pay a forensic accountant, especially if nothing nefarious is discovered. But it’s never a waste of money to gain peace of mind! A settlement is also more likely when each party has all of the facts instead of being left to their imagination about what may have gone on financially during the marriage.
Another area a forensic accountant can help is in the very beginning. In most states, there are financial statements to prepare that have to be submitted to the Court, as well as to the other party. These financial statements include two major areas; an analysis of what the marital lifestyle costs were during the marriage and what they are now, after a separation but prior to the divorce, and a marital balance sheet showing all the assets and liabilities of the parties. The accountant can be very helpful in preparing these documents, as most parties don’t keep personal books and records that they can just push a computer button to generate. The other important aspect of these required financial statements is that they should not be exaggerated! Doubling your actual estimated lifestyle expenses thinking that you will get more or pay less in preparing these documents will only aggravate the other party and the Court and cast you in a bad light during the proceedings. It also makes a settlement more difficult if you’re starting from an unreasonable position based on unsupported information.