Accounting is a topic that can frighten otherwise brave professionals. All the asset, liability, income, and expense talk can be overwhelming if the listener is not trained in the field of accounting. Even those who have taken a couple of accounting courses can get bogged down in the details and have a difficult time translating the numbers and determining what they really mean to a case.
The best forensic accountants are able to present financial issues in litigation so they can be understood readily. Attorneys, judges, and juries often lack an accounting or finance background, so being able to break down financial topics in a way that is easy to understand is essential for forensic accountants. The best expert witnesses are those who can relate to the judge and jury and who can make sense of even the most complex numbers.
Family law cases involving complex financial matters often require the assistance of a financial expert for the following issues:
- Preparing a financial disclosure, including creating a marital balance sheet
- Comparing balance sheets from period to period to evaluate changes in assets and liabilities and to determine the reasons for those changes
- Analyzing financial disclosures or affidavits prepared by the spouses to determine accuracy, completeness, and changes over time
- Calculating the historical income of the spouses
- Evaluating the prospects for future income of the spouses, including estimating future wages and business income
- Determining income (or the ability to pay) to calculate spousal support or child support
- Determining the standard of living (or the need for support) of the spouses and children
- Valuing business entities or other assets (such as real estate or pensions)
- Identifying assets and determining whether they are nonmarital (separate) or subject to division (marital or community)
- Tracing and finding funds or other assets
- Analyzing claims of dissipation, wasteful spending, or fraudulent conveyance
- Evaluating the income tax impact of various scenarios related to asset division and support payments
- Assessing the work of an opposing financial expert to determine its accuracy or to write a rebuttal report
- Providing other litigation assistance, such as assisting with drafting discovery demands and interrogatories or preparing for the depositions of individuals with financial information
In addition to these financial issues, an accounting expert could also play the following roles in family law cases:
- Assisting with settlement activities, evaluating the financial impact of a settlement offer, making certain calculations, and giving opinions on various settlement scenarios
- Mediating a divorce case with financial issues to help the parties reach a settlement
- Acting as a neutral expert in the divorce, providing an objective opinion on financial matters The parties may agree together on the financial neutral, or the court may appoint the accountant.
- Participating in post-court activity and aiding in the evaluation of financial disputes, including things like allegations of fraud during the divorce process or motions for modification of support.
Although a financial expert can be involved in family law cases in many different ways, this book focuses on determining income, determining the standard of living, identifying assets, and tracing and finding funds or other assets. The work may be done because of allegations of hidden income or assets, but many times it is done simply because of a need to determine income and expenses when the parties are unable to do so without the assistance of an expert.
The Lifestyle Analysis
This book focuses solely on the lifestyle analysis in the family law case, although other services from a financial professional may also be needed in a case. The financial goal in a divorce is an equitable arrangement in which the assets and liabilities are divided and the future income is potentially shared via support orders. The lifestyle analysis is the process of tabulating and analyzing the income and expenses of the parties. The lifestyle analysis is then used to determine the standard of living of the parties, which will influence support calculations, and possibly property division.
Calculating the lifestyle of the spouses prior to separation can provide insight into the lifestyle the married couple enjoyed and the cost of that lifestyle, as well as the income that was or is required to fund the lifestyle of the married couple. The results may be used to prove a spouse’s financial needs following divorce. In other words, a detailed analysis of the spending during the marriage can be the basis to calculate the funding the spouse needs to maintain a similar lifestyle after divorce.
The lifestyle analysis may also help confirm or refute income claims made by a spouse. If a spouse has declared income that is well below the cost of the lifestyle he or she is leading, the lifestyle analysis may suggest that undisclosed sources of income exist. It may also help identify previously undisclosed assets, which may have a substantial impact on the property division.
Investigating historical income and expenses is a process of working backward from the present time to see how the couple achieved their current financial status. For each financial transaction in which a party is involved, there are multiple pieces of documentation and evidence. Part of the forensic analysis may be trying to locate multiple sources of evidence that help prove the flow of funds. This is particularly true if a document or representation may be unreliable. When confirming or refuting income claims made by a spouse, searching for alternative sources of income can help clarify the issue.
The lifestyle analysis is typically used to sort out the numbers post-separation, but it may also be used to evaluate the finances of each party at the time of a prenuptial agreement. If a party did not make a full and accurate disclosure prior to the signing of the premarital agreement, the spouse may attempt to have the agreement set aside. A prenuptial agreement can also be instrumental in the forensic accountant’s work post-separation, as it provides a point at which to start tracing funds or assets.
Also included in this chapter:
Choosing a Financial Professional
Conflicts of Interest
Consulting Versus Testifying
Reasons for Hiring an Expert
Accountants and Attorneys Working Together
Tax Law Changes