Divorce can be a complex and emotionally charged process, particularly when it comes to the division of assets and financial matters. It’s not uncommon in divorce proceedings that one spouse has more control of the finances than the other, leaving the other spouse vulnerable to financial mal feasance. This is where forensic accounting plays a crucial role. Forensic accountants use their expertise in accounting, auditing and investigation to examine financial records and provide clarity in legal settings, especially in divorce cases, to ensure a fair and equitable division of assets.
Financial matters in divorce can be incredibly complex. Issues such as hidden assets, income verification and accurate financial evaluation are the key reasons that clients hire forensic accountants. The ultimate goal is full transparency for both parties so that an equitable settlement can be completed which typically includes division of assets and liabilities and possible alimony.
Key Functions of Forensic Accountants in Divorce
- Identifying hidden assets and income: During an engagement, forensic accountants are looking for undisclosed bank accounts, properties, investments and other financial resources. Forensic accountants use various methods, such as analyzing financial statements, tax returns and bank records, to uncover these hidden assets. Many CPAs use four main documents: financial accounts, tax returns, tax information from the IRS and credit reports.
- Valuing assets: Accurate valuation of assets is another critical function of forensic accountants. This includes valuing businesses, real estate and other significant assets. The more complex an asset is, the more expertise is needed for evaluation. A primary residence is easier to value than an international, multi-location business. The latter requires more training and expertise.
- Tracing income and expenses: Forensic accountants also trace income and expenses to distinguish between personal and business finances. This is particularly important in cases where one or both parties own businesses. Sloppy bookkeeping affects many small businesses when commingling business and personal expenditures. By analyzing financial records, forensic accountants can determine the true income and expenses, ensuring that the financial settlement is based on accurate information.
Providing expert testimony: In addition to their investigative work, forensic accountants often serve as expert witnesses in court. Their testimony can be pivotal in divorce proceedings, as they provide an objective analysis of the financial situation. Judges and attorneys rely on their expertise to make informed decisions regarding asset division, alimony and child support. The credibility and professionalism of forensic accountants can significantly influence the outcome of a divorce case. Most commonly, forensic accountants are hired by one spouse who believes they are the victim of some type of financial fraud. Most engagements won’t require expert testimony, but forensic accountants are hired by attorneys because the ultimate goal is the ability to use the forensic accountant as an expert in court.
Challenges and Considerations
While the benefits of hiring a forensic accountant are clear, there are also challenges and considerations to keep in mind. The cost of hiring a forensic accountant can be significant, and it is essential to weigh this against the potential benefits. “Is the squeeze worth the juice?” is a common question.
When I discuss engagements with a client, my goal is to understand why they believe that a forensic accountant is needed. Many times, I recommend that the spouse hire a forensic accountant in stages. Any additional findings can be approved by the spouse if they believe that the fee is worth the potential findings. As a selling point, I recommend hiring a forensic accountant for peace of mind even if there’s no hidden assets or income discovered, the spouse can stop thinking they were being substantially defrauded during the proceedings.
Forensic accounting plays a vital role in divorce proceedings, providing the necessary expertise to ensure a fair and equitable division of assets. By uncovering hidden assets, accurately valuing properties, tracing income and expenses, and providing expert testimony, forensic accountants help achieve transparency and fairness in financial settlements.