Why Divorce Attorneys Suggest Using Forensic Accountants

By Ron J. Anfuso

Family law attorneys sometimes advise their clients to add a forensic accountant to their divorce team when convinced the additional cost will prove worthy of the investment. This is often the case in divorces that involve complex financial issues.

What is Forensic Accounting?

Forensic Accountants – Why Divorce Attorneys Suggest Using Them

Forensic accountants are financial professionals (nearly always certified public accountants) who practice accounting in support of litigation. Their job is to provide an accounting analysis suitable to the court that will form the basis for discussion, debate and ultimately a judicial decision. 

Forensic accountants use specialized accounting skills to conduct an investigation into the actual earnings and income stream of individuals and businesses. For example, the efforts of a forensic accounting firm may pay off immensely by protecting the settlement from a spouse’s dishonest actions, or improper valuation of a business or other assets. A benefit of employing a forensic accountant is the ability to communicate financial information clearly and concisely in a courtroom setting. 

The job of forensic accountants often resembles that of a detective. Forensic accountants must sort through reams of documents and search for key pieces of data that, when put together like puzzle pieces, form a financial picture. 

Reasons for Hiring Forensic Accountants

The specific reasons why family lawyers recommend hiring a forensic accountant to assist in a divorce case include when: 

  • Unreported or under-reported income is an issue, 
  • One or both of the spouses is self-employed, 
  • Either of the spouses has separate property claims, 
  • Temporary and permanent spousal and child support are an issue, 
  • A determination of the marital lifestyle is required, 
  • Accounting for reimbursements, tracing, allocation, apportionment and characterization of assets is needed, 
  • A valuation of a business interest is required, 
  • Determination of business, executive or professional goodwill is needed, 
  • There has been a commingling of funds, 
  • There are reimbursement claims for post-separation maintenance of community assets, 
  • The community has made payments on a separate property residence, or 
  • An apportionment of business interest is necessary.

Forensic accountants can also take on additional tasks, such as reviewing property agreements, participating in mediation or negotiations, or providing expert witness testimony. Such accountants must possess thorough organizational skills, and employ professional skepticism and judgment. Attorneys and clients can expect the accountant’s efforts to conclude with a clearly written, easily understandable, concise report that complies with all professional standards within the deadline provided to the accounting firm. 

Business Ownership Issues in Divorce

Forensic accountants are often hired to work on cases involving business ownership by one or both parties when substantial assets exist that require scrutiny. In these cases, at the very least, the forensic accountant needs information on the business’s finances. Accountants obtain these details through personal interviews with the client and his or her accountants and attorneys, as well as by examining the business’s balance sheet and financial statements. 

Balance sheets disclose the liquid position (ratio of current assets to current liabilities), gross and net book value of principal classes of fixed assets, working capital, long-term indebtedness, capital structure, and net worth. 

In addition, the accountant will likely obtain detailed profit and loss statements for a representative period, preferably five or more years. Such statements show: 

  • Gross income by principal items, 
  • Principal deductions from gross income; officers’ salaries; contributions (whether or not deductible for tax purposes); and taxes by principal items, including income and excess profits’ taxes, 
  • Net income available for distribution, 
  • Rates and amounts of dividends paid on each class of stock, 
  • Remaining amount carried to surplus, and 
  • Adjustments to, and reconciliation with, surplus as stated on the balance sheet. 

Once the above information is gathered, the accountant may research the business’s industry. An understanding of the industry outlook will provide reasonable expectations regarding the company’s prospects. It is important to know if the company is more or less successful than its competition, or whether it is maintaining a stable position with respect to its competitors. In addition, the accountant may study the competitors of the company in other publications, and associations’ and industries’ regulatory agencies. 

There are numerous sources accountants may use to obtain data. These include reference books, industry surveys and reviews, the business press, trade publications, and associations and industries’ regulatory agencies. 

Communicating Your Expectations

Although clients nearly always have confidence in the team members their attorneys select, like any professions, the level of competence of forensic accountants varies. Thus, it is a good idea for clients to communicate their expectations before their attorney hires an accountant. 

The forensic accountant chosen should have excellent communication skills, keep the attorney and client informed of progress, provide clear and succinct explanations and responses, and possess an excellent track record for meeting deadlines. 

Should the client desire the case to reach a settlement and not go to trial, the client needs to have certainty that the forensic accountant will work solely with this objective in mind. On the other hand, if the case appears destined for trial, it becomes important to know whether the accountant has a credible reputation with Judges, will meticulously organize for court appearances, and has a track record for serving as a successful expert witness.  

In Conclusion 

It is not unusual for expert forensic accountants in major divorce cases to save clients tens of thousands, hundreds of thousands, or even millions of dollars. Thus, the ultimate decision as to whether to hire a forensic accountant comes down to the expected cost versus anticipated financial gain. 


About the Author 

Ron J. Anfuso, CPA, ABV, CFF, CDFA, FABFA graduated with honors from National University, San Diego, California with a Bachelor of Arts Degree in 1990. After graduation, he was employed as a Senior Accountant at Gursey | Schneider, LLP, a litigation support firm. His areas of experience include Forensic Accounting and litigation support services in marital dissolution and civil/commercial litigation matters. Additionally, he has performed services regarding numerous other family law issues including allocation of interest in pension plans and apportionment of interests in real property and other special projects. 

For further information, visit www.anfusocpa.com.



Related:

  1. Divorce
  2. Financial Issues
  3. Role of Forensic Accountants in Divorce