The Role of the Forensic Accountant in Divorce Litigation
Forensic accountants provide financial expertise throughout the divorce proceeding. They are trained to trace and identify assets and detect unknown assets as well as analyze current and future expected income. The forensic accountant should be impartial throughout the engagement and understand the various laws, rules, and regulations within the specific family law jurisdiction. The following section addresses key aspects to successfully fulfilling the forensic accounting role.
The difference between a Certified Public Accountant (CPA) and a forensic accountant is that a CPA will often specialize in areas such as taxation, solvency, or financial reporting and be licensed to open a business. A forensic accountant combines accounting knowledge with investigative skills.
Determining Income
The financial expert plays a vital role in accurately identifying and quantifying income and cash flow. Their role includes assisting counsel with discovery first by requesting relevant documents, analyzing the information provided, and performing forensic procedures to determine income and cash flow. Often, the forensic accountant will assist the attorney when drafting production requests to ensure they include specific documents used for determining income. Some examples of documents to consider are tax returns and supporting schedules, paystubs or other earnings statements, employment related agreements, bank statements, investment account statements, business records, virtual currency transactions or statements, and lender financial statements.
Identifying Hidden or Undisclosed Income
If there are suspicions or allegations of hidden or undisclosed income, a financial expert can prepare various investigative procedures and analyses to assist in identifying and calculating income for purposes of determining support. Forensic accountants have specialized training to identify inconsistencies or irregularities related to income and may use a variety of techniques and methods to uncover and quantify hidden income. Spouses attempting to hide assets and other sources of income may transfer assets to a third party, underreport income, or keep income in holding companies and/or offshore accounts.
A skilled forensic accountant will tailor the types of investigative procedures and analyses utilized based on the facts and circumstances of the engagement and available records. Techniques include tracing financial transactions, analyzing bank statements and tax returns, and performing a cash flow analysis. Alternatively, an expense or debt analysis can be used to determine the existence of other funds. If there are discrepancies in a spouse’s lifestyle and funding of expenses, these analyses can indicate the presence of other income. A detailed lifestyle and spending analysis may also be required.
Comparison to Industry Standards
“Sanity” checks for reasonableness and consistency can be performed by comparing the individual’s income to industry standards and benchmarks to identify significant variances and then to assess the cause of any variances. This can be especially useful in cases involving unreported income.
Assisting with Complex Financial Situations
The forensic accountant plays a key role in identifying, quantifying, and explaining complex financial issues related to income and cash flow. Some examples of more complex financial structures include partnerships, trusts, closely held businesses, tiered ownership structures, digital asset holdings, and other financial arrangements. If one or both of the parties are self-employed or have numerous income streams, investment portfolios, business ownership and/or trusts, the attorney may want to consider the use of a financial expert to analyze and determine an accurate level of income and cash flow. In some cases, a spouse may have the ability to manipulate financial reporting and/or commingle business and personal expenses. These are important considerations when valuing a business and calculating a spouse’s income and living expenses. Is reported annual income sufficient to cover the parties’ annual lifestyle expenses?
Providing Expert Testimony
Forensic accountants often serve as expert witnesses in legal proceedings. They may testify in depositions or at trials to support their analyses, findings, and professional opinions. A skilled forensic accountant will present professionally and have excellent and persuasive oral and written communication skills. Their testimony should explain complex financial concepts, methodologies, and conclusions in a concise and easy-to-understand manner that helps the legal team in the presentation of the case to the court.
The expert can support the attorney at any stage in the divorce process by assisting with the preparation of requests, gathering of relevant documents, assisting counsel with preparing for depositions of parties and opposing financial experts, analyzing financial information, communicating findings and discrepancies during settlement and litigation proceedings, and answering general financial questions. In divorce cases, financial experts often provide critical information that affects the division of assets and alimony. Clear communication helps all parties to make informed decisions.
Income: Performing the Analysis
During the course of family law proceedings, the calculation of income is crucial. As the Fifth District Court held in Brock v. Brock, 690 So. 2d 737 (Fla. Dist. Ct. App. 1997),
the extent of the parties’ income from all sources and the reasonable income-earning abilities of the parties are essential parts of the equation in determining whether permanent alimony is appropriate, and if so, the proper amount, and in determining the parties’ comparable financial circumstances, to justify or deny an attorney’s fee and costs to the spouse with less resources.
The financial expert should have the knowledge and experience to follow specific methods and best practices to ensure the accuracy and reliability of the parties’ income. Some of these commonly used practices include the following.
Gather and Verify Information
After assisting the attorney in gathering the relevant information, the financial expert can verify the completeness and reasonableness of the provided documents by performing detailed analyses to reconcile the information among various sources. To the extent possible with the information available, the expert may be able to identify inconsistencies within the information presented. For example, discrepancies between financial statements, tax returns, and supporting bank information should be identified and reconciled. Moreover, their analysis may also detect anomalies, such as unexplained withdrawals or deposits as well as overstated expenses or understated revenues in business records.
Identification of Income Sources
The expert may identify, quantify, and document all sources of income and cash flow, such as salary, bonuses, commissions, dividends, rental income, self-employment income, and any other form of income that may be applicable to the case. Sometimes, income can include nonmonetary benefits, such as housing allowances, company cars, or other personal expenses and perks. An expert can value these benefits and include them in the income and cash flow analysis.
Normalizing Irregular Income
In some cases where an individual has an erratic income source or their income fluctuates significantly the expert may need to apply appropriate methods to normalize the income. This often requires a detailed review of historical patterns, projections, and comparison to industry standards.
Consideration of Tax Implications
While the expert may not specialize in taxes, they should consider the potential tax impact of the various sources of income. The ability to analyze and communicate the estimated tax impact to the sources of income is crucial in assisting attorneys and their clients in assessing overall exposure and “the bottom line.” Tax implications are often overlooked but can have significant impacts during settlement discussions.
Hiring a Financial Expert
Hiring a financial expert can provide numerous benefits in proceedings involving the resolution of family law matters, but not all accountants are qualified to perform forensic accounting services. It’s important to perform due diligence when considering hiring a forensic accountant. A qualified expert who understands financial analysis, fraud detection, and legal procedures and has considerable experience in divorce cases is ideal.
Specialized Knowledge
The expert’s education, training, certifications, and relevant experience regarding the subject matter of the case should be examined. Some credentials that can be helpful in analyzing income and assets in a divorce case include Certified Public Accountant (CPA), Certified Fraud Examiner (CFE) and Certified in Financial Forensics (CFF).
Professional Reputation
Another item to consider is the expert’s professional reputation and credibility within the family law industry. Inquire with other attorneys and professionals about their experiences working both with and across from the expert. It speaks volumes when an attorney can add credibility and recommend someone based on previous positive work experiences. Look for experts who are well-respected in the community and maintain high ethical standards.
Interpersonal Skills
A skilled financial expert is collaborative, responsive, and cooperative with the attorney and their legal team. The expert should also be able to break down complex financial concepts and issues into understandable language for attorneys, divorcing parties, and judges who may not have specialized financial knowledge. Moreover, by educating attorneys and divorcing parties on the financial aspects of the case, a financial expert can help them develop realistic expectations about the outcomes of the litigation or settlement.
A Good Fit for Your Case
It is imperative that divorce attorneys thoroughly vet potential experts. Experts should be interviewed by attorneys so they can assess their qualifications, skills, matrimonial experience, industry experience and overall fit for the individual case. At times, you may find it difficult to decide between two different experts on the case. However, there is no perfect combination of skills, and sometimes your decision ultimately boils down to the personality that fits best with the divorcing party. By selecting a qualified and experienced expert in divorce litigation, the attorney can greatly enhance their case and expect accurate, reliable financial analysis and clear and effective presentation of findings.
More Favorable Outcomes with Forensic Accountants
Forensic accountants are extremely valuable in complex divorce litigation due to their specialized skills in both accounting and investigation. Their ability to critically examine financial records, identify hidden assets, analyze income, cash flow and expenses, and uncover financial discrepancies is important in ensuring a fair and equitable resolution in divorce proceedings. A forensic accountant’s expertise can be particularly useful when the divorcing parties’ financial situation is complex, there is a high level of assets involved, income is not straightforward, or there’s a suspicion of incomplete or dishonest financial disclosure. Forensic experts not only contribute to the financial analysis but can also provide credible, persuasive and unbiased testimony in court, explaining financial intricacies in a way that attorneys, divorcing parties, and judges can understand, which adds to the likelihood of a favorable outcome.
Useful Resources
- Association of International Certified Professional Accountants, A CPA’s Guide to Family Law Services: Forensic & Valuation Services Practice Aid (2020) at 1–83.
- Brock v. Brock, 690 So. 2d 737 (Fla. Dist. Ct. App. 1997).
