The Divorce CPA Overview

Marriage has become a delicate venture. According to the U.S. Census bureau, about nine out of 10 people will marry sometime in their lives, but about half of first marriages will end in divorce.

And while some marriages end peacefully, with both sides agreeing to an equal and fair settlement, some do not, and the ensuing process can get quite vicious. When ex-spouses significantly distrust each other, it is advisable to engage the services of a lawyer and a Forensic CPA such as Bo Donegan, especially if one or both do not understand their household finances and the economic implications of marital settlements. Attorneys often hire Donegan as a forensic accountant to help represent the spouse who doesn't have access to the family's financial information. In these cases, the forensic analysis might include reviewing financial data to determine its accuracy and reasonableness; determining each spouse's standard of living and disposable income; locating hidden assets; and determining what property may be considered separate from marital property, especially if one of the spouses runs a closely held business.

Most newlyweds probably don't think of their wedding day as the beginning of a personal business partnership: making money, budgeting, accumulating assets, and investing for the future. Nevertheless, couples should still plan how to divide this property at the blissful beginning, not the bitter end. This planning could take the form of a premarital agreement, which may not be a perfect document, but is generally enforceable in all 50 states. This is why both spouses must understand their household's finances.

It is not a good idea to allow one spouse to run all the finances while the other spouse knows nothing about it. After all, the person you plan to spend the rest of your life with would never try to hide something from you … or would they?

Locating Hidden Assets

Most marital assets are not hidden at all; it's simply a matter of knowing where to look. This is what Bo Donegan, a CPA and forensic accountant, told his client who has recently filed for divorce from her husband. Many hire Donegan as a CPA in divorce engagement because usually one side knows nothing about the family finances and no longer trusts the estranged spouse.

Tip: CPAs who are hired to perform forensic accounting are often hired to represent the spouse who doesn't have knowledge about or access to the family financial information and normally is not the breadwinner. The other spouse often has the higher earnings and thus the opportunity and motive to either hide assets or defer income. The reason is simply greed. Some spouses believe that the income they earned is theirs and theirs alone, especially in situations where there is either generational family income or one spouse earns a majority of the family income. Uninformed spouses are susceptible to the "breadwinner" hiding assets or deferring income, thus could reducing any child support or alimony settlements.

Forensic accounting in divorce engagements is a fairly new discipline, and the process of locating hidden assets or deferred income can be difficult. Many times one will go to extreme lengths in order to hide the assets not only from their spouse but from the IRS.

The critical first step in the investigation process is to meet with the client and their attorney obtaining the following information:

A complete education and employment history;
All Social Security numbers;
All tax returns from the past 5 years, for instance 1040's, 1120s, county assessor personal property filings for a business, 990s, and sales tax returns;
Premarital agreements;
A list of all banks, brokerage firms, and other financial institutions with which the estranged spouse has ever had a relationship, including each account number and type;
All sources of income, whether earned or passive, including pending litigation and insurance settlements, estate proceeds, asset sales, and loans;
Lifestyle and expense levels for items such as entertainment, travel, child care, interest, and property taxes; and
Detailed information on personal and business relationships, such as the names of children, parents, any ex-spouses, maiden names, and the names of all current and former business entities and partners.

This checklist would provide a foundation for investigation. Once finished with the interview process, there are several common methods to determine if income or assets may be hidden.

The expenditure method is used by Donegan is to prove the existence of hidden assets and income by comparing total personal expenditures to reported income. Reported income will often come from tax returns, financial statements prepared for bank loans, or financial statements prepared for the courts. By analyzing this data, Donegan can determine if the level of reported income is sufficient to support the family, based upon their spending habits. This will often lead to more-detailed analysis and is a good first step to gauge whether assets and income have been hidden.

Another method is the net worth method, in which Donegan would compare net worth at the beginning of the year (or period) to net worth at the end of the period. The increase or decrease in net worth is then reconciled to the reported income for the period, to help determine the likelihood of hidden assets. The final method is the bank deposit method, in which Donegan will examine bank and investment deposit activities. The bank deposit method is often used when there are large amounts of deposits and very little money is actually dispersed.

An important item can also look for if a premarital agreement exists. A properly executed premarital agreement should be very detailed as to what assets existed before the marriage. In this case, focusing in on tracing the assets that were listed on the premarital agreement to see if they led to acquisitions of other, undisclosed assets.

Summary

The initial interview with the client and her attorney, the methods for detecting hidden assets, and the review of the premarital agreement should help Donegan establish whether assets are being hidden. The actual search for hidden assets will usually require, as a first step, a public-records search. Public-records searches are used to help identify unknown businesses and real estate investments. When reviewing the public records, Donegan will also look out for any associates he learned about from the interview process.

A review of "frequent flyer statements" may show a pattern of travel to a particular city. Phone bills will be analyzed for toll charges to unusual locations, and credit card statements will be similarly examined for unusual expenditures, purchase locations, and hotel, air travel, and rental car charges. This information would lead to a search in any particular location that suggests an unusual spending pattern.