A forensic accountant is often called in on a divorce case to assess income and assets, especially when one or both spouses is a business owner. Here is a case study where PBTK was the court-ordered accounting expert in a divorce:
PBTK was engaged in a Court-ordered divorce matter to conduct a forensic analysis of all the businesses, separately owned and operated by the husband or wife (the “Parties”), for the purpose of determining the available income and earnings. Marital discord had heightened over multiple years, providing the spouses with ample time and opportunity to engineer their reporting of business operations, but also significantly raising the level of distrust.
The businesses consisted of entities established before, or received by gift during, the pendency of the marriage and entities formed during the marriage, presumptively establishing separate and community property interests.
PBTK’s forensic accountants performed procedures that included assessing reported business operations to determine the level of reliability, using QuickBooks reports, annual income tax returns and bank account records. They also evaluated expenses to determine whether personal benefits were received by the Parties even though they may have been deducted as ordinary and necessary business expenses.
Planning for this engagement included evaluating and understanding the financial and accounting of all the businesses, identifying areas of possible risk, conducting interviews with the Parties, accountants for the businesses and office/administrative personnel. Further, PBTK’s forensic accountants performed analytical review of business operating activity (revenue and expense) and year-end balance sheets for 3-5 previous years, both horizontally from year-to-year and proportional/common-size evaluation for each year.
Investigative Accounting Procedures:
Initial procedures concentrated on assembling complete accounting records for the scope period, by scheduling of deposits and withdrawals from bank account statements and supporting records. This resulted in portrayal of business revenues and expenses on the cash basis of accounting. Then, our forensic accounts performed analysis of the new customer acquisition process and related costs thereof, including internet based presence. Monthly revenue trends were identified and evaluated based upon the customer acquisition process, in addition to year-to-year revenue proportional change analysis by month.
Quantify the Income:
After analyzing the financial data, we determined the cash flow for the scope period to be substantially higher than the income reported on QuickBook reports or income tax returns. Necessary adjustments included: 1) add back of expenses that we determined personally benefitted the owner/manager spouse, 2) add back of non-cash expenses and 3) add back of costs incurred for overall overhead and administration of a group of entities, not just the paying entity.
PBTK adjustments were made to reflect stand-alone operations of each entity independently, which entailed shifting of expenses between entities to properly match revenues and expenses. Also, PBTK adjustments were made to reflect tens of thousands paid toward significantly past due credit card balances incurred primarily for business purposes, but with commingled personal charges that required separate efforts to isolate.
The Court-ordered Accounting Report added clarity to the businesses aspect of this protracted divorce battle, which allowed the Parties to effectively settle the dispute at mediation.
Contact Mike Rosten, CPA, CFE if you would like more information on using a forensic accountant in a divorce case.