Divorce is an emotional event for those involved. Because the emotions are typically negative — anxiety, anger, and mistrust — it is common for one spouse to suspect the other is hiding or undervaluing significant assets in an attempt to keep them out of the divorce settlement. This suspicion often arises when a family owned business is at stake. In these cases, determining whether one spouse has hidden assets requires that a forensic accountant investigate the business’s financial records and documents. The forensic accountant then can understand the location of assets, track any significant changes in spending habits of either spouse prior to the date of separation, and look for patterns or breaks in patterns that may point to suspicious activity.

Know the Company

A key reason for understanding the location of assets is to help identify whether any have been removed. The first step in making this determination is to thoroughly understand the company. Knowing the company makes it easier to spot changes in business patterns — changes that might indicate whether assets have been shifted out of the business.

Some of the questions a forensic accountant may inquire about the company include:

  • Who are its customers?
  • Has the level of business from these customers remained steady?
  • What types of products or services does the company provide?
  • How do trends in other industries affect the company’s income?
  • Have key clients been leaving the company for a single competitor or a new company?
  • Have there been changes from year to year in key areas of its balance sheet or income statements?

The answers to these questions may point to any number of explanations. For example, a review of the customer activity logs may show a sudden decrease in revenues from a major client. Further investigation may show that several customers have switched their business to a new competitor in the market. It may turn out that one spouse is a partner in the competing business, which was set up for the express purpose of siphoning off key accounts from the existing business to reduce its value in the divorce settlement.

Know the Industry

Just as an understanding of the company in question can help a forensic accountant unearth unusual patterns or trends in its business, so can a thorough knowledge of the industry. Trends within the industry as a whole, as well as with the business’s competitors in particular, affect the business.

Questions a forensic accountant may ask include:

  • Is the industry in a growth phase?
  • What are common earnings for other companies in the industry?
  • What are common levels of expenses?
  • What other industry trends affect the company?
  • What is happening with the competition?
  • Is the company using a higher level of supplies to produce the same amount of goods as other businesses in the industry?
  • Has the company experienced an income decrease while similar companies are experiencing growth?

If a forensic accountant suspects that a business owner is siphoning off assets from the company by cooking the books, he or she should look at statistics from similar companies. As a rule, two companies with similar levels of business will likely have similar levels of expenditures, but if one is spending twice what the other spends for supplies, there might be a problem.

Make Sense of Emerging Trends

Unearthing hidden assets can be a painstaking process because the spouse involved in the business may have taken steps to cover his or her tracks in anticipation of the increased level of scrutiny. Careful investigation of the company and the industry (as well as consideration of other factors, such as the individuals involved) can often reveal the trends that will show an investigator how and where assets have been moved.

SOURCE: Divorce Magazine