Child & Spousal Support
The Importance of Forensic Accounting in Child Support and Spousal Support
Determining your spouse’s true income may well be the hardest and most complicated issue in your divorce proceeding.
A second thorny issue is the classification or categorization of assets to determine these as marital and separate property. Professional accounting expertise is required for income determination and asset classification.
In most situations, a forensic accountant is a right choice in terms of cost effectiveness and quick results while providing astute financial analysis and reports to the client’s divorce attorney.
In addition, the forensic accountant is also a more economical option if either of the two issues is contested in court and needs testifying because the work would have already been performed by the accountant.
Forensic accountants are trained to examine the minutest details in financial records – personal and business – to expose all withheld information about income, assets, and liabilities, if any.
For instance, a capable forensic accountant will analyze the numbers from multiple corporate tax returns to project an income pattern.
Red flags are raised in the accountant’s mind when there is a decline in gross profits, even as gross revenues increase over a period of time. Forensic accountants have a good idea to distinguish genuine and credible explanations from one contrived for the purposes of divorce.
This is the only expert you need to burrow through mountains of financial paperwork and reveal all financial truths to find evidence of any wrongdoing. A skilled forensic accountant will be able to uncover the following unethical practices by making the right efforts:
- payroll padding
- creditor overpayment
- not disclosing full income
- creating dummy corporations for assets transfer
- fake debt creation
- using secreted cash to purchase expensive items
- and, so much more
To ensure fair divorce settlement negotiations, your team of attorneys and forensic accountant will need to construct a likely representation of your spouse’s true income (if they have been misreporting their financial situation through inaccurate, incomplete, or downright fraudulent documents).
This is called imputing income and is one of the major domains where a forensic accountant can prove to be invaluable.
Many forensic accountants double up as valuation experts as well since similar skills are required for both. These skill sets prove to be extremely beneficial in cases with no suspicion of wrongdoing but become invaluable where assets require definite valuation such as in medical practices or law firms.
These unique combinations of skills are extremely important while valuing closely-held businesses or partnerships.
At first, it may seem excessive to you to hire professionals for spotlighting shady practices. It is even possible that you would be reluctant to add yet another professional expense to your divorce team.
However, you need to keep in mind that investing in the right forensic accountant can pay in manifold by protecting your settlement from being gutted by unethical and unscrupulous tricks of your spouse or by an improper and erroneous valuation of significant assets.
Tax returns may not be able to fully disclose the entire story in terms of what your spouse’s true income was during the marriage period and onwards. This is owing to the laws that allow business owners to experience significant leeway in terms of reporting personal payments and making deductions.
Forensic accountants have a primary role of examining the accuracy of financial data and to add back all other relevant payments to the income to arrive at the true financial picture of cash flow during and after (but before the divorce) the marriage.
This analysis and figure become important when you are assessing child support, spousal support, other financial obligations or when arriving at the value of your spouse’s business interest.
The lifestyle led by a couple during marriage and the way they spent their money forms the basis for assessing alimony and in some cases, even the child support. A thorough review of expenditure made by both parties during the marriage period is required to make such an analysis.
An appropriate support amount is arrived at by creating spreadsheets and analyzing the spending by placing the marriage lifestyle at the backdrop.
As you can very well see, that forensic accountants deliver invaluable benefits as part of the divorce team and can prove to be very useful as you navigate the complicated and adversarial divorce waters.
However, only you and your divorce attorney are the best judges of when, and if, services of a forensic accountant are necessary.
Business Interest Valuations
In most instances, business interest is deemed as the largest marital estate asset. Forensic accountants take all the steps necessary to arrive at a true figure of business interests.
They perform all the necessary inquiries and conduct extensive research to determine the premise of business (liquidation or going concern), the standard of value, and the valuation date.
Labeling the state of business as an equitable distribution jurisdiction or a community property is another important step in their process. Following actions are undertaken by forensic accountants to conduct a business valuation:
Interviews and Discussions
The first step in the process is to dive into frank discussions with the client and their divorce attorney to obtain extensive background information and to make a note of their individual perspectives.
In this stage, the forensic accountant makes requests for specific documents and conducts extensive research into the industry, competition, and other spouses (as well as other business owners). This phase is not a single occurrence and is largely continuous throughout the case.
Forensic accountants make a site visit to confirm the accuracy of the data gathered by them during the initial interview. They also conduct a preliminary review of documents and dig deeper to discover additional information that was not made aware to them.
Review and Follow-up
Here, all financial information gathered plus any other document is analyzed with due professional skepticism and a critical eye.
The forensic accountant may make inquiries of the other spouse, their employees, and other outsiders who have a vested interest in the business, such as vendors, third-party providers, and clients.
From a financial point of view, the accountants may normalize the earnings by adjusting income statements to develop capitalization rates. This includes reasonable rent, reasonable compensation, depreciation (tax to book), non-recurring items, and personal expenses applied through the business.
There might be adjustments made to the balance sheet as well to reflect excess cash, such as removal of non-operating assets (ex: real estate), reclassifying shareholder loans to equity, and measuring collectible accounts receivable, among others.
They may also add/subtract non-operating assets/liabilities such as accurate loan balances and related-party loans to arrive at a true figure.
The numbers are crunched as soon as the analysis and follow-up are completed to arrive at the end result of the indicated value for the business interest.
Preparing a Written Report
The conclusions of the review are communicated by the forensic accountant in a clear, concise, and understandable written report. This report complies with all professional standards of a particular governing body or organization, including ASA, AICPA, NACVA, and IRS, among others in terms of the included content.
This allows the written report to be (in certain circumstances) presented at the trial in order to help settle the case.
Income Calculation and Determination
In divorce cases, especially the contested ones, it is extremely rare for a spouse to get what they see.
In almost every engagement, forensic accountants are employed to calculate income and prepare an assessment of the spousal couple or just the spouse who is a business owner. This is done to help arrive at an appropriate and fair amount of alimony (and child support).
There are considerable opportunity and freedom for people who own a business to intermingle personal affairs with business.
While, the circumstances surrounding divorce and the facts of a case dictate the investigation led by a forensic accountant, some common examples of personal expenses included as a business expense (and not revealed) are:
- Salary reported on Form W-2
- Business distributions charged to a loan account
- Payroll and wages for work attributable to the business owner disguised as work done by no-show employees or family members
- Automobile expenses, such as gas, oil, insurance, maintenance, loan payments, lease expenses, and EZPass
- Personal expenses, like shopping, family dinners, vacations, and gifts
- Personal Insurance
- General maintenance and home improvement expenditure
- Voluntary contributions to retirement plans
- Professional fee for non-business related matters, like divorce attorney fee
When to Hire a Forensic Accountant for Child Support and Alimony?
Forensic accountants are undeniably helpful if you suspect your spouse of hiding assets with ill-will to gain an advantage during the settlement negotiations or divorce proceedings.
The best attorneys in such situations are the ones that work with forensic accountants to ensure that all assets of both parties are revealed in full form and that no assets are hidden.
You should consider retaining the services of a forensic accountant if you suspect your spouse of not making full disclosure and hiding assets to put you at a disadvantage.
There are many situations when a couple divides their responsibilities and plays particular roles in the marriage.
For instance, one spouse may take responsibility for caring for the children and home, while the other may be responsible for money management. It is also possible for one spouse to be running their own business while the other is employed by a corporate.
In such situations, you would benefit from investing in the services of a professional forensic accountant.
This wise decision shall prevent you from being at a disadvantage and get you the fair share of assets during divorce finalization. Remember, that any asset which is not disclosed by your spouse or is failed to be revealed during the divorce period can be sold or spent by them.
Get in touch with your divorce lawyer for guidance and advice if you are not sure whether you need a forensic accountant for your divorce.