What is a Forensic Accountant and When Would I Need One?

On behalf of The Marks Law Firm, L.L.C. posted in Divorce and Forensic Accountant on Friday August 23, 2013

Often in high asset divorces, one spouse may not have a full understanding of how the other spouse takes in money – particular income streams, different sources of income, delayed earnings – or actually spends money – asset transfers to foreign accounts, shell corporations, gifts to family members.  All income earned during the marriage qualifies as marital property; consequently, one of the most important tasks a lawyer faces in a high asset divorce is uncovering the true earned income and accumulated assets of the marriage.

Unfortunately it is not unusual in high asset divorces for a wealthy spouse to seek to hide funds from the other spouse in a myriad of ways, some rather obvious and some not obvious at all.  In these cases, a family law attorney might retain the services of a specialist – a forensic accountant, essentially a detective of sorts with experience and training in uncovering hidden assets.

Just because a spouse has a W-2 listing a certain salary does not mean that spouse has no other sources of income.  The spouse may choose to hide certain funds in a variety of ways that go unreported on a W-2, from “under the table” payments to expense accounts that become a funnel for investments.  Spouses who own their own business require even more attention, because those persons have full control over the operation of the business and can divert a wide amount of funds in ways that escape salaried income the other spouse sees but still represent earned income through the business.

During discovery, the attorney and the forensic accountant work as a team to make sure all documents are turned over by the wealthy spouse.  After close investigation, the forensic accountant will report “red flags” that seem like hidden sources of income or questionable expenses, and the attorney will follow up with more document requests or a detailed deposition of the spouse.  Deferred compensation, hidden bonuses, slush funds, phony expense accounts, and fraudulent transactions – all could be possible targets for hiding assets and therefore investigative points for the forensic accountant.

When would I need a forensic accountant?  If your spouse makes a significant income, if you have little access to all of the financial accounts, if your spouse owns his or her own business (especially if part of a family business), you will likely want to retain a forensic accountant because the stakes are too high and the chance for mischief too high. The court makes only one division of marital property and, absent a direct appeal, that division cannot be subsequently altered.  So, for example, if you discover secreted assets five years after your divorce, you cannot go back to the family court and ask for a division; you would have to bring a separate suit for fraud against your former spouse, which is much more complicated.

The bottom line in property distribution is fairness, and the court cannot make a fair distribution if it does not know all of the assets and income sources.  If you think your spouse may try and hide some of these assets or income sources, you should do everything necessary to protect yourself before the entry of a decree.

If you have questions about the use of a forensic accountant in your divorce, contact us – we can help.