Conducting a Forensic Monetary Evaluation in Divorce Proceedings: Half 1

Almost everyone has heard divorce horror stories.

Almost everyone has heard divorce horror stories. For example, during the divorce process, the parties exchange financial information in a transparent process with full disclosure. Based on this disclosure of assets and liabilities, the parties reach an agreement or go to court to have the court split the assets and liabilities. A year later, they learn that their spouse had a retirement plan that they didn’t know existed. Or maybe there was a secret bank account as well as other assets accumulated during the marriage that were not disclosed. Another problem is that the parties are providing what is known as an affidavit of financial information to the court and the numbers reported are incorrect. Child support and spouse support are often based on the information on this form. Therefore, underreporting of income can adversely affect the amount of dollars granted to a needy spouse.

So what are some tricks of the trade? During the divorce process, it is common for the parties to provide copies of bank and bank statements, retirement plan statements, individual and corporate tax returns, credit card statements, any loan applications (including personal statements), and a variety of other documents (such as titles for motor vehicles and real estate). Whether or not the parties have an attorney, it is advisable to exercise some care in drawing up the list of assets and liabilities. For example, in a simple scenario where both employees are employed with no additional income from a business or rental property, it can be verified that the paychecks have been deposited in an exposed account. If the employee is paid bi-monthly and only one check is deposited, this should be noted as there is a possibility that the other spouse will either cash the check or deposit it into another undisclosed account. Obviously, if the spouse receives cash back at the bank, the amount deposited can sometimes be less.

A paystub check is also helpful in that most stubs will show if funds are being split between two bank accounts (e.g., savings and checks), or if funds are being deposited in a 401 (k), health savings, or other plan would be considered an asset during the divorce. Other deductions on a pay slip should be checked for life insurance policies that may have surrender value. Finally (and some people unfortunately do), a spouse may withhold their federal and state taxes excessively in order to get large refunds after the divorce and to keep those funds to themselves.

Another tip for discovering undisclosed bank accounts is to review credit card statements. Monthly statements indicate the date and amount of a payment. These payments should be shown on a bank statement that has been disclosed. If there are payments that cannot be traced back to a known bank account, this is also an area for further investigation.

When the parties own a company, financial analysis becomes a little more complicated. Often times, the company pays for various expenses that benefit the owner. Examples include cell phones and monthly cell phone bills, automatic payments, automatic insurance and fuel, travel and meals, clothing, retirement plans, and health and life insurance. While the owner / employee may receive a W-2 (depending on the company structure), their real income is often much higher. When completing the financial information affidavit, the owner / spouse often reports the expenses listed above but does not note that they are not personally paying the expenses. If the company was founded as a sole proprietorship and the spouse reports the net income per tax return as personal income on the affidavit without properly disclosing the costs paid by the company, this is also misleading. Of course, I’ve also seen expenses in a company that shouldn’t have been for tax purposes. It is therefore advisable to carefully review the income statement and related records when using these figures in a financial information affidavit. This includes a review of commercial bank and credit card statements, as well as a detailed ledger. In some cases, it will be necessary to verify the actual receipt confirming the withdrawal.

In conclusion, the tips above are a starting point for performing due diligence during a divorce proceeding. Stay tuned for part two! FBN

By Jenny Staskey

Jenny Staskey, CPA, CFE, CDFA, is employed by Aspey, Watkins & Diesel, PLLC as a forensic accountant supporting legal services. She can be reached at [email protected].

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