17/07/2024
When and why are forensic accountants useful in a divorce case?
Proficient Lawyers strongly advocate for peaceful divorce with minimal acrimony. We advise clients – and help them – to avoid litigation wherever possible. The less traumatic the divorce process, the easier it is to build a new life after the marriage has ended. And an amicable divorce is indisputably better for the children of the union, whatever their age. Why, then, are we writing about forensic accountants in the context of divorce? Isn’t the involvement of “forensics” the opposite of amicable? It’s true…engaging a forensic accountant in the divorce process is a sign of mistrust, that things may not be as they seem. But in some cases it is a necessary step to establish the full extent and value of asset holdings. Forensic accountants are most likely to be used in high-net-worth divorces, and/or where one or both partners own a business. In this article we look at the role a forensic accountant may play in a divorce, and how their expertise and technical knowledge can actually help both spouses and their attorneys arrive at a fair and just settlement agreement.
What is a forensic accountant?
The popularity of TV crime dramas has caused the word “forensic” to be widely associated in the public consciousness with criminal investigations, often murders. Forensic scientists examine and analyse evidence from crime scenes that may help in the investigation and prosecution of criminals, or they may help remove suspicion from an innocent person. But forensic science and criminology is just one branch of forensics, which also includes accountancy, auditing, insurance, and many more. The word “forensic” simply means “pertaining to, connected with, or used in courts of law or public discussion and debate”. So any forensic investigation, whether of a crime or a set of accounts, is designed to uncover facts that provide evidence to support a case, especially one that may wind up in a court of law.
A forensic accountant analyses financial records and accounts. They are often called to give evidence based on their investigation and may be cited in court as expert witnesses. Forensic accountants handle cases of fraud and embezzlement and other types of financial crime. But they do more than that. When a couple with a high net worth and complicated finances decides to divorce, a forensic accountant can help ensure equitable distribution of assets. They are often called in when one spouse suspects the other of hiding assets. But they can also be a valuable part of open and honest negotiations. The presence of a forensic accountant does not automatically suggest there are unscrupulous dealings afoot.
Divorce in the South African context
The division of assets on divorce depends entirely on the matrimonial regime the couple chose when they got married. If they married in community of property, the joint estate is divided equally when the marriage is dissolved. This is straightforward – on paper – but can still lead to squabbles and deceit over the full extent of assets. If the marriage is out of community of property without accrual, both parties walk away with the assets they owned when they entered the marriage. A property they purchased jointly will still need to be divided. It may be intricate: one may have made the bond payments while the other financed a renovation; but it should be relatively easy to determine the value of each party’s holding. The most complicated regime is out of community of property with accrual. Out of community of property with accrual is almost like out of community of property without accrual, except that the increases or decreases in each partner’s estates are shared.
The individual estates are valued at the time of marriage, and again when the marriage ends. It is considered a fair solution by partners who are both independently wealthy before getting married. However, determining the fair value and division of the accrual, particularly where the couple has been married a long time and there is a large amount of accrued wealth, can be very complex. This is where a forensic accountant can add considerable value.
Business ownership
It is not unknown for estranged couples to avoid divorcing purely because they own a business together. Others may divorce but carry on being business partners and manage to maintain a friendly relationship. In this case, the business is unaffected by the terms of the divorce. But it’s not always that simple. Buying out the other spouse’s share of a business, where there is no possibility of continuing to work together, can be financially prohibitive. It is easy to see why one spouse might want the business to appear worth less…or more…than it really is. And then there is the case of the spouse who is not a legal owner of the business but feels their contribution over the years has added value, whether by providing unpaid admin support or taking on all household and childcare tasks to allow the other to devote their time to the business. How is that contribution to be valued?
A forensic accountant has the specialist knowledge to ensure the valuation is fair in all of these cases. Various factors influence the valuation, such as past performance of the business, potential projected earnings/profit levels, asset holdings, and market data on competitors. A specialist in divorce financial investigations may also be able to advise on a potential restructure of the business to enable one party to extract funds when the divorce settlement is finalised. They can also advise on tax considerations, particularly around Capital Gains Tax (CGT), which may be applied on transfer of assets or withdrawal of cash from the business.
Hidden assets
Unfortunately, the trauma of divorce can cause reasonable people to act unreasonably or at least unwisely. Where there is a lot of wealth involved, and the estate is to be divided equally, one spouse may feel the other is not entitled to an equal share, for example if they have been the sole income earner, and they may attempt to hide assets or income. There are various ways to do this. They may not declare their full portfolio in the discovery phase of the divorce, they may depreciate assets beyond their current value, or they may conceal the extent of the assets. They may also overstate debts to appear insolvent, report income to be less than it really is, and/or claim expenditure to be higher than it is. If they are a business owner, they may fail to reimburse their own business expenses, overpay creditors or pre-pay suppliers, having the money refunded later. Family or friends may be put on the payroll or paid for fictitious services rendered, which will also be refunded. The forensic accountant will discover all of these tactics.
Maintenance
Child support is generally calculated using a formula that considers the child’s needs. But when it comes to spousal maintenance, the calculations regarding need and expenditure of the payee vs. affordability for the payer can become heated. A forensic accountant can calculate cash flow and provide the spouses – and their attorneys – with an accurate financial picture which provides the basis for a sound decision.
The forensic accountant may work with either or both spouses, or each may engage their own accountant. The spouse due to pay support benefits from a realistic representation of their financial circumstances that should protect against incorrect income calculations presented by the opposing spouse or used by the courts. The spouse hoping to receive support wants to be sure the opposing spouse is not hiding cash, investments, assets, or income that might give a completely different impression of their finances. One forensic accountant may act for both parties as a Single Joint Expert (SJE). This has advantages in terms of overall cost and smooth proceedings. However, in most cases where it is necessary to engage the services of a forensic accountant, it is unlikely the divorce will be amicable enough to accommodate a single source of financial information
