Outlining the role of a forensic accountant in divorce proceedings.
By David L. Gresen, Business Valuator
It is not uncommon for a forensic accountant to receive a call from a matrimonial attorney to perform a “lifestyle tracing,” “account analysis,” “expense analysis,” or just a “tracing.” Each of these terms may have different meanings to the accountant and counsel.
What is the role of a forensic accountant when performing Financial Asset Tracing and/or a Lifestyle Analysis in a divorce? How are these analysis utilized by matrimonial attorneys?
Financial Asset Tracing
The forensic accountant’s role in Financial Asset Tracing includes the documentation and verification of financial transactions including: deposits, withdrawals, and transfers within bank and brokerage accounts; purchase and sale of securities and similar assets; and deposits and withdrawals from retirement accounts.
Reasons why financial asset tracing is needed include:
- To support a claim that specific financial assets represent or contain a spouse’s separate property;
- To support a claim that a spouse secreted monies;
- To support a claim that a spouse failed to list all financial accounts on their financial disclosure statement;
- To support a claim that financial assets, which one spouse is claiming are separate (either obtained prior to the marriage, gifted, or acquired with separate monies), have been transmuted into marital property by commingling with marital monies;
- To ensure that all financial assets have been accounted for.
Each of the above analyses is critical in determining equitable distribution. The forensic accountant’s role in verifying and documenting the above claims can be arduous depending on the number of years and number of accounts that require analysis.
Open communication between the forensic accountant and counsel is key in order to prepare a comprehensive, meaningful, and timely analysis.
A Lifestyle Analysis, in the context of a divorce action, involves the documentation, verification, and quantification of actual expenditures incurred during the marriage. The forensic accountant’s role includes the review and analysis of documents such as bank and brokerage account statements, canceled checks, credit card statements, tax returns, and loan documents.
Reasons why a Lifestyle Analysis is needed include:
- To determine the standard of living during the marriage;
- To determine the level of support required for maintenance and/or child support;
- To determine whether or not a spouse is underreporting income;
- To determine if a spouse has dissipated marital monies by incurring expenditures on paramours or habits such as drugs or gambling;
- To determine if a spouse has secreted monies.
Issues that need to be discussed with counsel and the client(s) prior to the forensic accountant performing a Lifestyle Analysis include:
- The appropriate time period for the analysis — were there any unusual years which would not be representative of the family’s “normal” lifestyle (e.g., sickness, one-time financial windfalls, one-time financial pitfalls, etc.).
- Was there any divorce planning?
- Are any personal expenses paid through a family business?
When undertaking an engagement such as a Financial Asset Tracing or Lifestyle Analysis, prior to performing the actual analysis, the forensic accountant should have a meeting with counsel and the client(s) to obtain an understanding of how the parties lived and why the analysis has been requested.
The task of performing the above noted analyses can be very time consuming and therefore expensive, by working closely with counsel the forensic accountant will be able to target their analysis and provide counsel the information required to settle or litigate their matrimonial matter in a meaningful, time efficient, and less costly manner.
David L. Gresen, CPA/ABV/CFF, CFE is a partner in the forensic accounting and business valuation firm of Klein Liebman & Gresen, LLC (“KLG”). If you would like to find out more about KLG please visit our website at www.goKLG.com.