The Importance of Forensic Accountants in High-Asset Divorce
As a young family law solicitor, when I dealt with my first high-asset divorce case, I was surprised with the advice that my barrister in the case first provided me. They advised that I immediately contact a certain Forensic Accountant so that we could “claim” her and just as importantly the other side would not be able to use her. The barrister explained that she was very well respected by the court and it was a significant advantage to our client to have her in our corner. Like most people, at this stage I did not fully understand what a good forensic accountant brought to a high-asset divorce case. It comes therefore as no surprise to me that clients have to be educated as to the role of the forensic Accountant in these cases. This education is especially important when I inform them that the cost of retaining these experts can range from 10k to 70k or in particularly complex cases even more. When they are spending this money, they need to understand the work that these experts perform. Here I will try to explain.
What Forensic Accountants Do in High-Asset Divorces
At a simple level, High net worth individuals often possess a diverse range of assets, from real estate and businesses to stocks and intellectual property. Forensic accountants specialise in valuing these assets accurately. In these cases, full financial disclosure is essential to achieve a fair division of the marital assets. Forensic accountants have the skills and training to uncover hidden assets, including offshore accounts, undisclosed investments, and underreported income. Their ability to conduct thorough investigations ensures that all assets are brought to light, preventing one party from gaining an unfair advantage ie by trying to undervalue the marital assets.
When and How Forensic Accountants Are Appointed
So, we understand the why but how and when are they appointed? Generally, they are appointed by the solicitor acting for one spouse in the case. Usually, they are appointed by the solicitor once the proceedings have started and where the Affidavit of Means has been exchanged. These are the sworn documents where both spouses exhaustively aware as to all their income and expenditure and assets and liabilities. Sometimes they will be appointed earlier and will help one of the spouses prepare this affidavit of means.
Misconceptions About Forensic Accountants
Just a note to say that there may be some misconceptions about Forensic Accountants. They are used in all High-Asset divorce cases as the work involved in arriving at the pot of available marital wealth would be outside the expertise of a solicitor. It is standard practice and is to ensure fairness and transparency. Employing this expert does not imply distrust and they are not there “to cause trouble”. Ultimately In all cases, their primary role is to provide assistance to the court in understanding and dealing with the financial matters of the parties. Regardless of how or who appoints them, they are an independent Expert to provide an “Experts Advice”.
How Forensic Accountants Perform Their Work
So what do these financial detectives actually do in the high-profile divorce cases? I spoke to the person I would use in all my cases and they stated “ The overall aim of our work is to try to narrow down the differences in the financial figures. This will involve sifting through the information, to condense it into a report that provides a clear explanation of the finances, sets out our opinions on Valuations of businesses/investments, and reflects on the issues that are particular to that case.
This should result in there being an accepted “pot” available to divide. And to try to reach this point as quickly as possible so the parties can finalise their case.
Our role can be limited to dealing with a specific asset, like the valuation of a share in a company, or an income source, or an individual transaction. Or we can be engaged to review and report on the whole financial picture of the family.
In assisting the client, an important element of the work will be in explaining those financial figures, and how the supporting documentation has led us to the conclusions we have made. For example, perceptions of the lifestyle they lead may not actually reflect the true economic position of the family, and so we need to be able to explain this to the client using the documents provided.
Importance of Full Financial Disclosure during a High Asset Divorce
So at all times, I recommend that a client should provide all documents they have, regardless of what they “think” their spouse knows. The client needs to ensure their Spouse’s advisors, both legal and financial, fully understand the position, and that way they can then advise their client properly, and the case progresses. “
They say that the nuts and bolts of how they perform this work is “Generally the starting point for my work, is the review of the Affidavits of Means, and the financial history disclosed within the pleadings, followed by the review of the vouching documents from both parties.
In general, clients are advised to provide the basic vouching documents to their affidavit figures.
External sourced documents will give an independent source of information to vouch for what a client has sworn in their Affidavit.
- Bank & loan statements, investment valuation reports, solicitors’ completion statements, Revenue raised tax assessments and P60s, and Company Financial Statements. Basic starting points for information.
However, further documents may be required to explain how an asset or liability arose, how an income source is earned, what factors impact it and its value, and finally, how it can be treated for the purposes of Asset/income division.
The more complete the documentation is at the start, the quicker the overall review will be. When I am engaged to assist a client prepare and vouch their Affidavit, I look at what may be needed so that the otherside will understand it hopefully without needing to raise queries.
For example, to get an understanding of current debts and loans:
- Loan facility letters, correspondence with Banks, which show the terms & conditions of the loans, and so cashflow/security/period for loan repayment (Bullet or Balloon payments) are fully understood.
- Are there Personal Guarantees given and by which spouses?
- Reconciliations of the application of loan proceeds, where re-financing or top-ups have occurred
To get a better understanding of a Company/Partnerships & interaction with the clients:
- Copy of any Shareholder or Partnership Agreements should be furnished. It is important to stress that these will be treated as confidential as proceedings are “In camera”.
- Copy records from the business accounting packages – the Nominal Ledgers for specific expense categories or assets/liabilities. E.g. Motor & travel, the directors’ loan accounts
- Explanations from the company’s auditor or accountant can also assist in the interpretation of the company transactions.
To get a better understanding of Income:
- Bonus or share awards. While the Tax assessment or P60 will include a value for this, it may not provide the full picture of the benefit, and so documents such as Employment contracts specifying entitlements, annual employer correspondence notifying the figures for bonus/share awards, and correspondence from the Sharebrokers administering the Share awards should be furnished.
- Income through a company. Examples of incorporation by individuals who provide a service, e.g. doctors, dentists, etc. The income in the personal name as filed for tax purposes can decrease significantly – but is this the real position? What income is being retained by the company? What expenses is the company paying on their behalf?
Case Study: Not Declaring Full Income in a High-Asset Divorce
An example or case study of what they look for and ascertain from this discovery process is where the Forensic accountant had a case where the company’s profits had in fact increased but the spouse in the case had decreased his salary by half. He was taking out the same level of drawings as he had always been but instead of declaring this as salary, he was taking out a director’s loan. The Company’s net profits increased and the value of shareholding increased, But he now owed monies to the company on foot of the director’s loan. This is an example of the complex steps some parties will take to reduce their apparent income.
After all the documentation is pulled together “We have a standard format of report for all cases. A summary page that pulls together the total value of assets & Liabilities, with a separate page for each asset category, and a summary page of Income from all sources. Depending on the facts or the issues in the case, we prepare analysis as required – bank summaries, reconciliations for cash/capital movements etc.
The intention is to present a simple summary of what is available, and then through advice, and evidence, explain by use of our analysis, of the more complicated financial issues. Often again, these summaries are used to explain to the instructing client how assets/income they believed to exist have evolved into the current reality. We try to assist a client in understanding the family’s finances, and how proposed divisions will impact them day-to-day. Particularly the question of maintenance, and whether it is for them, and thus taxable, or for the children, and thus ends when they are no longer dependants.”
Once the main figures are established in the report the Forensic accountant can consider and prepare possible divisions of assets, and income, and the tax consequences of these. This is effectively putting figures to the client’s “wishlist”, which can highlight any potential problems or issues that may arise.
Potential Complexities and Issues
The main difficulties that often crop up are
- Mortgages, either in joint names or secured on a desired property,
- The CGT inherent in properties,
- complex tax schemes that may need to be unraveled,
- The expectation of “finding” the hidden cash. The reality of the work that would be required to investigate to prove this, followed by the implications of what it would mean in tax liabilities if so proved.
- Where the majority of the value of the family is represented within one asset, which is also the income-producing asset. Potentially looking at a situation where both spouses must retain an interest in this asset. Shareholder agreements must be prepared to set out how those interests are maintained into the future.
Conclusion: The Value of Forensic Accountants in Divorce
Obviously in a perfect world, both parties in a case could be implicitly trusted to comply with their obligations to provide full and frank financial disclosure under the Family Law Acts. However this does not always happen and forensic accountants are an essential tool to ensure both parties meet their legal obligations. As well as this, the valuation of company shareholding etc which can be illustrated to the court in a logical and coherent document can prove invaluable to a client’s legal advisors understanding. In addition, they can shed light on the reality of the couple’s joint finances sometimes to the displeasure of the client. This can be where the accountant will clarify that the family finances were a house of cards built upon smoke and mirrors. The lifestyle was not actually backed up by a successful business but by loans and overdrafts.
While there are obvious cost considerations, if you are involved in a high-asset divorce, I would submit that what you will gain from hiring a forensic accountant to assess the family pot will far outweigh what you will spend on their services.
Long-term, this will give you peace of mind that you have taken all steps available to ensure that you obtain a fair outcome. Should you find yourself going through a Divorce in such circumstances, please contact the Family Practice for assistance.
