Greed or Ignorance – Which Costs More?

by Larry Goldsmith, C.P.A., J.D., C.F.F.A.

Was it legal greed or ignorance that deprived a divorcing wife her reasonable financial settlement and left her destitute after a 30 year marriage?

Recently a woman in distress called me to perform forensic accounting to ascertain and document the amount of income her husband truly received from a cash business.  The attorneys charged hundreds of thousands of dollars in fee, collected dozens of boxes of financial documents and did nothing to prove the husbands actual cash earnings.

Her quivering voice explained that the family business generated cash that was not reported for tax purposes and was never deposited into bank accounts. She believes the cash is now stashed with his relatives.

In a divorce, it is common for parties to believe that their spouse has been hiding cash or hiding income.  In most situations the beliefs are unfounded.  The best service that a forensic accountant can perform in these situations is to be honest and ease the party’s fears.

In other cases, as in the aforementioned case, the discovery period had terminated.  Discovery is the time period where the court permits parties in a law suit to gather information, documents, and engage in depositions from the other party. The attorney never told them that an independent forensic account was needed. Many lawyers believe that their paralegal or other staff person has the skill to review bank and brokerage statements. Unfortunately, hidden assets are not usually in bank or brokerage statements.

Illinois Courts are less tolerant of violations of discovery rules even at the expense of the case being decided. This means that if a party “stonewalls” and does not produce reasonably requested documents, the court can decide the case against the stonewalling party. Forensic accountants understand what records or documents are required in constructing income from lifestyle and income of businesses from sources that attorneys may not be knowledgeable of.

The spouse found herself at trial and the attorneys could not prove the husband had any income except for family trusts (premarital or inherited).  Therefore, the spouse received no maintenance after a 30 year marriage. She cried, not knowing where the monies were to come from to pay hundreds of thousands of dollars of legal fees or where she would find the funds to pay her rent and ordinary living expenses – while her ex-husband drives luxury cars and vacations several times a year at exotic locations.

These cases are sad and can be prevented.  Individuals considering a divorce retain divorce attorneys who meet their required criteria, but they should also engage a forensic accountant who will represent them and will independently answer their questions and their fears. The forensic accountant will work with the attorney and will maintain their independence so that you are informed with the facts as they are determined.

Lawyers and their legal assistants are not forensic accountants nor have they most likely received advanced forensic training. They are knowledgeable in law and what it takes to handle your divorce with its unique issues.

The forensic accountant may be engaged to perform the following tasks in a divorce.

1. Identify and locate assets.
2. Perform internet investigations.
3. Determine the income of the other party.
4. Provide for a valuation of assets
5. Determine cash flow.
6. Identify and quantify marital monies that may have been misused.
7. And other accounting issues that would best assist the attorneys in court

The forensic accountant is a financial expert.  The Courts respect the findings of court experts and their findings, if reasonable, can have an influence on how the Court will decide a matter and in whose favor. A forensic accountant is not your tax preparing accountant, who reconciles bank accounts and advises companies. The forensic accountant is like the television detective Columbo, piecing together clues to unravel the truth.

In a recent Illinois Appellate case, the Court ruled that the spouse failed to engage in discovery prior to entering into a marital settlement agreement and therefore she cannot rely on the other party’s representations as to assets and income.  In this case her attorney’s failure possibly caused her a share in two million dollars.

If you are in a situation where there is a divorce or business litigation, consider retaining a forensic accountant to be a part of your legal team. Litigation is costly and the contemplation of another fee is frightening, but the forensic accountant may help you achieve a reasonable settlement.

Larry Goldsmith JD, CPA, CFFA

Member at CJBS, LLC