Divorce: a game of hide and seek?
Among the other emotional accusations made during her divorce, Jane informed her attorney that throughout the year immediately before her separation, she had noticed that her husband, John, had changed the way he handled their finances. Bank account balances were depleted, John's paychecks were no longer deposited regularly into their joint accounts and creditors began to demand payment on delinquent accounts. As Jane described other unusual occurrences, such as more frequent business trips for John during this time, her attorney recognized the probability that John had hidden significant assets from his soon-to-be ex-wife. Unless they are located, these assets cannot be included in the divorce settlement.
Unfortunately, Jane's story is not uncommon and she and her attorney now face the task of locating these assets. In most instances, effective searches require analyzing numerous financial documents and specific transactions, reviewing public and private records and discovering relationships and patterns among the data that indicate the existence of additional assets.
Accountants are uniquely qualified to assist attorneys with these searches because of their knowledge and experience in financial document analysis, accounting principles and auditing techniques and their awareness of common schemes to secrete property. This article explains how the process works, including a step-by-step approach for conducting searches, tips for gathering evidence and analyzing records, how to learn more about the field and ideas for getting started in the business.
WHAT IS FORENSIC ACCOUNTING?
The process of locating hidden assets is a component of forensic accounting, a fairly new discipline for CPA firms. Since forensic accounting involves applying financial facts to legal situations, it is becoming an important litigation service that practitioners offer to attorneys. To be effective, a forensic accountant must command a thorough understanding of the legal process, its unique language and the rules of evidence used in both federal and state courts.
The initial meeting. A typical divorce investigation begins with a conference between the forensic accountant, lawyer and client. The CPA should try to determine the credibility of the information being presented by objectively separating the emotions from the facts. He or she may decide at this point that the case does not have merit, perhaps because the client's story is not logical or credible, the amounts involved are immaterial or the cost of obtaining the needed evidence would exceed the benefit gained by locating the assets.
Ifa CPA decides to accept the engagement, normally it is best to have the law firm engage the CPA and not the client. In most states this approach subjects the accountant's work product to the attorney privacy rules, which means it is not discoverable unless the attorney decides to use the work in connection with expert testimony.
Beginning the search. The second meeting with the client and attorney should be a detailed interview designed to obtain
* A complete educational and employment history of the spouse suspected of hiding assets.
* A list of all banks, brokerage firms and other financial institutions with which the spouse has ever had a relationship, including each account number and type.
* All sources of income, whether earned or passive, including pending litigation and insurance settlements, estate proceeds and sales of assets and loans. A recent balance sheet from a credit application will supply some of this information, if no other source is available.
* Lifestyle and expense levels for items such as entertainment, travel, child care, interest and property taxes.
* Detailed information on personal and business relationships, such as the names of the spouse's children, the parents of both the spouse and client, any ex-spouses, maiden name of spouse or client and the names of all current and former business entities and partners. Get addresses and phone numbers for each name.
The next step is to prepare the work program based on knowledge gleaned from detailed discussions with the client and attorney, as well as from documentation they supply. Since a common concealment ploy is to transfer assets to other parties, the CPA at a minimum will need to do the following before proceeding to a review of cash transactions and public records:
* Compare the names and locations obtained during earlier interviews with payees on cancelled checks and other documents. Use the information to initiate public records searches.
* Obtain copies of all trust documents for any family member and identify the trustee and beneficiary.
* Acquire copies of all life and disability insurance policies and determine the beneficiaries and owners. Look for any large checks made out to insurance companies.
* Obtain a mortgage activity report or examine cancelled checks to see if excessive mortgage principle payments have been made. (This technique is particularly useful in states that allow debtors to protect their assets from creditors using the homestead exemption.)
* Review credit card statements for unusually large credit balances indicating prepayments to accounts.
* Obtain passports to determine travel history.
Accessing private records. Sometimes a court order to obtain the necessary private records is needed. Even though getting these records requires significantly more time and--usually-legal intervention, the investment may prove to be very rewarding. Useful records may include credit card, bank and telephone records, insurance policies, mortgage documents, broker statements, trust documents and tax returns.
Making the most of public records.
There is a record for almost every transaction in which we engage. Helpful public records include newspapers, telephone directories, secretary-ofstate corporate filings, civil and criminal court records, county clerk filings, uniform commercial code filings and voter registration files. Databases available in most states can assist in a search through the public records (see the sidebar at left).
City, county, state and federal public records often provide substantive evidence of the spouse's transactions, which can be correlated with private records. In many cases, this access also provides additional names, locations or other information to expand the search.
DETERMINING PATTERNS AND RELATIONSHIPS
Once the public and private records searches have been performed, it is crucial to continually evaluate the results. The data gained in private records often will shine new light on information from the public records, and vice versa. In many cases, additional areas to search are exposed. For example, a review of frequent flier statements may show a pattern of travel to a particular city, which means it's time to intensify a public records search in the destination city, county and state.
An examination of secretary-of-state corporate filings may reveal corporations and other individuals with whom an individual is involved. Correlating this information with data retrieved from personal checkbooks, other public records and tax returns often can reveal where assets are being hidden.
When examining cancelled checks, it is important to know that the magnetic ink character recognition system that banks use to read checks is a uniform system. By understanding how to interpret the numbers contained on checks deposited to a spouse's account, the CPA can locate banks used by the suspect.
Phone bills should be analyzed for toll charges to unusual locations. Do these locations correlate to places mentioned in other records? Credit card statements similarly should be examined for unusual expenditures, purchase locations and hotel, air travel and rental car charges.
It is also helpful to organize, by date, payee and type of transaction (such as food, travel, entertainment and rent) all credit card charges and cash disbursements to see if total expenditures exceed cash income and borrowings, including the increase in credit card debt. If the suspect is spending an unusual amount, it's more likely there are assets hidden somewhere.
During the investigation, it may become apparent that assets have been transferred offshore. The Multilateral Assistance Treaties and Department of Justice procedures allow for formal requests of foreign countries to provide information to verify the offshore repository of a domestic transaction.
GETTING STARTED IN THIS NICHE
The most effective way to gain clients in this area is to inform attorneys of your expertise. Cite specific examples of ways in which your financial and search skills can make their jobs easier while providing a service to their clients. Begin by educating friends and lawyers with whom you have become associated through client work. It's also helpful to become involved in organizations that spotlight attorneys, to write articles on the subject and to give speeches for attorney groups. Insurance and title companies and public organizations also use forensic accountants.
Hidden-asset searches often are exciting engagements that provide the opportunity to use your creativity. By following the approach outlined in this article, it's possible to make a successful entrance into an important new practice area.
Various computer databases offer access to public records information in most states. Although hundreds exist, some of the best known and most extensive are
5) United Press International.
6) Prentice-Hall OnLine.
Information is always available in print form, but an online service is significantly more efficient, especially if an investigation spans several states.
* ACCOUNTANTS ARE UNIQUELY QUALIFIED to assist attorneys with searches for hidden assets in divorce cases because of their knowledge and experience in financial document analysis, accounting principles and auditing techniques and our awareness of common schemes to secrete property.
* A FORENSIC ACCOUNTANT must understand the legal process, its unique language and the rules of evidence used in both federal and state courts.
* EFFECTIVE SEARCHES REQUIRE analyzing numerous financial documents and specific transactions, reviewing public and private records and discovering relationships and patterns among the data that indicate the existence of additional assets.
* THE BEST WAY TO GAIN CLIENTS in this niche is to inform attorneys of your expertise. Cite specific examples of ways in which your financial and search skills can make their jobs easier while providing a service to their clients.
* OTHER NICHE DEVELOPMENT STEPS include becoming involved in attorney organizations, writing articles on the subject and giving speeches for attorney groups. Insurance and tide companies and public organizations also use forensic accountants.
WILLIAM M. MICHAELSON, CPA, CFE, is president of Michaelson & Co., West Palm Beach, Florida. He is a member of the American Institute of CPAs and the Florida Institute of CPAs, and of the Academy of Experts, a professional society, and qualifying body for forensic accountants and other experts.
Just the Facts
Here are some of the sources of public records that will help reveal the business and personal background of someone suspected of hiding assets:
* Clerk of the courts, for all lawsuits and judgments involving the spouse.
* Department of Motor Vehicles for automobile and boat registration.
* Federal Aviation Administration for airplane registration and pilot records.
* Tax assessor for property registered in the spouse's name.
* Departments of state for business entities in which the spouse is involved and associates connected to those businesses.
* Voter registration records.
* Uniform Commercial Code filings with the state.
* Securities and Exchange Commission for public filings and entities in which the spouse is involved.
* Professional licensing authorities.
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|Author:||Michaelson, William M.|
|Publication:||Journal of Accountancy|
|Date:||Mar 1, 1996|
|Previous Article:||Understanding and implementing FASB 124.|
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