Use a Forensic Accountant to Prove Fraud in Divorce

Too often, divorces get ugly. Estranged spouses may bicker, turn family members against each other and even hide assets to protect their financial interests. The burden of proving fraud is on the accusing party. Finding evidence to support a fraud claim in court can be difficult, but a forensic accountant knows how to build a case -- and how to defend against fraud allegations made by the opposing side.

crumpled dollar bills being viewed under a magnifying glass

The Mystery of the Offshore Accounts

Consider the wife who suspected that her husband was hiding assets in accounts in the Cayman Islands, his preferred destination for his "guys' weekends." Her attorney recommended a private investigator who befriended the husband and eventually received an invitation to join him on a trip to the Cayman Islands. Once there, the husband bragged about the money he was hiding in an offshore bank. However, the private investigator was unable to obtain hard evidence — such as a bank statement or debit card receipt — to identify the account numbers or quantify the balance.

So, the wife's attorney hired a forensic accountant to estimate the value of assets that were purportedly hidden by the husband. She used a net worth methodology — similar to the technique used by the IRS — to estimate the value of the hidden assets. This analysis compared the change in the marital estate's net worth to the difference between the couple's income and expenses each year. The cumulative difference between the two measures was assumed to be hidden in the Cayman Islands account.

As a result of this analysis, the judge order the husband either to:

  1. Provide bank statements for the offshore account over the last five years and pay for the forensic accountant to perform additional analytical procedures or
  2. Use the forensic expert's estimate of hidden assets to settle the marital estate. For simplicity sake, he chose the latter.

The Case of the Skimming Grocer

In another case, the husband owned a grocery store. His wife accused him of skimming from the cash registers and not reporting a large portion of cash receipts for tax purposes. In fact, she told her attorney that he'd bring home shopping bags of cash each year on Christmas Eve to count under the Christmas tree.

So, the wife hired a forensic accountant to estimate amount of cash skimmed by comparing industry standard ratios — such as gross margin, earnings before tax and inventory turnover — to the grocery store's actual ratios. The wife used the threat of exposing the husband's blatant tax fraud as a bargaining tool in settlement talks. As a result of the forensic expert's estimate of unreported taxable income, she was able to negotiate a more favorable asset allocation and maintenance agreement than she otherwise would have.

Important note: This strategy can backfire if the parties admit to underreporting taxable income in court. Here, the wife was aware of the husband's unethical behavior and signed joint tax returns for many years. Because she knew that those returns didn't include the income from the skimming, she could be charged with filing fraudulent income tax returns along with her husband. She clearly wasn't an "innocent spouse." In addition, judges may perceive spouses who knowingly evade taxes to be unethical and be less sympathetic to the needs and preferences of both during the divorce proceedings.

Supporting Your Case

Not all fraud allegations turn out to be true. Sometimes the spouse who's suspected of fraud is just a spendthrift who dissipates marital assets. Or perhaps the accusing spouse doesn't understand finances or is unrealistic about the cost of living (and raising a family). Proving (or refuting) fraud allegations can be difficult, because of the inherent mistrust between divorcing spouses.

A forensic accountant knows forensic tools — such as the net worth methodology or industry benchmarking — that can be used to evaluate hidden assets and income. He or she also knows how to best document and present proof of fraud. These analyses can be powerful bargaining tools in settlement talks. Or they can be used to persuade the court to allocate assets in the client's favor, if the case winds up in court.

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