Forensic Considerations: Addressing Fraud Allegations in Matrimonial Cases

Sometimes, during divorce proceedings, there is very little contentious behavior between the two spouses. However, more often than not, a harmonious separation is nonexistent, and each party to the dissolution attempts to take advantage of the other. Spouses often try to conceal relevant financial information related to their actual income and all the assets that should be included in the marital estate.

Depending on the geographic location of the proceedings, the laws for each jurisdiction dictate how the financial information will be used in the divorce proceedings. In general, the laws direct that each spouse must produce all relevant financial information. During a divorce, it is not uncommon for one spouse to try to conceal assets belonging to the marital estate or hide the true amount of income they have received either during the marriage or during the divorce proceedings. Counsel may retain a forensic accountant to assist them in locating concealed assets or uncovering the true income stream attributable to the other spouse.

Types of Analysis and Work a Forensic Accountant Can Provide

A forensic accountant is someone who specializes in investigating matters using their accounting, auditing, and investigative skills. This involves training in addition to the traditional training of a Certified Public Accountant (CPA); their specialized skills and experience allow them to, among other services, uncover financial crimes and provide expert testimony. Many forensic accountants also separately study and pass examinations to qualify for specific forensic designations, such as a Certified Fraud Examiner (CFE) and/or Certified in Financial Forensics (CFF).

A forensic accountant can be a helpful, powerful, and resourceful tool when engaged by counsel and can assist in divorce proceedings, including, but not limited to:

1. Income Analysis: Detailed analyses of income sources for both spouses to ascertain the actual earning capacity. This is often times different from the amounts that have been disclosed by the parties in the marital dissolution.
2. Lifestyle Analysis: Analysis of the standard of living during the marriage to help in proving proper alimony and support payments. This involves evaluating patterns pertaining to spending and the financial requirements needed during and after the marriage.
3. Tracing Hidden Assets and Income: Identifying and locating hidden assets or income by using various forensic techniques and tools. The finding of hidden assets or undisclosed income will enable full disclosure, transparency, and fairness in allotting assets to each spouse. Digital forensics may be used to recover deleted files and emails that identify hidden assets and income.
4. Assessing Debt and Liabilities: Analysis and assessment of any debts and liabilities to properly document the obligations of each spouse.
5. Fraud Investigation: If there is a suspicion of fraud or some type of misappropriation of assets, forensic accountants analyze the financial records to discover any fraudulent activity. This may include, but is not limited to, interviewing certain individuals, performing computer forensic analyses, and pursuing hidden cryptocurrency accounts.
6. Expert Witness Testimony: Forensic accountants often provide expert testimony during the divorce proceedings, testifying about their findings and providing their expert opinions.
7. Settlement Support: Forensic accountants can facilitate settlement negotiations to assist both parties in reaching a resolution to the divorce proceedings.

 Types of Fraud That May Occur

 Committing fraud is not a new phenomenon. There are many types of fraud, including but not limited to check fraud, embezzlement, and skimming, to name a few. These types of fraud are the basis and foundation for the types of fraud that can occur in a marriage dissolution.

Common types of fraud in a divorce matter include, but are not limited to:

1. Hiding cash in a separate account;
2. Unreported or underreported income (tax fraud);
3. Deferring income until after the divorce is finalized;
4. Investing funds in international accounts when minimal documentation exists;
5. Paying cash to friends and family members disguised as payback of borrowed funds;
6. The use of cryptocurrency to hide assets;
7. Holding cash in a safety deposit box; and
8. With respect to a business owned by one of the spouses, deferring income, i.e., new contracts, until after the divorce is final.

Characteristics to Consider when Selecting a Forensic Accountant

 When deciding to use a forensic accountant to assist in a marital dissolution, the following should be considered when making the selection of a forensic accountant:

• Objectivity: The forensic accountant cannot demonstrate any bias and must maintain impartiality. This includes actual bias and impartiality and any perception that may exist based upon actions, written documents, or oral statements. Perceived bias and impartiality can be as damaging as actual bias or not being impartial. Regardless of who engaged the forensic accountant, the forensic accountant must be unbiased and impartial.
• Integrity: In addition to being objective, forensic accountants should not manipulate or misrepresent the data to favor one party over another. Again, maintaining integrity is absolutely necessary for a successful resolution to a marital dissolution. Any deviation from integrity will discredit the forensic accountant, and any work produced by the forensic accountant will be deemed to be tainted, unreliable and barred by the court.
• Competence: Forensic accountants must have the necessary skills, knowledge, and expertise to conduct a thorough investigation. This includes having the proper credentials, i.e., CFE and/or CFF, to demonstrate that the forensic accountant has the necessary skills, knowledge, and expertise. They must also be familiar with the latest tools, techniques, and standards. Although a forensic accountant may be credentialed and have experience in fraud matters, if they are not skilled and experienced in marital dissolutions, the result of their work may not be proper or correct.
• Conflict of Interest: Before a forensic accountant accepts an engagement, they must perform a conflict check to ascertain that there are no conflicts with any of the direct parties or even the indirect parties of the marital dissolution. Forensic accountants should not accept engagements where their objectivity might be compromised. This applies to the parties involved in the current divorce proceedings or prior engagements.

The Association for Certified Fraud Examiners and the American Institute of Certified Public Accountants accredit the CFE and CFF designations, respectively. Each CFE and CFF is required to adhere to professional standards and code of ethics, and before engaging a CFE or CFF, it is important to ascertain that they have the requisite experience in marital dissolutions.

 Impacts of Using a Forensic Accountant

Engaging a forensic accountant and utilizing their findings in a divorce matter can be extremely beneficial. There can be significant impacts on the allocation of assets and spousal support based on their findings, as deception by one spouse may cause the court to reallocate a larger share of the marital estate to the other spouse.

• The settlement terms of the divorce may be changed due to discovery of fraud. The court may adjust the allocation of the marital estate to compensate for the true financial status of both parties.
• If the forensic accountant discovers hidden assets, the division of the marital estate will be impacted because these assets will be added to the marital estate.
• Spousal support may be impacted due to the fraud causing the income to be artificially distorted. A true financial picture of the spouse who caused the fraud may result in an increase in spousal support to the other party.
• The spouse that perpetrated the fraud may be subjected to fines and penalties imposed by the specific state where the divorce proceedings are held. Fines and penalties may also be influential in the division of marital assets. Additionally, the spouse that committed the fraud may be obligated to pay for additional legal fees and the cost of the forensic accountant for the work they performed to uncover the fraud.

 By uncovering issues like these, a forensic accountant can have a significant impact on a marital dissolution.

 Another important impact is that the credibility of the spouse who took steps to manipulate the records and provide false information is damaged. Such damage gives the other spouse leverage in negotiating a settlement, division of assets, or other aspects of the divorce dissolution. When someone commits fraud, others often look at the person as untrustworthy and dishonest. Typically, the spouse committing the fraud has their reputation damaged, and the court may give the benefit of the doubt to the other spouse.

Conclusion

Based on the specific facts and circumstances, uncovering fraud in a marital dissolution can result in a more equitable division of assets, spousal support, and alimony and can have a significant negative effect on the offending spouse.

When suspicions arise during divorce proceedings as to whether full disclosure has been provided by one of the parties, the other party should give strong consideration to whether a forensic accountant should be engaged to provide information about hidden assets, underreported or deferring income, moving funds to international accounts, or using a business to manipulate income or increase expenses. A forensic accountant can be a very valuable resource in providing information that has been intentionally hidden to benefit one spouse to the detriment of the other spouse. Engaging a forensic accountant can be the key to achieving an equitable settlement in the marital dissolution.

To learn more, connect with a CBIZ professional today.