Financial Fraud and Divorce
Apart from the emotional distress during divorce, the financial dimension is a force to be considered as marriage constitutes both an emotional and financial partnership. While financial fraud is estimated to be alleged in approximately 50 percent of divorce cases nationally, evidence of such claims is found in only approximately 10 percent of cases. (Glenn et. al., 2010). So, of the approximately 700,000 divorces that occur annually on average in the US, evidence of fraud was uncovered in approximately 70,000 cases.
Perhaps one reason for the low detection rate is the fact that the process of uncovering hidden and fraudulent activities is characterized by complex and costly legal and professional fees. It also lengthens the divorce process, thus impacting the families and their ability to move on.
Forensic accountants are typically enlisted to detect financial divorce fraud which may involve concealing assets, hiding income, improperly valuing assets and dissipating funds.
Concealing assets involves hiding or shielding assets from the marital estate. When Certified Divorce Financial Analysts® or forensic accountants are involved in divorce cases, they often can uncover such assets during the customary review of financial information. These assets include bank accounts, brokerage accounts, deferred compensation, real estate, boats, cars, planes, an ownership interest in a business and foreign asset protection trusts, as well as digital assets. An unfair financial advantage is given to the cheating spouse for undisclosed assets. Overpayments to the IRS or credit card companies may also temporarily remove assets from divorce considerations if the professionals do not uncover these maneuvers during the review of the financial statements.
Hiding income involves more than deferred compensation. Cash payments may be underreported or skimmed, deposits to different hidden accounts may be made directly from the employer, purchases of EE Savings bonds may be made and key financial forms such as W2s, K-1s and 1099s may not be produced.
Valuation of assets and businesses is another concern. Closely held businesses may be overstating expenses or underreporting or slowing down income to lower the value of the business.
Often a party to a divorce proceeding spends marital funds lavishly (gambling, drug usage), merely for his or her own benefit (shopping sprees, vacations/hotel rooms with a paramour), maximizing credit cards or withdrawing form retirement accounts. This is considered dissipation of marital assets and in California a reimbursement claim may be made to recover 50 percent of what was spent for these endeavors by charging the other spouse with a reallocation of other assets to compensate for the dissipation.
There are several red flags that que professionals to identify the existence of these types of activities. They include:
Changes to online accounts and passwords
Transfers of property to children/family members
Unusual cash withdrawals and spending behaviors
Cash deposits just below $10,000 made by the suspected spouse
Declining income at the onset of marital difficulties
Declining income while living expenses are not changing
Multiple bank accounts
Payroll checks not matching deposits
Family/friend dealings
Time spent in a foreign country
Corporate cloaking – shell companies to held assets and money
New loans for which hidden income is used for loan payments
Frequent refinancing of mortgage (cash out refi)
Related-party transactions
Closely held businesses’ red flags:
Personal expenses become business expenses
Suspicious new hires (ghost hires or paramour placed on payroll)
Unusually high prepaid expenses
Recent use of LIFO inventory method
Capital investment made below fair market value
Decreased price per unit with new customers
Unusually long payment terms or collection periods
Accounts payable do not match sum of units sold
Suspicious terms in notes payable
When approaching divorce, a keen observation of the financial statements and money movement is essential if there is any hint of fraudulent behavior. Spouses often have recourse for dissipation of assets and this is embedded in the statutes of family law in most states. Third party appraisers or important for appraising both marital assets and closely held business.
Both anecdotal qualitative information and quantitative analysis by professionals can help uncover financial fraud in divorce cases, combining both analytical and critical thinking skills to uncover potential fraud if suspected to minimize the harm to the other spouse.
Note: This article is for informational purposes only and is not intended to provide either tax or legal advice. Please contact your attorney or accountant and rely on their independent research and advice for these matters.
