Greed or Ignorance – Which Costs More?
October 10, 2011
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.
- Identify and locate assets.
- Perform internet investigations.
- Determine the income of the other party.
- Provide for a valuation of assets
- Determine cash flow.
- Identify and quantify marital monies that may have been misused.
- 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
The Telephone Rings: The Anatomy of a Forensic Accounting Investigation
September 2, 2009
by Larry Goldsmith, C.P.A., J.D., C.F.F.A
It was a dark and stormy afternoon when suddenly I heard the familiar sound of the telephone ringing. No doubt another person seeking forensic assistance where a ‘perceived’ violation of trust has occurred. Notice the emphasis on ‘perceived’; after years of answering these calls I’ve learned that just because there is suspicion does not mean there is cause for action.
This time, the caller was a woman with a cool but quiet voice. From her quivering tone I knew there was trouble, but when you’re a Forensic Accountant, you get used to trouble. You even get to like it. The caller said she suspects a family member of stealing from mom and dad’s estate. Mistrust and suspicion among family members is unfortunately common in my business. Sometimes it’s about a family member stealing monies held in trust, or taking financial advantage of an elderly relative. The caller usually has no proof. No evidence of a crime being committed. Just an unshakeable belief that something bad is taking place.
Typically, the caller is unaware of their options and is seeking guidance. They are usually upset and often angry, seeking restitution. In their emotional state, these callers are also generally unmindful of the consequences of pursuing an unfounded suspicion. If the caller’s assumption is wrong, they stand to lose more than money – they may lose a lifelong relationship with a family member of a family friend. Or worse, they may be sued for defamation of character.
Contacting a Forensic Accountant at this stage was definitely the right thing for the caller to do. Lawyers and police will not get involved without evidence of wrongdoing. But Forensic Accountants are trained to investigate financial matters and provide documentation that shows that something untoward may actually have happened, or be happening. Remember – a CPA is not necessarily a Forensic Accountant. Just as you wouldn’t trust a pediatrician to perform brain surgery, you shouldn’t assume that your family accountant knows the specialized methods and tests used by Forensic Accountants to resolve often complex issues involving potential financial malfeasance.
The Forensic Accountant’s first job is to listen to the caller with an objective ear. Determine if the caller has legal standing to pursue a claim, if the matter is financially worth pursuing, and if the caller’s assertions can be proved: for example, an estranged son may be jealous that his brother, who lives with and takes care of mom, is receiving greater financial benefits now and in the mother’s will. Or, a daughter visiting from out of town notices that the live-in nurse is now driving a Mercedes and seems to be wearing her mom’s jewelry. Two situations, maybe only one of which may have a cause of action.
After determining whether the matter can or should be pursued and establishing that there are no conflicts of interest, the Forensic Accountants then develop a plan and a budget:
· The plan establishes the goals and step-by-step procedures of a forensic search, including a study of the relationships of the parties involved and an investigation of how the money flows.
· The budget gives the prospective client a realistic idea of the costs involved in pursuing an investigation.
Once the plan and budget are approved and the investigation begins, the Forensic Accounting team develops theories on how a financial defalcation may occur. The goal is to determine if a “smoking gun” can be found that provides an attorney with sufficient reason to file a lawsuit, or, in more extreme or urgent cases, allows the client to file a police report and pursue criminal remedies.
Even when a report has been filed, the police are powerless unless the State’s Attorney is willing to pursue the matter. The police and the State’s Attorney generally do not have the manpower nor the financial resources to pursue what they often consider to be no more than “family squabbles”. Only if television or newspaper media get involved and publicize a wrongdoing — as in the Brooke Astor case in New York — will the authorities initiate a criminal investigation.
A lawsuit, as opposed to a criminal charge brought by the state, is a civil court matter. In the event of a successfully concluded civil suit, the courts have the power to protect the remaining assets, appoint receivers to watch over the assets, and recover stolen assets. Court and attorneys may produce the best results in the long run, but they come with a price. And a civil case can drag out for years.
Whether the action is civil or criminal, the subpoena power of the Court can open up doors and provide a flood of documents that can greatly increase the probability of proving malfeasance or theft, if either has in fact occurred. But to get into court one needs evidence and a cause of action. The Forensic Accountant is often the only one who can find the evidence needed so that the attorney can file a strong and compelling cause of action.
I explained all of this to the woman on the phone. I gave her options. And finally, I warned her that confronting the suspected wrong doer can be very dangerous. Wrong doers have been known to commit violence to keep their acts undiscovered.
Just as I was about to ask her name and suggest she come to the office to talk further, I heard a man’s voice and what sounded like a struggle through the receiver. Then the line went dead. I hung up the phone and listened to the rain beat against the window. There are some things a Forensic Accountant can fix and some he can’t.
CJBS, LLC is a Chicago based firm that handles Forensic Accounting issues on a national basis. E-mail me at larry@cjbs.com, if I may be of assistance.
