CLIENT’S FAQ’S REGARDING FORENSIC ACCOUNTING SERVICES

FOR DIVORCE MATTERS
By David V. Hanzich CPA MBA ABV CFF CVA CFE CGMA

Why do I need a forensic accountant, you have all of the information?

There are situations involving your case that will require the analysis and possible testimony of a qualified expert witness knowledgeable in financial divorce matters.  The financial analysis required for your case is beyond the scope of my legal services and expertise that I can provide.  In addition, the attorney is your advocate.  The forensic accountant is an advocate for his/her opinion.

Why can’t I just hire my own accountant?

There are stark differences between a traditional accountant and a forensic accountant such as:

·          Forensic accountants are trained in many financial disciplines and have obtained other professional designations such as the Certified Valuation Analyst (CVA), Certified Fraud Examiner (CFE), Certified in Financial Forensics (CFF) and others.

·          Forensic accountants are more likely to have qualified as an expert in a court of law and have extensive experience providing expert testimony regarding financial matters during deposition or at trial before a judge or jury.

·          Forensic accountants have knowledge of case law that may apply to financial issues related to your marital dissolution.

·          Forensic accountants are familiar with the legal process beginning with discovery of financial information through the various court proceeding and often assists your attorney in these matters.     

·          Forensic accountants are good communicators and prepared for controversial engagements.

What does a forensic accountant actually do?

Depending upon the complexity of your case, the forensic accountant is involved in the following: 

·          Assist the attorney in identifying financial divorce issues.

·          Identify any potential community tax issues to include innocent spousal relief.

·          Prepare a valuation of the community businesses.

·          Determine the cash flow of the income earners for support purposes.

·          Prepare a tracing of separately owned investments, cash and inheritance.   

·          Assist your attorney in identifying community assets and liabilities subject to division. 

·          Determine the potential tax consequences of certain asset distributions. 

·          Identify any credits or reimbursements due to the community from a spouse.   

·          Assist the attorney with settlement negotiations, to include structuring a buyout of the business, addressing spousal and child support issues and division of property. 

·          Analyze financial records to identify any diversion of assets. 

·          Testify in court regarding opinions reached on financial matters. 

Why can’t I use my spouse’s expert?

Under certain circumstances, both parties may agree to use the same forensic accountant.  However, in complex cases, there are financial issues where reasonable minds can (and often do) differ.  Given the same relevant facts, it is likely that two competent forensic accountants would reach differing opinions (conclusions).  For example, business appraisals prepared by two different appraisers may differ significantly.    

Mr. Hanzich has worked on over 500 civil and family law cases and has testified over 100 times, producing positive results for our clients.  For your next divorce matter, consider hiring our firm to provide competent forensic services and litigation support.  Call us to discuss your case.  We can help you identify the scope of the work needed and, for most cases, give you a general idea of the cost for our services. There is no case too small.

A Financial Forensic Specialist May Be Better Qualified to Assist Attorneys in Fraud and Irregularities in Trust and Estates

by David V. Hanzich CPA MBA ABV CFF CVA CFE CGMA

The transfer of wealth from the “Baby Boomer” generation to their beneficiaries will be very significant in the coming years.  There also has been an increase in Fraud and Irregularities related to the management of trust assets by Trustees and other Fiduciaries of trust assets.  The services of a fraud examiner/forensic accountant are often engaged to provide the following services related to Trust and Estate financial activity:

·         Complex tracing of cash and investment transactions

·         Complete accounting of the trust’s assets and expenditures over a number of years

·         An appraisal of trust assets to include businesses

·         Analysis of potential asset misappropriation to include complex tracings

·         Digital forensic services to include data extraction from hard drives

 

For assistance with estate financial matters, the attorney should consider using a qualified forensic accountant.  Our firm has provided services in many Trust and Estate matters involving complex controversial financial issues.  Some of these services are similar to fraud examinations where tracings of bank transactions and analysis are required in order to identify possible diversion of assets. This could also include a detailed review of bank and investment statements, cancelled checks, wire transfers, deposit slips and other source documents. 

Trustees and attorneys normally engage traditional accountants for their tax compliance services and often incorrectly assume that the tax accountant is qualified to provide forensic services. However, there are stark differences between traditional tax accountants and forensic accountants as follows:   

 

·         Forensic accountants are trained in many financial disciplines and have obtained other professional designations such as the Certified Fraud Examiner (CFE) or Certification in Financial Forensics (CFF) or business valuation certifications such as the Certified Valuation Analyst (CVA)

·         Forensic accountants have expertise and experience in other areas of business services such as business appraisals, due diligence, bankruptcy, fraud examinations, and assessment of business economic damages that may apply in your case

·         Forensic accountants are more likely to have qualified as an expert in a court of law and have extensive experience providing expert testimony regarding financial matters during deposition or at trial before a judge or jury

·         Most forensic accountants bring to the table a background in auditing and tax or experience as a former officer or manager of a corporation

·         Forensic accountants are good communicators and are prepared for litigation and controversial engagements

Mr. Hanzich has worked on over 500 civil and family law cases and has testified over 100 times, producing positive results for our clients.  For your next controversial Trust and Estate matter, consider hiring our firm to provide competent forensic services and litigation support.  Call us to discuss your case.  We can help you identify the scope of the work needed and, for most cases, give you a general idea of the cost for our services. There is no case too small.

 

RELEVANT ISSUES AND FAQ’s ABOUT BUSINESS APPRAISALS

By David V. Hanzich, CPA, MBA, ABV, CFF, CVA, CFE, CGMA

Before engaging a business appraiser, there are things your client may want to clarify. Here are some preliminary issues to discuss with your client and appraiser before defining the scope and level of service required for the business appraisal.    

How will the appraisal be used?

Appraisals are prepared for a number of purposes, to include estate and trust tax reporting, succession and exit planning, civil and family law litigation, fairness opinions, fair value assessments for financial statement purposes, ESOP appraisals, buyout provisions and others. For example, appraisals for litigation may be presented in a summary form.  The appraisal purpose should be identified before the work is started and limited to this purpose. 

Are the financial records complete and available for review?

There are a myriad of issues regarding this question.  The appraiser will adjust the balance sheet to reflect “fair market” values for fixed assets, inventory, accounts receivables, investments and other assets.  Are there any related party transactions that affect the balance sheet? Any significant intangible assets such as royalty agreements, trademarks, and patents that require separate valuations?  Does the company report on a consolidated basis?  For litigation, are financial records available from the other party?  Just a few items to ponder.

What is the standard of value?

A judge may order an appraisal, however, will not allow any discounts.  If no discounts are applied to a privately held company, is this a fair market value or fair value standard?  Is the investment or intrinsic value standard required?  What about a liquidation value?  The appraiser will need clarification regarding this issue before the analysis begins.  The standard of value will have a material impact on the overall valuation of the business.

Is there an understanding of the subject company’s fundamentals?

The appraiser should understand the complexity of the case before getting started.  Does the company have multiple lines of business or related subsidiaries? Is the company a “C” or an “S” corporation?  Are there any buy/sell agreements?  Is there a complex capital structure with different levels of ownership?  Does the company require applicable discounts for privately held companies or minority shareholders?  The corporate structure and fundamentals will affect the scope and cost of the engagement.

The business broker said the company was worth 5 times earnings.  Why can’t I use this estimate and not pay you to give me the same value?

Let’s start off with the assumption that a “rule-of-thumb” valuation technique is the most unreliable valuation method, however, it is also the most commonly used.  In certain circumstances, rule of thumb values are routinely used for small retail or service related businesses, flower shops, gas stations and others.  However, for tax and litigation matters, complex corporate structures, and certain sales transactions, there should be an adequate basis for the underlying value.  For complex matters, the burden is on you to justify your valuation claim.  If you wish to proceed without the benefit of a well-researched and documented independent and professional appraisal, the choice and risk is yours.

 
Mr. Hanzich has over 11 years of experience as a business valuator.  He has prepared hundreds of business appraisals specializing in small to mid-sized closely held companies in a wide variety of industries.  Additionally, he has testified over 50 times in civil court as a qualified expert in business appraisals.  Also, with over 20 years of experience in auditing, Mr. Hanzich has an edge over non-CPA appraisers.  If you are looking for “FMV” quality at reasonable rates, let us handle your next business appraisal. There is no engagement too small.  Call us for an estimate of cost

Marital Balance Sheet What Is It and Why Is It Needed

     In most divorce cases, a marital balance sheet is the focal point and or summation of all community assets, liabilities and credits.  This compilation will also determine the equalization (buyout) that one spouse owes the other. 
     I was assisting an attorney with a settlement offer, which I basically prepared a rudimentary balance sheet on a piece of paper, I stated to the attorney that he should have had us prepare a marital balance sheet before the settlement.  He stated that it wasn't necessary, that it was easy dropping in numbers in the disso program.  However, when his client started to notice certain monies being withdrawn from the accounts by the other spouse that she wasn't aware of, and the attorney couldn't find current investment statements and other important documents, no accounting of the numerous credit card statements were done, it was clear to the attorney that he was way over his head and reluctantly admitted that we should have prepared a marital balance sheet.  Fortunately, in this case no harm was done.  We were able to obtain all of the records needed.  However, in other cases, this could be a real problem.
     The accountant should prepare a marital balance sheet as soon as possible in the case not only to identify what's on the table as far as assets and liabilities but also to trigger the identification of other financial issues such as withdrawals of cash by a spouse made on or near the date of separation, separate and community property issues related to stock options, pension plans, real estate and other investments, identification of separate debt incurred after the date of separation, identification of certain credits the spouse could claim and many other financial issues that the attorney may be aware of but would not be able to calculate and present on his/her own (I'm being nice). 
    If you wait too long in the case to prepare a marital balance sheet, or don't prepare one at all, you could run the risk of not identifying financial issues that may have a favorable material financial impact on the community with respect to the division of assets and liabilities, ultimately shorting yourself on your half of the available community assets.  Also, any delays could effect the ability to obtain vital financial records as you could run up against discovery deadlines or the accountant may not have enough time to analyze and calculate the numbers before the trial. Be smart, be prepared and get us in early in the game.

Dave

Buy Out Spouse's Interest in a Community Business (C-Corp) from the Company's Assets - Does This Trigger a Taxable Event?

I am going to make this format a little less formal.  More fluid.  So don't gig me for my spelling, grammer, punctuation, I plead the fifth.  In this case, the community will have no cash liquidity (not booze) with most of the capital tied in real estate and the community business.  How does one spouse buy out the other's interest in the business (a C-Corp) without liquidating assets?  Do the parties set up  a note payable where the buyer can make payments, using after tax dollars?  However, what if the spouse(buyer) decides to pay the obligation directly through/from the cash of the business (C-Corp)?

Does this transaction trigger a taxable event?  Is there a way to avoid taxes completely on this transaction?  If it is a taxable event, what option would result in the lowest taxes?  Should both parties be liable for the tax?  Should the buyout price be adjusted/discounted for taxes?

This issue comes up often in divorce, and no one seems to have a definitive answer.  Professionals have strong opinions but usually opinions not supported by the tax code/law.  You could apply common sense to this issue.  However, common sense should never be applied to tax issues, because, "it's the tax code". 

You'll have to come back later for the answer.

Tracing of Cash Activity for Identification of Separate Assets - Always the Separate Claimant's Burden?

Tracing of Cash Activity for Identification of

Separate Assets – Always the Separate

Claimant’s Burden?

by David V. Hanzich MBA CPA ABV CFF CVA 

As any 1^st year divorce attorney knows, the burden of proof in identifying “Separate” assets (cash, investments, etc.) is on the person that is making the claim for separate property in a marital dissolution.  Is there any occasion that would require the opposition to prepare a tracing analysis if the other party is making the separate property claim?

I would say that tracing of cash assets is the most costly and detailed analysis required for fraud and divorce matters.  There is no short cut to prove the location of assets or to identify the characterization of cash as separate or community property. 

Financial tracings can become extremely complex when the trail of cash transactions involve the tracing of “separate” cash assets through “community” bank accounts or when separate cash is moved from and to numerous bank accounts over a number of years.  It is further complicated when it is necessary to identify bank activity occurring during marriage to determine the characterization of those transaction and it’s affects on separate or community assets.   

The criteria for a successful tracing are as follows:

1.Separate property funds were available at time of   acquisition

2.Separate funds were actually withdrawn;

3.with the intent to acquire a separate property asset

4. Disclosure of intent to use separate property to acquire an

    Asset (1)

The financial documents used to prepare a tracing analysis involve bank statement copies, cancelled checks, deposit vouchers, withdrawal slips, and check registers identifying the source of cash deposits and identification of payees for all disbursements. 

So, at the risk of providing the opposing counsel evidence of his/her client’s separate property, is there any occasion that would require one side to prepare a tracing analysis for the other side? 99.9% of the time, the person making a separate claim will prepare a tracing analysis, subject to cross examination and review of the underlying evidence.

In a recent case, the respondent claimed he used separate property to invest in an apartment complex during the marriage.  This purchase occurred approximately a year into the marriage.  He claimed his separate account held sufficient cash to make the investment.  (There are other criteria.  However, we’ll focus on the tracing aspect).    Our risk was that the respondent could show sufficient separate cash available for the investment located in a separate account.  In addition, the respondent was a real estate broker with a history of investing in real estate.  However, when you reviewed the detail of the “separate” account, there were certain transactions that occurred during the marriage that were not identified. 

We obtained the respondent’s financial records and prepared a tracing of cash transactions from the date of marriage to the date of purchase.  From our analysis, we noted a number of deposits that were made into the separate account during the marriage which we identified as community (or income earned by the respondent during the marriage).  One of the rules when preparing a tracing is that when community expenses are paid during the marriage, community assets, if available, are used first to satisfy the payments for community expenses.  When community funds are depleted then separate assets are used to pay community expenses.  Following the rule, we noted that at times only separate cash was available to pay community expenses, eventually depleting any separate cash within the separate account. 

In addition, we noted a distinct pattern related to community cash deposits made into the separate account during the marriage.  Every time a significant deposit was made during the marriage, the respondent would immediately transfer the money over to a “separate” investment account (which had a zero balance as of the date of marriage) showing no intention of using his separate funds.  The investment account was eventually used to fund the investment purchase.  We proved that there were no separate funds available at the time of the purchase.  Had we not prepared our own tracing, it could have been difficult to rebut the respondent’s separate claim without reviewing all of the detailed information and doing our own work.   The judge agreed with the petitioner and our analysis that the million-dollar plus property was a community asset. It’s the claimant’s burden, but in some situations you may need to look under the hood yourself. 

Be careful out there!

Dave H.

(1) Complex Issues in California Family Law, Second Ed., Vol. D, Tracing Separate and Community Funds, Dawn Gray, Stephen J. Wagner, 2010, LexisNexis, Mathew bender

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I have set up this blog to post relevant information regarding financial matters related to civil litigation and family law primarily for individuals seeking information and attorney's that I work with.  Improving communication between attorney's and experts is always a good thing.  Creation of a good information blog is a start.  I would also like to initiate feedback or discussion of issues as they come up.