Question

The A-List Hollywood couple, Ben Afflicted and Madummy have decided to divorce. In their declaration of their financial net worth, they disclosed the following (summarized):   

Afflicted
Assets $10.4 Million

Liabilities ​ 9.8 Million

Net Worth $0.6 Million

Afflicted’s career has steadily been on the downward

Madummy
Assets $50 Million

Liabilities ​35 Million

Net Worth $15 Million

Melvin Bellyache, Afflicted’s attorney, strongly believes that Madummy is not being truthful regarding her declaration of net worth. He hires you as his forensic accountant to search for hidden assets.

Facts which are given:
- Afflicted and Madummy filed separate income tax returns and maintained separate bank accounts.
- Bellyache estimates that Madummy has earned at least $250 million per year for the past 10 years based on public information which he has reviewed.   
- Madummy has made numerous trips to the Grand Cayman Islands and the Amalfi Coast during the past few years.   
- Madummy’s manager, Yma Crook, handles all of Madummy’s personal chores.   
- Bellyache has unlimited subpoena power.   

Assignment:
Describe how you would approach conducting a search of possible “hidden assets” of Madummy if you were retained by Bellyache.

Answer 1

THE ROLE OF THE FORENSIC INVESTIGATOR before the forensic accountant which begins a study of the art of forensic financial searching, it is helpful to have an understanding the role in overall matrimonial proceeding and the factors that determine whether to join the disagreement in a particular case.

Forensic investigators play three very important roles in a divorce proceeding:

• · Forensic Accountants’ competence and credibility in these three areas are the foundation of a successful forensic practice.
• · Forensic accounting expert is likely to be more present on matters of business accounting and the techniques used by business people.
• · The role of the forensic accountant is to uncover assets or income secreted or otherwise hidden by one party to a divorce proceeding.
• · The forensic expert will be expected not only to conduct a thorough investigation, but to reduce the results to a written report to testify in court.
• · Also, before undertaking a forensic assignment, the forensic accountant shall consider carefully the availability of time and the potential conflicts of interest, and the cooperation expected from the parties.
• · The matrimonial lawsuit is commenced by the service of a summons and complaint by the plaintiff (spouse who is seeking the divorce). The defendant spouse then appears and serves an answer, which may or may not contain counterclaims.
• After the preliminary phase, discovery is conducted. Each side must furnish certain information and documents to the other side. In addition, interrogatories or depositions serve to produce answers to specific questions.

Two types of property distribution schemes divide property in a matrimonial action: community property and equitable distribution.

1. Community property states treat many assets and most income acquired by a couple during their marriage as belonging to each in equal shares.

2. Equitable distribution states do not have such automatic rules but attempt to treat each spouse in a fair fashion.

The following are basic documents that should be reviewed as part of the investigation:

• The examination of business tax returns, particularly over a period of several years, may be revealing.Are there any purchases of equipment that have been expensed?
• The forensic accountant will need to investigate whether the depreciation exceeds the current value of the depreciated asset
• Has there been a noticeable increase in expenses or decrease in income that cannot be explained purely in economic terms? Simply put, it is rare for marital troubles to develop overnight. The forensic accountant should ask the client when the marital discord surfaced.
• Are there huge differences in perks from one year to the next? These may appear as a discrepancy in a variety of places including on the lines for the deduction of employee benefits or on the “other deductions” schedule.
• What has the cash flow of the company been over time? Sometimes cash has been withdrawn by loans to the spouse or dividends from a corporation, particularly an S-type corporation.
• What are the value and profit drivers? The forensic accountant should determine if they have changed recently.
• Retirement plan Distributions-Did the party receive a distribution from a deferred compensation plan or IRA? If so, how were the funds used? Trace them to determine their ultimate disposition.
• Real estate and personal property taxes-Are taxes being paid on properties that are not listed on an asset statement?
• Insurance statements for cash value of insurance policies
• Bank statements to analyze deposit of cash and checks, ATM withdrawals and to whom checks are written
• Loan Applications and Personal Net worth Statements at Banks
• Notice cancelled checks and to whom they are payable. The purchase of an investment or property might be revealed.
• Savings accounts and money market funds
• Property used to earn income or for business purpose appear on Schedule A
• Investment interest paid could reflect the existence of a liability related to an investment or a margin account
• Casualty and theft loss: If a loss is reported, inquire into the disposition of the insurance proceeds.
• Miscellaneous deductions: safety deposit rental expense, other expenses incurred to produce income and tax advice. Estate planning advice may be deductible. This could lead to the existence of an estate planning file that could contain information about the entire estate.
• Schedule B, Interest and Dividend Income, Regarding foreign accounts and foreign trusts. An entry on this line may be the only clue about what is commonly called a “foreign asset protection trust”.
• Schedule C, Profit or Loss from Business: which Could reveal a side business that is used to fund a Keogh plan to increase retirement plan deductions
• Schedule D, Capital Gains and Losses: Reflects the sale of property for gain or loss: Trace the proceeds from any sale.

Conclusion:

The above mentioned are important documents that the forensic accountant should review in the investigation are business tax returns, agreements and contracts, the corporate books and company financial statements, appointment books, loan documents, insurance policies and, of course, all checks and bank statements.The forensic accountant should verify the Madummy’s assets and declaration of net worth based on the above mentioned points and find out the truthfulness of net worth declaration.