Divorce clients frequently raise concerns that spouses are hiding assets or income. Often, however, such concerns are the product of the other spouse’s attempts to manipulate the client into staying in the marriage or believing she will ultimately “lose” anyway, so she may as well settle now on unfavorable terms.
Uncovering a spouse’s plot to artificially devalue the marital estate or shrink the gap between income and expenses can be financially and emotionally exhausting. Thus, it’s important to help clients make informed decisions as to how much time and energy should be spent pursuing potentially hidden assets and income.
To that end, practitioners and clients should evaluate the risk that financial malfeasance has occurred by critically assessing a spouse’s opportunities to conceal assets and income. While the depth of analysis required varies greatly from client to client, the following list identifies red flags that your client’s spouse has had the opportunity to employ some common schemes for asset and income concealment:
1. The spouse maintains completely separate bank accounts and finances.
2. The spouse maintains a joint bank account with your client, but a review of account statements and cancelled checks reveals:
Unexplainable deposits and withdrawals;
Monthly bills are apparently being paid, but evidently not from this account;
Monthly deposits exceed alleged income;
Monthly deposits and withdrawals are less than the spouse’s claimed expenses; or
Checks are sent to entities or individuals that the client is not familiar with.
3. The spouse works in an industry that commonly deals in cash.
4. The spouse has a familial or friendly relationship with his employer, who might collude to defer a promotion or pay increase.
5. The spouse owes debts to a friend, family member, co-worker or employer.
6. The spouse generally prepares tax returns and simply asks for your client’s signature (or signs on their behalf).
7. The spouse recently applied for a loan and did not allow your client to review the application, which likely included a personal financial statement and allegations regarding income and expenses.
This list is not intended to be comprehensive, but rather provide a starting point for you and your client to brainstorm possible opportunities the spouse might have for artificially lowering the value of the marital estate, or artificially lowering the spouse’s income to expense ratio.
Perhaps the most fruitful opportunity for hiding assets and concealing income is the closely held company. If your client’s spouse owns and operates one or more closely held companies, the opportunities to lower income and devalue the marital estate are limited only by the spouse’s level of sophistication and imagination.
For example, one class of schemes to devalue a marital estate through a business involves artificially increasing the expenses of the business, which lowers the business’s net profit and thereby the value of the business. Frequently, this is accomplished through the use of business funds to pay family expenses, such as insurance, mortgage payments, personal travel, or automobile loan payments.
Some business owners pay salaries to family members or friends for services never provided, or pay salaries to non-existent employees. Another class of schemes involves payments between companies owned by the same person for services or rent at inflated rates.
These are only two of many stratagems that a spouse may employ to hide income or assets through her closely held company. If you are unfamiliar with business operations, financial statements, and corporate tax returns, it may be necessary to employ a consultant early on in the litigation to ensure you are not overlooking the spouse’s opportunities for financial malfeasance.
While you will almost always employ a business valuation expert in such circumstances, keep in mind that a business valuation will not always reveal a spouse’s fraudulent efforts. Rather, detecting efforts to conceal income and assets via a closely held company will often require a forensic accounting or fraud investigation into the company’s books, records and operations.
In the U.S., various professional designations signify competency in forensic accounting, including certified public accountants (CPA) and certified fraud examiners (CFEs). When faced with a business-owning spouse who might be using the company nefariously, you may want to consider ensuring that your business valuation expert has one of these, or a similar, designation, or hiring an additional consultant with a forensic accounting background.
As Eric Larson, a CPA in Grand Rapids, Mich., explained, “While there are some tools used by business valuation professionals that are related to forensic accounting, CFEs are credentialed in this type of analysis. The CFE is granted by the Association of Certified Fraud Examiners. The focus of CFE training and practice is on the detection and prevention of fraud. The tools CFEs possess are also often utilized in a variety of forensic accounting engagements.”
After completing your analysis of opportunities, the attorney and client should form a game plan to explore whether the spouse took advantage of those opportunities. This may involve subpoenaing loan applications, financial statements, and tax returns with complete schedules and attachments, or retaining a business valuation expert and/or CFE or other forensic accountant.
In formulating an action plan, attorneys must remember that, though your client’s husband may have concealed 40 percent of his income, you are ultimately only playing defense if he never represented, under oath, that his income was less than what it actually is.
Attempts at concealment must be clearly and unequivocally affirmed by the fraudster spouse, whether through interrogatories or depositions, as early as possible. Only then may your client be entitled to attorney fees incurred in discovering and proving the concealment.
Likewise, it also may be relevant in dividing the marital estate and in determining spousal support.
– By Pennie S. Johnson. Johnson practices family law in Grand Rapids, Mich.