I’m worried that my spouse will try to hide assets from me. How can I be …

Divorce is an emotional event for those involved. Because the emotions are typically negative — anxiety, anger, and mistrust — it is common for one spouse to suspect the other is hiding or undervaluing significant assets in an attempt to keep them out of the divorce settlement.

This suspicion often arises when a wholly- or family-owned business is at stake because the total management and control of income and assets has been entirely in the other spouse’s hands. Also, you may have had a conversation with him/her where you were told of cash income from the business that was used to buy a new TV, jewelry, or even gold coins, or you found a large amount of cash or other valuable items in the safe at home. In these cases, determining whether one spouse has hidden or diverted assets requires investigation by a forensic accountant of the business’s tax returns, financial records, and documents. With these tools, the forensic accountant can begin to find the weak link in the accounting and tax records. It is the documents that lead to the answer.

Forensic accountants commonly ask themselves, “What would be the easiest way for someone to cover up or obscure their diversion of assets? What assets can be sold out the back door for cash? How could they hide a transfer of a large sum of cash to themselves?” For example, we can find the location of hidden assets by reviewing the company’s paid bills for any public storage facilities. We can track significant changes in spending habits of either spouse prior to the date of separation by looking at the credit card charges paid by the company. We look for patterns or breaks in patterns that may point to suspicious activity in areas. For example, we can look at a break or change in the pattern of travel by the owner/spouse by examining their gasoline credit card charges and by requesting their personal diary or calendar book.

Key to Success: Know the Company

A key first step for finding the location of any possible hidden assets is to thoroughly understand the company. Knowing the company makes it easier to spot changes in business patterns — changes that might indicate whether income has been depressed and assets have been shifted out of the business.

Whether a business has a gross profit margin (that is, sales less the direct cost of goods sold) of 40% or 50% makes a huge difference. For example, inventory and supplies worth hundreds of thousands of dollars may have been purchased right at year-end and not recorded as inventory because they were not yet logged into the warehouse inventory system.

Some additional questions a forensic accountant may inquire about the company include:

• Who are its customers?
• Has the level of business from these customers remained steady?
• What types of products or services does the company provide?
• How do trends in other industries affect the company’s income?
• Have key clients been leaving the company for a single competitor or a new company?
• Have there been changes from year-to-year in key areas of its balance sheet or income statements?

The answers to these questions may point to any number of explanations.   For example, a review of the customer activity logs may show a sudden decrease in revenues from a major client.  Further investigation may show that several customers have switched their business to a new competitor in the market.  It may turn out that one spouse is a partner in the competing business, which was set up for the express purpose of siphoning-off key accounts from the existing business to reduce its value in the divorce settlement.

Know the Industry

Trends within the industry as a whole, as well as with competitors, in particular, can also affect the business.

Questions a forensic accountant may ask include:

• Is the industry in a growth phase?
• What are common earnings for other companies in the industry?
• What are common expense levels?
• What other industry trends affect the company?
• What is happening with the competition?
• Is the company using a higher level of supplies to produce the same amount of goods as other businesses in the industry?
• Has the company experienced an income decrease while similar companies are experiencing growth?

If a forensic accountant suspects that a business owner is siphoning-off assets from the company by “cooking the books,” the forensic accountant can research statistics from similar companies. As a rule, two companies with similar levels of business will likely have similar levels of expenditures, but if one is spending twice what the other spends for supplies, there might be something hidden below the surface.

Make Sense of Emerging Trends

Unearthing hidden assets can be a painstaking process because the spouse involved in the business may have taken steps to cover his or her tracks in anticipation of the increased level of scrutiny.  Careful investigation of the company’s financial documents and industry research (as well as consideration of other factors, such as the individuals involved) by an experienced forensic accountant can often reveal the trends that will show them how and where assets have been moved.

David Fox has been a CPA for more than 25 years. He has ample experience as an expert witness for divorce cases, and he also holds a law degree. Located in West Los Angeles, he travels all over southern California for cases.