What Does a Forensic Accountant Do in Divorce?

Both parties involved in a property settlement need to provide financial information to verify their current asset position and their finances during the relationship. Issues can arise, when the parties cannot agree on the value of a certain asset based on this information. This is when engaging a forensic accountant to go over the finances involved is recommended.

This page was written for financial advisors and accountants. 

If you are going through separation and divorce yourself, click here to find information about forensic accountants written with you in mind.

What is forensic accounting? What does a forensic accountant do in divorce?

Forensic accounting is accounting work that relates to matters that are, or are likely to come before a Court. Forensic accountants can be used to make sure all numbers provided are true and accurate. In their role they utilise accounting, auditing and investigative skills to reach accurate conclusions.

Forensic accountants are often brought in mainly in relation to valuation issues that come up when a couple separates. In the area of family law, forensic accountants are often appointed as an expert to value businesses, trusts or companies. They can also be used to assist in locating “hidden assets” or considering appropriateness of expenditure. 

Forensic accounting and valuations

A forensic accountant can be appointed as an independent expert witness to assist in valuing entities or a business. When it comes to preparing a valuation, forensic accountants request all documents in relation to the company or trust’s financial account. If just one party runs the business, then the forensic accountant may interview them and ask them questions about it.

They then issue a report as to the value of the business or trust. For example, there was a case where a former couple had businesses that were franchises. One of the main issues in dispute was the value of each of the businesses. This led to a forensic accountant being appointed to determine the value of each of the businesses.

Another example is in farming situations. It is very common to have the land that the farm is on valued, but also the business itself. In these cases, usually the farming entity is structured in a way that one party does not have a controlling interest of the business as it is often involved with other family members. In valuing the parties’ interest in the farming entity, the forensic accountants can determine what ‘discount’ should be attributed to one person’s share in the business because of their lack of control and the lack of marketability if a sale was to occur.

Shadow expert and adversarial expert

What is important to note is that generally a forensic accountant acts to provide valuations for both parties in the separation. Essentially a joint expert. 

But occasionally, particularly with people where funding isn’t a big issue, one party might then decide to go away and get their own report completed if there are aspects of the joint expert’s report that they don’t agree with or which there could be a different perspective about. This forensic accountant is called a shadow expert or potentially, an adversarial expert if you are in Court.

For example, there was recently a case where in Court, the wife did not accept the value of the business. So, she made an application for leave to produce evidence from an adversarial expert. In order for this to happen the Court has to be satisfied with a number of factors to let the adversarial expert come in. This includes that there is a big enough difference in opinion on the valuations.

In these circumstances if the one party is granted leave to do so, then you end up with competing experts at the final trial and the Judge ends up making a decision about the value.

Forensic accountants as shadows

Forensic accountants can also be used as shadow accountants. One example of where this is helpful is if you have one party who has completely controlled all the finances and the business, while the other party is in the dark about the parties’ financial situation. In that instance it is wise to get an accountant to assist in reviewing all of the financials and ensure it all adds up. 

They will also be able to tell if any information is missing. If you are not acting for the party that has a good financial understanding of what’s going on, sometimes you might get a forensic accountant to review things. This is because many times you might have a situation where your client has just blindly signed tax returns and accounts throughout their marriage or relationship. Now they have separated, there is a lot of value in having someone else look at what is going on before they sign any agreement. A forensic accountant will look at it in detail and will be able to give you a better understanding of the financial set up.

Bringing in a shadow accountant is common when considerable wealth is involved, because your client, or their ex-partner might be used to a certain type of lifestyle with a seemingly plentiful disposable income. But when they get to this stage of their divorce and they see the numbers on paper, they might question whether it is correct. This is often because they had a set amount coming in regularly and their ex-spouse had told them certain information relating to their finances during their time together. So sometimes you will need to have a shadow accountant to look at the valuation and discover if something is missing or if it is accurate.

If your clients are going through, or about to go through the divorce process and have concerns about differing opinions on financial valuations, the best thing you can do is recommend they seek legal advice as soon as possible. That way we can give them the right advice for their circumstances and help them to prepare for what is ahead.

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