By mistake or on purpose, business owners may fail to disclose perquisites or “perks” and “add-backs” to their cash flows. This can affect how much money is considered to be available for support purposes and the assets subject to equitable distribution in a divorce.
Finding perquisites, personal benefits business owners may receive from their companies, often requires forensic accounting skills. Not every proceeding needs a forensic accountant. But, when a case involves complex financial concepts, such as business valuation or identifying business income sources for support and there’s a need to explain them for the parties, the court, or stakeholders, they’re helpful.
How Do Forensic Accountants Explore Business Financial Operations and Marital Spending?
Our recent webinar, Capturing Cash Perks/Fringe Benefits and Add Backs for Support Purposes, covered the following aspects of discovery:
- Red flags for possible perks and add-backs
- Important considerations in working with your financial experts
- How your expert can use the non-titled spouse to identify perks and add-backs
- How industry data and metrics play a role
It featured family law attorney Allen J. Scazafabo, Jr. (Riker Danzig Scherer Hyland & Perretti LLP) “cross-examining” experts Alex Krasnomowitz (Smolin Lupin) and Daniel Roche (Marcum, LLP) on the forensic accounting methods involved.
Mr. Roche defined forensic accounting as “Accounting and investigative techniques combined to result in a financial conclusion that is acceptable for use in a court.” Essentially, through their business and lifestyle analyses, forensic accountants use common sense to tell a story about what they see happening with money.
As Daniel explained, they follow a holistic approach to examine all the financial documents from a closely-held business. These include:
- General ledgers
- Business and marital balance sheets
- Cash-flow and profit and loss (P&L) statements
- Marital spending, income, and savings records
When they get this information and analyze the business industry and the state of the economy, they seek more data and request access to the business.
Business Financial Operations: Digging Into the Details
In the documents they audit, forensic accountants check if income, distributions, and savings match. While they examine company cash, trends, and internal controls, they can discover potential conflicts or “red flags,” such as:
- Large amounts of cash payments for goods/services
- Low/high amounts of cash on hand
- “Friendly” relationships with customers/vendors
- Poor internal controls
- High employee turnover
Alex and Dan deal with a lot of closely-held small businesses that lack formal financial controls. In these cases, the owner may leave the handling of payables and receivables, petty cash, etc. to their spouse or a CPA.
“And then, that person becomes very, very valuable to you because they know the operations better than the titled spouse,” Dan said.
If Alex sees poor internal controls, he assesses the accounting department, their decisions, and the controls to identify where to go next.
A “cash business” can involve goods or services paid for in cash, but sometimes also bartering. Forensic experts may deal less with cash in business investigations; most over the counter payments involve debit or credit cards and electronic payments via services such as Venmo and PayPal.
Regarding cash improprieties, Alex said they will be more likely to occur during the pandemic and its changing economy. For example, some business owners might not deposit all of their Paycheck Protection Program (PPP) money or pay taxes on the income. Therefore, in the coming months, forensic accountants will look for misuse of loan funds.
High employee turnover can also raise a red flag. It can occur when employees often work for only a few months and then leave, possibly due to how management keeps the financial records or how they treat employees or customers. If it seems to be part of a pattern, it may be worth looking into.
When seeking information from an unwilling party through filing a motion, Alex agreed that forensic analysts are happy to provide a certification to explain what they need and why. Dan cited an interesting example of his firm’s investigation into a case that involved bank withdrawals of large amounts of money and missing documents. They showed the bank statements with the evidence to counsel, who convinced the judge to open up the discovery.
Learn More About Perks to Stay Competitive
Learn more about finding hidden perks and how they affect the discovery process, including:
- Important considerations when interviewing the titled and non-titled spouses
- Understanding and auditing the revenue cycle
- Records of sales, expenses, assets, and liabilities
- Marital assets and spending
Financial literacy is the cornerstone of every successful family law practice. If you lack enough knowledge, our CFL™ course can teach you all about the less understood financial aspects of divorce to help you serve your clients better.