Very simply put, forensic accounting is accounting that is used in a legal setting.
In a divorce scenario (which may include child support issues), a forensic accountant may be interested in various types of documentation, both business and personal, that can reveal financial information about a spouse, for example, tax returns, accounting records and financial statements, bank statements, cancelled checks, credit card statements, appointment books, sales invoices, business contracts, financial projections, mortgage applications and other documentation.
Depending on the particular circumstances, your attorney’s requirements and the terms of the engagement, some of the ways in which a forensic accounting can be used in divorce scenarios are as follows:
1. Search for hidden assets and/or hidden income. This may include searching for hidden bank accounts (including off-shore accounts) and hidden property. For example, the payment of utilities through the other party’s bank account at an address previously unknown to you may indicate the existence of a property owned by the other party or even the existence of an extra-marital relationship (the other party could be paying for a property in which to house a paramour). A forensic specialist may find assets that the client spouse is unaware of simply because of his or her lack of participation in the couple’s financial affairs. Sometimes forensic accounting finds things because the other party does not remember or did not keep records – this does not equate to mal-intent.
2. Search for inconsistencies between financial information on certain important documentation.
3. Corroborate financial information with non-financial information.
4. Determine and quantify personal expenses accounted for as business expenses by the other party and which may impact items such as the valuation of a business.
5. Perform a business valuation.
6. Calculate the cash flow which may be used in calculating support payments.
7. Perform a tracing to be used in determining the separate or community nature of property.
8. Assist your attorney in preparing document requests of the other party. If you don’t ask for the right documents, you may not get the right answers.
9. Assist your attorney in gathering information to be used in the preparation of subpoenas.
10. Assist your attorney in preparing interrogatories or in preparing deposition or trial questions to be asked of the other party’s forensic accountant.
11. Review certain work performed by the forensic accountant working with the other party.
12. Testify in court or at depositions.
13. Should your attorney require them, possibly have contacts with computer forensics specialists, private investigators and other professionals.
14. Provide input during the settlement process on the tax consequences of certain proposed actions.