Executive Summary
In divorce cases, forensic accountants – often neutral CPAs – help untangle complex finances by tracing assets, uncovering income and valuing businesses. They gather documents, analyze lifestyle and income, prepare schedules of assets and liabilities and provide impartial analysis to facilitate fair settlements. Their involvement often prevents lengthy court battles and supports equitable distribution.
When this issue arises
Forensic accountants are engaged when divorcing spouses have complex financial situations, such as business ownership, commingled assets, allegations of hidden income or assets, high net worth or suspicion of financial misconduct. Early involvement helps ensure accurate discovery and fair distribution.
Accepted methods/frameworks
Practitioners use several analytical techniques:
- Asset tracing and lifestyle analysis: Following the flow of funds through bank, credit‑card and investment accounts to detect hidden assets or unreported income.
- Income reconstruction: Reconciling income and expenses to estimate true earnings and support obligations.
- Business valuation methods: Applying income, market and asset approaches to determine the value of closely held businesses.
- Standard of value and property law considerations: Applying appropriate standards (fair market value, marital vs. separate property) based on jurisdiction.
Numeric example: Suppose one spouse deposits $30,000 into a personal account that is not disclosed during discovery. By tracing bank statements, credit‑card transactions and invoices, the forensic accountant identifies the deposit and reclassifies it as marital income. After considering monthly living expenses of $5,000 and legitimate business expenses of $3,000, the accountant estimates $22,000 of undisclosed income available for support.
Documents & Data Checklist
Key documents and data typically requested:
- Federal and state tax returns (at least 3‑5 years)
- Bank statements for all personal and joint accounts
- Credit‑card statements and loan applications
- Brokerage and investment account statements
- Payroll records and employment contracts
- Business financial statements (income statement, balance sheet, cash flow)
- Real estate and property deeds
- Other relevant records (trust documents, retirement account statements, insurance policies)
Pitfalls / Common Errors & Rebuttal Strategies
- Commingled assets: Mixing marital and separate funds can obscure ownership. A rebuttal is to trace each deposit and withdrawal to its source.
- Incomplete documentation: Missing bank statements or tax returns hinder analysis. The accountant may subpoena records or use third‑party confirmations to fill gaps.
- Undervaluing a business: Parties may understate revenue or overstate liabilities to reduce settlements. Experts apply accepted valuation methodologies and review normalized earnings to counter such claims.
- Double counting liabilities: Debts may be counted in both asset and income calculations. A careful schedule of assets and liabilities avoids duplication.
- Assuming lifestyle equals income: High spending doesn’t always mean high income; a forensic accountant compares income and expenses to reconstruct cash flow accurately.
Frequently Asked Questions
What does a forensic accountant do in a divorce case?
They analyze financial records, trace assets, identify hidden income and prepare schedules of assets and liabilities to help attorneys and courts divide the marital estate fairly.
When should I hire a forensic accountant in a divorce?
Engage a forensic accountant early if there are complex assets, businesses, suspicions of hidden income or disputes over support; early involvement ensures timely discovery and analysis.
How do forensic accountants uncover hidden assets?
They examine bank, credit‑card and investment statements, tax returns and accounting records, tracing transactions through multiple accounts to identify undisclosed funds or transfers.
How long does a forensic accounting investigation take?
The duration depends on complexity and cooperation; investigations can range from a few weeks for straightforward cases to several months for high‑net‑worth divorces.
What documents should I provide to a forensic accountant?
Provide tax returns, bank and credit‑card statements, business financials, payroll records, investment account statements, property deeds and any other financial documents covering the period in dispute.
How are forensic accountants compensated?
They typically bill by the hour, with rates varying by credentials and case complexity; total costs depend on the scope of work required.
References
- Journal of Accountancy – Neutral CPAs in divorce cases – outlines the role of neutral CPAs in divorce proceedings.
- American Academy of Matrimonial Lawyers – Tips for engaging a forensic accountant – practitioner guidance.
Contact the team at Joey Friedman CPA PA for a confidential consultation to discuss your forensic accounting and divorce litigation financial needs. We serve clients nationwide in litigation, disputes and investigations.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Outcomes depend on specific facts and circumstances.
