Connecticut is an equitable distribution property state. When a marriage is dissolved the court can grant to the husband or wife all or any part of the estate of the other after considering all the required statutory criteria. This “all-property” equitable distribution scheme means that presenting admissible evidence establishing the value of assets and the amount of income flow can be critical to the court’s decision and a party’s financial future postdivorce.
The broad mandate to consider “all property” requires the court to value assets. To do so the court needs adequate and convincing admissible evidence presented. When the asset is significant and not easily valued, a forensic expert and a forensic accounting may be critical to valuing it. The state Supreme Court noted in Bornemann v. Bornemann, 245 Conn. 508, that “when neither party in a dissolution proceeding chooses to introduce detailed information as to the value of a given asset, neither party may later complain that it is not satisfied with the court’s valuation of that asset.”
Forensic accounting is important to asset and liability division as well as determining a fair alimony award. A well-done admissible analysis can determine true income flow and available income for distribution, as well as true asset value.
When selecting a forensic accountant, it is critical that credentials be sufficient to satisfy the court that they qualify as an expert. The accountant should have credentials specific to the profession as well as appropriate academic degrees. At a minimum they should be certified public accountants (CPAs).
Additional desirable credentials include being accredited in business valuation (ABV) and certified in financial forensics (CFF) by the American Institute of CPAs. More specific certifications as well as practical experience in the industry and teaching in their field are also helpful. It is also critical that the attorney ensures that the forensic expert has an adequate opportunity to examine material documents.
In Weinstein v. Weinstein, 18 Conn. App. 622 (1989), the court found a certified public accountant unqualified to testify as an expert regarding valuation because he had not examined documents sufficiently enough to allow him to valuate the business. Trial courts have broad discretion in ruling on the admissibility of expert testimony. It is important that a forensic analyst has adequate access to, and thoroughly examines, all documents and records necessary to give an admissible opinion.
Forensic accounting can be particularly valuable in analyzing the asset value of closely held businesses and corporations, professional practices, trusts and intangibles, including intellectual property and real estate interests. A qualified forensic investigator should have analytical skills and industry experience necessary to investigate all types of financial documentation related to the asset being investigated, as well as the classic skills of a CPA coupled with financial investigation tools.
It is critical that they have the proven ability to testify as an expert witness. A careful litigator will investigate and research the credentials and experience of any potential forensic accounting expert being considered.
Once selected, a forensic accountant can make important contributions to the discovery process as well as perform the analysis and serve as an expert witness. They can help an attorney understand and credibly justify the need for the documents necessary for a useful analysis.
Forensic accountants are helpful in analyzing complicated tax returns where there are numerous and varied kinds of assets and business interests. An accounting analysis should always be considered when one of the parties is actively involved in running a closely held or single-owner business. There may be cash and other assets that are being taken out or hidden through the business. Assets may be bought through the business that are hidden, and evidence of those assets may be buried in the fixed assets or written off as the cost of goods sold or operating expenses. A qualified forensic accountant with experience in the industry should know what to ask for and look at to find evidence of hidden assets, as well as to establish the value of a business.
Forensic accounting can be used to find and demonstrate the real income flow from a small business, and thereby be able to establish its value. Business funds are frequently used to pay family and personal expenses. Typical nonbusiness expense being paid through the business that may be found and proved through a forensic accounting include: nonbusiness travel and entertainment; automobile and boat expenses; social and club expenses; salaries and payments to “ghost” employees and material providers; rent and lease payments on nonbusiness property and equipment. Establishing the true and full income flow is critical to obtaining fair asset division. The value of the business or professional practice is important in divorce even if it is not an asset that is being divided. Once accurately and fully established, that value can be used to offset the award of other assets or obtain a greater alimony award.
Forensic accounting can also be used to find out if revenue and expenses are being moved between periods to report artificially lower profits close to the time the divorce is being finalized. Discovery of this type of manipulation of income and profits is important because in Connecticut the date of valuation for asset-division purposes is generally the date of dissolution. It is not unheard of for litigants who want to hide income or assets to plan and execute their manipulations to minimize income and profits while the divorce is pending.
Forensic accounting can also be valuable where there is financial complexity and significant income. Previously unknown bank accounts, investments and other assets may be discovered through an accounting analysis of income flow and expenditures. A key issue where there is a highly compensated spouse may be whether all income from all sources is accounted for in known expenses and assets.
Having a detailed and thorough forensic accounting is an effective and necessary litigation tool. In many cases it can also be used to more quickly and efficiently settle cases where assets, values and income are disputed. Forensic accountants may also be hired jointly by the parties to evaluate assets. They can be helpful in establishing the absence of wrongdoing and hidden assets, as well as their presence. Retaining and cooperating with a forensic accounting expert when litigating a divorce can be critical to a successful outcome, as well as helping to resolve it sooner and more equitably without having to go to trial.•
Beverly Krieger is an attorney at Greenberg & Krieger in Stamford, where her practice focuses on family law.