Financial negotiations are challenging, even under the best of circumstances. Add in any sort of dispute, and they can quickly escalate into something far more difficult. It’s during these times that conflicting parties might seek the services of a forensic accountant to ensure that the opposing party is being fully forthright.
Whether in a divorce, a business valuation, or recovering assets in cases of fraud, a forensic accountant will work to find hidden assets, additional sources of income, or financial incongruities that the other party may be shielding from view. A lifestyle analysis is one of the tools they utilize to uncover such anomalies.
In the early stages of a divorce proceeding or a business valuation, the parties (generally, through their attorneys) will put forth statements of their financial position, usually referred to as financial affidavits. The US government, for instance, has a financial affidavit form that asks for financial information from employment, other income, cash, and property.
When completing these forms, some people simply provide estimates or take a guess because they don’t have the information at hand. Others will inadvertently (or purposefully) leave out assets, such as stock certificates, annuities, or deeds to property.
So while the affidavits might serve as a good starting point, they often do not represent the party’s full financial picture.
A lifestyle analysis involves taking the preliminary financial information that’s been made available and meticulously assessing it against the person’s or business’ full asset and liability profile, with an eye towards spotting gaps or inconsistencies between the two.
Lifestyle analyses are frequently used in divorce settlements to establish what the couple’s standard of living was during the marriage, often focusing on the last three to five years, in order to equitably distribute their assets. What were their spending habits? Did they have any unusual or seasonal expenses? What do their bank, brokerage, and tax statements reveal? Have their patterns been consistent over the past few years, or have they been erratic?
By scrutinizing credit card transactions, for example, a forensic accountant may discover that a party’s liquid assets do not appear ample enough to support their current standard of living – they seem to be spending much more than they’re bringing in. This discrepancy may point to the possibility of unreported income sources or that one of the spouses is concealing assets.
In a business valuation, the business to be acquired might have correctly reported income and expenses, but grossly over-appraised the value of some of its assets, such as vehicles, machinery, or inventory. The forensic accountant will require an appraisal of these assets to determine their true value and bring that revised financial information to their client.
At the end of the day, forensic accountants perform lifestyle analyses to find clues that point to hidden assets or wealth, thereby ensuring financially favorable litigation or mediation results for their clients.
If you are involved in a spousal dispute, merger, or acquisition and think you would benefit from the investigatory services of a forensic accountant, please reach out to us.
Get our latest posts delivered to your inbox: