By Bob Nemeth, CPA/ABV, CVA, CDFA, CFE, Principal – Business Valuation & Tax
Earlier blog posts have focused on fraud occurring within a business. But, fraudulent activity is not limited to a business setting. Unfortunately, the ending of a marriage can provide a motive for one spouse to engage in financial misconduct.
Hiding Financial Assets
Prior to the filing of divorce, a spouse may attempt to hide assets and falsify income with creative divorce planning. In an attempt to hide financial assets, cash or marketable securities may be transferred to a friend or relative or to a financial account in an unknown location. By doing so, the hidden assets are not included in the marital estate and shared with the other spouse. After the divorce the financial assets are returned to the offending spouse.
Asset sales to friends or relatives may take place for less than fair market value, with the intent of reversing the “sale” after the divorce is finalized. This technique also reduces the amount shared with the other spouse since the cash received is less than what would have been received if the sale was legitimate.
Income Manipulation When One Spouse Owns a Business
If the spouse owns a business, income manipulation can take many forms. For example, the business owner spouse may not deposit “cash sales” into the business which may also lead to an underestimate of the value of the business. Business owners may work out a deal with vendors to prepay expenses, also reducing business income. Personal expenses may be disguised as business expenses reducing business income and potentially the value of the business.
During divorce, a spouse may attempt to manipulate income, by delaying raises or deferring bonuses. If the spouse owns a business, the failure to report all income and disguising personal expenses as business expenses may continue. Dividends or distributions from the business may suddenly stop for obscure business reasons.
Fraud After Divorce
Fraud may even continue after divorce. One spouse may attempt to take steps to artificially reduce their income in an attempt to go back to court to reduce their spousal support payment. A spouse may also attempt to hide their increase in income to avoid an increase in their spousal support payment if the support is modifiable.
There is no end the creativity that some divorcing spouses will devise in an effort to understate their assets and their income. Forensic accountants can use various techniques to find hidden or transferred assets as well as reconstruct actual income.
If you suspect that fraud has occurred in your divorce case, contact Bob Nemeth about Apple Growth Partners’ forensic accounting services at 216-687-3800.