Sometimes divorcing spouses or sparring former business partners illegally hide assets to prevent their fair division. And fraud perpetrators almost always try to hide their ill-gotten gains. In such cases, sociological information — gathered as part of a lifestyle analysis — can be almost as revealing as financial data. Here’s what forensic accountants examine when they’re on the hunt for hidden assets.

Starting with numbers

Forensic accountants usually start with numbers. For example, an expert typically reconstructs the subject’s income by analyzing bank deposits, canceled checks and currency transactions, as well as accounts for cash payments from undeposited receipts and non-income cash sources, such as gifts and insurance proceeds.

A forensic expert also usually analyzes the subject’s personal income sources and uses of cash during a given time period. If the person is spending more than he or she is taking in, the excess likely is unreported income.

In general, investigators assume that unsubstantiated increases in a subject’s net worth reflect unreported income. To estimate net worth, an expert reviews bank and brokerage statements, real estate records, and loan and credit card applications.

Scrutinizing assets and tax records

Proving that a person has unreported income is one thing. Tracing that income to assets or accounts that can be used to support a legal claim or enforce a judgment can be a more challenging matter. Forensic accountants may scrutinize assets, as well as insurance policies, court filings, employment applications, credit reports and tax returns.

Tax returns can be particularly useful because people generally have strong incentives (including tax evasion charges) to prepare accurate returns. In fact, tax return entries often reveal clues about assets or income that someone otherwise attempts to conceal. Another potentially fruitful strategy is to interview professionals with knowledge about the subject’s financial resources and spending, such as accountants, real estate agents and business associates.

Getting the goods

Investigators often need a court’s authorization to request their subject’s bank and tax records and other personal information. This may not be a problem in divorce or business partnership litigation.

But when investigating occupational fraud, experts may only have salary information provided by the employer and publicly available information such as real estate sale and purchase records and court filings. Experts can also interview coworkers about a subject’s lifestyle, including whether the suspected fraudster suddenly bought a new luxury car or showed other signs of receiving a windfall. Increasingly, social media provides valuable information about subjects’ lifestyles, assets and purchases.

(This is Blog Post #1519)