Dividing a marital estate is rarely easy. But it’s made much harder if a divorcing spouse owns a private business and attempts to artificially deflate its profits or hide assets. If you or your attorney suspects this type of deception, engage a forensic accountant to investigate.

Key questions

When working on divorce cases, fraud experts ask several questions about private business interests. For example, does a spouse own a cash business that may have unreported income? Does the owner receive special (or excessive) perks or tax write-offs that affect the business’s profitability? Are numbers intentionally reported incorrectly to affect the business’s value?

n addition, experts investigate whether the company has any subsidiaries or is part of any other business ventures. Sometimes, a business owner may be a silent partner in an entity where ownership isn’t obvious.

Readily transferable

Anomalies in a business’s income statements may reveal possible deception, particularly:

• Excessive write-offs,
• Withheld revenue deposits,
• A large one-time expense, or
• A decrease in revenue with no related decrease in variable expenses.

Sudden changes that occur when a spouse is contemplating divorce may suggest unreported income or overstated expenses. However, these changes could also be due to external forces, such as the loss of a major salesperson or adverse market conditions.

When evaluating expenses, experts often focus on the amounts paid to owners and other related parties. These may include payments for compensation, benefits, rent, management fees, and company vehicles and other perks. The owner-spouse also might try to flush personal expenses through the business.  

Balance sheet secrets

Balance sheets may reveal whether an owner is trying to hide assets (for example, in an offshore account) or transfer them to a related party for less than market value. Inventory is particularly susceptible to manipulation. Although notes payable to shareholders can be legitimate transactions, they also may be used to conceal income being distributed to an owner.

Experts review the equity section for any changes in the business’s ownership after the parties filed for divorce. They also search for suspicious withdrawals or distributions from capital accounts. Controlling owners may sometimes attempt to transfer ownership of business interests to close friends or associates to deprive their spouses of portions of the assets or portions of the business income.

Distorted value

Although divorce can give rise to angry actions, most business owners would never stoop to falsifying financial records simply to deprive their ex-spouses of a fair division of marital assets. But if the value of a business seems distorted, seek professional help to identify the causes and to suggest reasonable adjustments.

(This is Blog Post #1004)