Studies say that more than 50% of all marriages will end in divorce and one of the major breaking points are disagreements around finances. It’s not surprising that many divorces end up in legal battles over some financial matter. One common type of these disputes is known as a dissipation claim. Generally, a dissipation claim centers around one party alleging the other party is recklessly and/or unjustifiably wasting marital assets through unnecessary spending, extravagant or unplanned gifting, or borrowing. Dissipation claim law varies from state to state and because I am not an attorney, this article will illustrate the role of a forensic accountant in these matters, the types of information they rely on, and examples of what they are looking for.
Typically, forensic accountants are engaged to investigate the financial information of the parties to determine the validity of the dissipation claim. The types of documents they review and what they look for depend on the claim, however.
Below are some examples of items they may investigate:
- Bank Statements – deposit slips, withdrawals, transfers, check logs and check images, transaction history, spending habits, and changes in habits for a period of time
- Credit Card Statements – payments, spending habits, and changes in those spending habits for a period of time
- Retirement and Other Investment Accounts – account statements, withdrawals, deposits, transfers
- Reloadable Gift Cards and Charge Cards – cash withdrawals from shared account and deposited on these cards
- Credit Reports – unexplained credit items/loans, evidence of additional credit cards, or accounts not previously identified or reported
- Asset purchase contracts and appraisals (real estate, vehicles) – Additional “big ticket” items, cash purchases of saleable items such as real estate, vehicles, artwork, and jewelry which can easily be “gifted” or held by family members or trusted friends until after divorce
From this list, you can quickly see one of the most difficult parts of a forensic accountant’s job is to identify hidden assets and track spending not readily produced by the parties. One method to trace spending back to a point in time is to consider a Source and Use of Funds Analysis. The main purpose of this analysis is to determine trends in the sources of funding (paychecks, loan proceeds, other miscellaneous income) the parties utilize, where the funds are deposited, and how money is spent through trends in the transaction data over time.
Some of the questions this analysis aims to answer include:
- What accounts have been identified, who “owns” them, and who “controls” them?
- Where did the money come from (including marital and non-marital account transfers)?
- Who spent it?
- What payment type did they use?
- Who benefited from the transaction/purchase?
- Is it a typical marital purchase (reasonable trends)?
- Any change in sources of income and/or spending habits and behaviors on or around a specific point in time, usually when the marriage was first in trouble?
One concern that arises is the cost of hiring a forensic accountant. Dissipation claims are serious matters and, if true, it can significantly impair an equitable settlement for both parties. If one spouse has syphoned off a material amount of assets from the marital estate, there are pieces of the marital “pie” missing.
Imagine this very simplistic example: If one party dissipates marital assets (through spending, gifting, etc.) of $500,000 from a marital estate worth $2,000,000, that only leaves $1,500,000 left to divide equitably ($750K each). If dissipation is a concern and proven through the work of a forensic accountant that the marital estate was worth $2,000,000 prior to the dissipation of $500,000 of marital assets, then each side would get $1,000,000 instead of $750,000. This also assumes a settlement splitting everything 50/50 after a dissipation. But even in this example, that’s a $250,000 difference!
Through specialized training and years of experience, good forensic accountants know the typical hiding places for “lost”, “hidden”, or “forgotten” assets and income. If you think you are a party to a litigation support matter involving financial inconsistencies, it might be time to reach out to a qualified professional to help you put the financial puzzle together.
Our forensic accounting team at TDT CPAs and Advisors uses a team-based approach of multiple qualified professionals who work together to uncover the hard numbers you need to objectively present and prove your case. Additionally, as a full-service CPA Firm, TDT CPAs and Advisors can assist you with those challenges related to litigation support matters and also provide services related to your accounting, tax, and assurance needs.
Jeremy Green, MBA, CPA, ABV, CFE, CFCI, is a Forensic & Valuation Director at TDT. Jeremy specializes in business valuations, forensic accounting and litigation support engagements, succession planning, and management consultation services.