Early in my career I often worked in the family courts, where my duty was to put a value on martial assets to help determine distribution of those assets or to determine the amounts required for alimony or child support. This this led to uncovering a wide variety of frauds, including under/over reporting income or the value of property, concealing assets, fraudulent business reporting, and other unscrupulous acts. I have seen highly contentious divorces lead to other crimes such as tax fraud, insurance fraud, arson, and attempted murder.
At its core, fraud is a violation of trust. By the time a couple reach the point of ending their marriage, more often than not, trust has already evaporated. When there is a lot of money on the line, it is easy to see why one or both parties may engage in fraudulent activity. While different statues define fraud with different language, a general definition of fraud is the knowing or reckless statement or omission of fact with the intent to cause a person or organization to act or not act in a certain way.
To be clear though, fraud does not exist in every divorce case, and even if there is a likelihood of fraud in a particular case it may not make be the best decision – from a financial standpoint – to investigate the fraud. Fraud investigations can become expensive very quickly and there is no guarantee that a fraud investigation will bear fruit in most cases.
When I have worked divorced cases in the past I typically start with an analysis of assets and lifestyle analysis of both parties. Both of these procedures are generally useful in divorce cases regardless of whether there is a suspicion of fraud or not. From this analysis, I am looking for red flags of potential fraud that could indicate assets are not valued correctly or that income or expenses have been misrepresented. If there are sufficient red flags of potential fraud then I will propose a multi-step investigation framework that typically includes:
- A review of documents that have been provided by both parties, and interview of the client spouse.
- Demand of records from both spouses.
- Public records research.
- Subpoena for additional information.
- Support for the deposition of spouses and other parties.
It is important to remember that at the end of each step I reassess the case and have a discussion with the client spouse and his or her counsel about the results of the investigation up to that point, the additional cost of the next stage of investigation, and the potential benefit from further investigation. More often than not, these discussions are fraught with intense emotional commitment to the investigation on the part of the spouse, so I have to focus on level-setting what could be expected from further investigative efforts.
When investigating fraud in divorce cases there are typically three areas that are the most common to find schemes: the amount of income being generated, the amount of expenses being paid out, and the value of (or hiding of) assets. While there are some straightforward ways to perpetrate these schemes, there are also more deceptive means that may not be immediately apparent. For instance:
- A spouse may claim that their business or investments have been impacted by generally recognized economic incidents when in fact the impact is not as severe as presented. In the aftermath of the Great Recession a real estate agent saw significant decreases in new home purchases, which resulted in reduced revenue for her business. However, she did not disclose that she had purchased several residential properties at foreclosure prices and was earning significant revenue on these properties from rental income.
- A spouse may also make business decisions based on how those decisions would impact their reported income. In one case a successful attorney stopped taking new clients in the twelve months leading up to filing for his divorce. While his firm looked like business was declining, he had actually setup a shell company that was used as a front for starting a new practice with his mistress (another attorney) as the principal owner. Instead of bringing new clients into his existing practice, he was referring them to the new practice.
These types of schemes illustrate how a spouse with significant financial assets at risk in a divorce may engage in highly inappropriate behavior to shield those assets. It is incumbent upon the forensic accounting professional to work with the client spouse to understand the unique situation of each case and to determine how or even if a martial fraud examination is warranted.