The stakes in ferretting out hidden (and undervalued) assets become higher in Community Property states such as California, Idaho, Nevada, Texas and Washington. Optional 401(k) plan features can offer further employee advantages. For example, 401(k) plans can allow employees to direct their own investments and provide them with access to their funds during times of financial hardship.
Deceptive spouses, habitual individual and business bankruptcy filers and other parties to litigation are often experts at hiding assets. To protect yourself or your client from such fraudulent tactics and trickery, you will need an expert in your corner.
To begin searches for hidden assets, forensic accounting experts request information and records relating to the suspected person’s employment and financial holdings. Details about all sources of income (including pending litigation and insurance settlements), and all banks, brokerage firms and other financial institutions where the person has held accounts, are critical.
Experts also need to know about the person’s lifestyle and personal spending habits, as well as his or her personal and business relationships. The individual could be funneling income or assets to family members, friends and business associates.
Tax returns can be a particularly rich source of information. Itemized deductions listed on Schedule A, for example, may suggest that the person is living beyond his or her apparent means, in turn raising the possibility of hidden assets. It’s important to investigate whether the deductions for property taxes, mortgage interest and charitable giving are proportionate to reported income.
Individual tax return Schedules B, D and E may also reveal bank accounts, investments or even partnership interests not previously disclosed.
Methods That Work
Forensic accountants use one or more of several methods to uncover assets:
Net worth. The person’s net worth (assets less liabilities) at the beginning of a period is compared with the ending net worth. Information about assets might be accessed through bank and brokerage records, tax returns and credit applications.
Expenditures. This strategy is deployed by matching total personal expenditures during a period of time—using evidence from bank statements and canceled checks—against the available sources of funds. These sources can include salary, loans, gifts, inheritances and cash on hand at the beginning of the period.
Bank deposits. This method assumes that money is either spent or deposited. Thus, net deposits (deposits less transfers and re-deposits) are added to cash expenditures to calculate total receipts. Funds from known sources are then deducted to calculate the total funds from unknown sources.
Business Owners Pose Particular Challenges
If the suspected fraudster is a business owner, he or she may try to use the company to mask assets and income. A deceptive spouse, for example, may use business funds to purchase personal assets, such as cars and real estate, or to cover personal expenses, such as mobile phone bills, insurance premiums or club membership dues. All of these expenditures can reduce the business’s net income, thereby reducing its value as a marital asset.
The business also could have unreported income. A forensic accountant will scrutinize:
Associated expected sales,
Journal entry write-offs,
Internal controls (and the owner’s ability to override them), and
Finally, an expert will search for related-party transactions. These are important because they can indicate the owner’s attempts to divert income from the business.
What Clients Deserve
No matter how well-intentioned, clients and attorneys are unlikely to be able to find all of a deceptive person’s hidden assets or income on their own. Forensic accountants, on the other hand, are trained to gather relevant data, scour it for anomalies and prove that the opposing party is being dishonest. This is the kind of expertise you and your clients deserve.
Richard Gordon, CPA/CFF, CFE, CGMA joined Lindquist LLP in 2014 as the Director of Forensic Services in the firm’s San Ramon office. In addition to being licensed as a CPA in both California and Illinois, Rich is a Certified Fraud Examiner (CFE) and is Certified in Financial Forensics (CFF) through the American Institute of Certified Public Accountants (AICPA). He is a member of the AICPA’s Forensic & Valuation Services section, the Association of Certified Fraud Examiners, and the California Society of Certified Public Accountants’ (CalCPA) Forensic Services Section. Rich possesses vast forensic experience in the areas of family law, financial statement and tax fraud, contract disputes, economic damages, bankruptcy fraud, and embezzlement cases, in which he has successfully represented both prosecution and defense. Rich graduated from Eastern Illinois University with a Bachelor’s degree in Accounting. Contact him at (925) 277-9100 with questions.