Forensic Accounting in Divorce

Reported taxable income does not always provide a complete picture of the income and other financial benefits received by an individual. This can be particularly relevant when a spouse owns or controls a closely held business and receives financial benefits through multiple forms.

Depending on the engagement, our analysis may consider:

• Salary, wages, bonuses, and commissions
• Business distributions and owner draws
• Retirement contributions
• Personal expenses paid by a business
• Perquisites and fringe benefits
• Related-party payments
• Other recurring and nonrecurring receipts

We analyze the nature, amount, and timing of these items and reconcile them, where appropriate, to tax returns, payroll records, business financial statements, bank records, and other available information.

Where a closely held business is involved, we may also analyze transactions between the owner and the business to understand the nature and amount of financial benefits received. Matters involving the value of the business or ownership interest are discussed further in our business valuation in divorce services.

We trace funds among accounts, entities, assets, and individuals to understand their source, movement, and disposition. We may also analyze transactions and changes in financial activity to understand how funds were used and identify activity requiring further analysis.

Depending on the engagement, our analysis may include:

• Funds or assets held before the marriage
• Gifts and inheritances
• Contributions to and distributions from businesses or investments
• Proceeds from the sale or refinancing of assets
• Transfers among personal, business, and investment accounts
• Funds used to acquire or improve assets or pay down related debt
• Significant or unexplained transfers and withdrawals
• Related-party and intercompany transactions
• Changes in account balances or transaction patterns

The analysis may require following a series of transactions across multiple accounts or entities and reconciling those transactions to the available records.

Where the question is specifically whether marital property was spent or transferred away, we set out how that analysis is built, and what the records can and cannot establish, in our explainer on finding hidden assets in divorce.

Where the assets themselves are digital, the records that identify, trace, and value them differ, and we describe those in our explainer on cryptocurrency in divorce.

When funds from different sources are deposited into the same account or used together in subsequent transactions, determining their movement may require additional analysis.

We review deposits, withdrawals, transfers, asset purchases, and other transactions to identify the sources and uses of funds to the extent supported by the available records. Where funds cannot be reliably traced, we identify the limitation rather than assuming a source or disposition.

In some divorce matters, funds or other resources from one category of property may be used for the benefit of another, for example, to acquire or improve an asset, pay down debt, or fund a business. These transactions may be relevant to a potential reimbursement claim.

Where financial analysis is needed, we can trace the source and use of the funds and quantify the amounts contributed and any related repayments or distributions. Counsel determines whether the transactions give rise to a right of reimbursement under applicable law; our role is to provide the financial analysis relevant to that determination.

Concerns about hidden or undisclosed assets can arise in divorce matters where financial records appear incomplete, reported income or assets seem inconsistent with a spouse’s lifestyle, or one spouse has primarily controlled the parties’ financial affairs. Assets may be hidden through unreported income, undisclosed accounts or entities, transfers to third parties, or other means intended to remove them from a spouse’s or the court’s view.

Depending on the engagement, we analyze available financial records, including tax returns, business records, bank and brokerage statements, and public and third-party records, to identify unreported income, unexplained transfers, undisclosed accounts or entities, and other indicators that may warrant further investigation. Where such indicators are identified, we work with counsel to evaluate what additional information or discovery may help resolve them.

The scope and available methods for locating and tracing potentially hidden assets depend on the facts of the matter, the information available, and the applicable discovery process. Counsel determines the legal avenues available to pursue additional information; our role is to analyze the available financial records, identify indicators warranting further inquiry, and trace funds and assets to the extent supported by the evidence obtained. Additional considerations relevant to identifying hidden assets are discussed further in our explainer on how to find hidden assets in divorce.

Some assets, such as retirement accounts, pensions, deferred compensation, and stock-based compensation, accrue in value or vest over a period that may span both before and during the marriage, or before and after the date of separation. Determining the marital and non-marital portions of these assets often requires a coverture calculation.

A coverture calculation typically applies a fraction to the value of the asset, with the numerator generally reflecting the period of service or accrual occurring during the marriage and the denominator reflecting the total period of service or accrual applicable to the asset. The specific dates, formula, and treatment of post-marital contributions, growth, or vesting can vary depending on the type of asset, the plan or award terms, and the applicable legal framework.

We calculate the applicable coverture fraction and apply it to the relevant account or award values based on plan statements, vesting schedules, service records, contribution histories, and other available documentation. Counsel determines the applicable formula and dates; we perform the calculation based on the inputs and financial records provided.

Financial records in a divorce matter may come from multiple individuals, businesses, financial institutions, and accounting systems. Those records do not always agree with one another or cover the same periods.

For example, tax returns may not reconcile to internal financial statements, general ledgers may contain incomplete transaction descriptions, account statements may be missing, or transfers between related entities may not be clearly documented.

Where inconsistencies exist, we compare the available records, reconcile differences where possible, identify gaps, and determine what additional information may be needed. If a limitation cannot be resolved, we document and explain how it affects the analysis.

We may review financial analyses prepared by other experts, including income calculations, tracing schedules, transaction classifications, and reconciliations. As part of that review, we evaluate the methodology and assumptions used and whether the analysis is consistent with the underlying financial information.

Differences between analyses may result from different methodologies, assumptions, classifications, or information available to the respective experts. We independently evaluate those differences and assess whether the resulting conclusions are supported and internally consistent. Where a written critique is required, see our litigation support services.

A forensic accounting or valuation analysis depends on the availability of relevant financial records. Early identification of the accounts, entities, and documents relevant to the engagement can help ensure that discovery requests are appropriately scoped and that the information needed for analysis is obtained in a timely manner.

We assist counsel in identifying the financial records relevant to the engagement and in developing document requests, interrogatories, and subpoenas directed to individuals, businesses, financial institutions, and other third parties. As records are produced, we review them for completeness and identify gaps, inconsistencies, or additional documents that may be needed to complete the analysis.

Counsel determines the applicable discovery process and requirements; we assist by identifying the financial information relevant to the issues in the matter and evaluating the records produced against that information.

Insight Forensic & Valuation Services provides independent forensic accounting and financial analysis in marital dissolution matters. Our work may include analyzing financial records, tracing funds and assets, analyzing income and cash flow, reviewing opposing financial analyses, and preparing expert reports or other required disclosures.

When testimony is required, our experts explain their analyses and conclusions through deposition or expert witness testimony. We present complex financial information in a clear and supportable manner, including the information considered, methods applied, and basis for our conclusions. That work is described further under litigation support.

Counsel determines the legal significance of the financial activity analyzed. Our role is to independently identify, trace, reconcile, quantify, and explain the financial information relevant to the engagement.