by Bruce Knapp, CPA, ABV, CVA, CFF, Director, Litigation Support & Forensic Services Group, TR Moore & Company, A Doeren Mayhew Firm
Distrust is typically part and parcel of divorce litigation — especially when it comes to financial matters. To secure a fair and equitable resolution, attorneys may need to trace assets and income that a business owner spouse has hidden to reduce child support, alimony liability or the final settlement amount. Forensic accountants can help by deploying the same asset-tracing techniques they use to detect occupational fraud.
Tracing Suspicious Payments
Experts typically start by looking for suspicious payments that could indicate a business is stashing assets for its owner. These payments ostensibly represent business expenses but could actually represent money transferred into the owner’s pocket and away from disclosed bank accounts. To find these payments, the expert collects various financial documents from the business, including:
- Bank account statements
- Purchase orders
- Invoices
- Receipts
- Records of payments from bank accounts, check registers and ledgers
Checks associated with the suspect payments are studied particularly closely. A check to a vendor that was cashed — rather than deposited — may indicate a nonexistent vendor. Or, a vendor might appear to have endorsed a check, but it was subsequently endorsed by an individual for cash or deposit to an undisclosed personal account. Even when a check has been deposited in a business account, the forensic specialist may seek to confirm the accountholder’s legitimacy.
Experts check payments against the company’s documentation as well. Discrepancies from normal practices, missing documentation, photocopies and unnumbered or sequentially numbered invoices all raise red flags and may merit further investigation.
Detecting Fraud Schemes
Forensic accountants on the hunt for hidden assets frequently search for on-book fraud schemes, such as payments to nonexistent vendors or “ghost” employees. A business owner also might recruit third parties to assist in asset-hiding schemes. For example, the company could issue a check to a vendor in an amount greater than actually owed, with the vendor returning the excess as cash.
To detect payments to fictitious vendors, experts look for unusual activity in the business’s cash receipt and disbursement journals, ledger accounts, purchase orders, and invoices. Vendor accounts with no tangible deliverables — for consultants, commissions and advertising, for example — receive special attention, as do multiple vendors with the same address. Another potential red flag is when cash has been deposited into a company account, but not recorded on the company’s books.
To uncover potential ghost employees, experts review payroll lists, current and former employee lists, personnel files, and employment applications. The accountant also checks withholding forms and authorized deductions because ghost employee records typically omit the appropriate deductions and exemptions.
A suspected overbilling scheme with a third party may exist if there are invoice notations for “extra” or “special charges” without additional explanation or corresponding goods or services. Other warning signs: discrepancies between the invoice and actual payment, and unusually high charges.
Uncovering Hidden Income
Spouses attempting to hide assets may also fraudulently drive down their business’s income to reduce the company’s net income — and value as a marital asset. For example, a business owner might purchase personal assets such as cars and real estate or cover expenses like cell phone bills and insurance premiums with business funds.
To find hidden income, an expert scrutinizes the business’s actual expenses and expected sales associated with that level of expenses, accounts receivable and journal entry writeoffs. He or she also examines the business’s internal controls and the spouse’s ability to override them, the company’s markup structure, and the associated expected profitability. Large or unusual accounts receivable credits or sales returns usually merit further investigation.
Leading the Litigation Support & Forensic Services Group for TR Moore & Company parent firm Doeren Mayhew, Bruce Knapp offers more than 25 years experience in consulting, forensic accounting, expert witness, economic loss and business valuation services to assist Houston litigants. Contact us for more information.
by Jennifer Mailhes, CPA, Consulting Partner, TR Moore & Company, a Doeren Mayhew Firm
