The valuation and distribution of marital property is typically one of the most difficult and arguable issues to be dealt with in a divorce proceeding. The process can become considerably more complicated and expensive when the marital community owns an interest in a business. In such cases, a Forensic Accountant is often hired by the attorney to prepare a list of documents needed to perform a business valuation and then to conduct the valuation. The problem is that to perform an accurate assessment of the value of a business, the Forensic Accountant will need to review a considerable number of documents. When the list of documents is presented to the attorney, the attorney’s reaction may be to request minimizing the number of reports due to the size of the case or the costs involved. Thus, it is imperative for the Forensic Accountant to be able to explain why the requested documents are essential to attain an accurate valuation. In this and subsequent issues of Forensic Accounting Today, I will concisely clarify the reasons why Forensic Accountants make these requests.
Documents Forensic Accountants Require
Financial Statements: A good starting point is to review the business’s financial statements to visualize the financial condition of the company based on its assets and income. Financial statements assist to form a standard for comparison to industry information and help indicate the amount of additional analysis that will be required. Forensic Accountants will be able to compute business ratios for profitability, leverage and liquidity. In addition, financial statements can help establish prior-to-marriage property tracing requirements. Careful review may also uncover discrepancies that could red flag the legitimacy of the financial statements.
Tax Returns: Reviewing tax returns are invaluable because they are filed under the penalty of perjury. Studying returns also benefits the task because the Forensic Accountant can compare what was reported with what was stated on the financial statements. The Forensic Accountant will then be able to assess whether an aggressive tax position was taken. This can suggest the likelihood of perquisites, which may not only influence business valuation, but spousal support calculations, as well.
It is customary to have experts review five years of returns. Forensic Accountants consider this adequate enough to thoroughly analyze business cycles.
General Ledgers and Journals: These are essential because they provide thorough information behind the broad picture that financial statements and tax returns present. General ledgers and journals provide the details concerning all disbursements. Thus, the Forensic Accountant can inspect who and what was paid, as well as the dollar amount of all transactions.
Paid Bills: Paid bills assist in determining whether disbursements were made for the business, or for the owner (or shareholder). Because paid bills show whether disbursements were made for the business or for other expenditures, such as divorce legal fees, they are useful in determining the existence and amount of perquisites.
Bank Statements, Canceled Checks and Brokerage Statements: In some instances, bank statements and canceled checks can reveal what general ledgers and journals do not disclose. Together, these test the reliability of the records and books provided, as they can reconcile deposits and income. In some instances, bank and brokerage statements and canceled checks will also uncover previously undisclosed bank accounts.
Income Tax Audits: Federal and state agency audits may disclose unreported income and sales, and deductions of personal expenses. In addition, audits may reveal business entities or locations that were not previously known to exist. Reviewing the audit reports often save time and effort in establishing a business’s actual earnings.
Stockholder and Director Minutes: Corporate minutes often discuss company plans, such as the purchase of new buildings or acquisitions. In addition, minutes may disclose salary information, authorizations for dividends, reasons for debt existence or appropriation of retained earnings. In some cases, the content of the minutes may include information that expose attempts to mislead the other party.