What Is a Forensic Accountant?

A forensic accountant is a financial professional who specializes in investigating, analyzing, and interpreting financial data to uncover evidence of fraud, misconduct, or mismanagement. They are often called upon to work in legal matters, including civil litigation, criminal investigations, and family law disputes, where the accuracy of financial information is critical.

Forensic accountants combine accounting skills with investigative techniques to identify discrepancies, trace financial transactions, and provide detailed reports that can be used in legal proceedings. Their work often involves looking beyond the surface to uncover hidden or undervalued assets, identify sources of income, and assess the financial health of individuals or businesses.

Forensic Accountants in Divorce and Family Law: Why They Are Essential

Divorce and family law cases frequently involve complex financial issues, such as the division of assets, valuation of property, spousal support, and child custody arrangements. In these situations, both parties often need help to assess and fairly divide the wealth they accumulated during the marriage. Forensic accountants help ensure that these financial matters are handled accurately, transparently, and justly. Here’s how:

1. Uncovering Hidden Assets and Income

One of the most critical roles of forensic accountants in divorce cases is their ability to identify and uncover hidden assets and income. It is not uncommon for one spouse to attempt to conceal assets or underreport income in order to reduce their financial obligations during a divorce settlement, such as alimony or child support.

Forensic accountants use a combination of investigative techniques, financial analysis, and experience to trace assets that might otherwise remain hidden. These techniques include:

• Tracking financial transactions: By reviewing bank statements, tax returns, and credit card statements, forensic accountants can identify irregular transactions, undisclosed accounts, or transfers made to third parties.

• Analyzing lifestyle: In cases where income is being underreported, forensic accountants may examine the spouse’s lifestyle, including spending habits, to detect inconsistencies with reported earnings.

• Tracing assets: Forensic accountants can trace the ownership and movement of assets like real estate, investments, and business ownership interests, helping to identify any assets that have been concealed.

Hidden assets can significantly impact the final division of property, so a forensic accountant’s ability to uncover them can ensure that both parties receive their fair share of the marital estate.

2. Valuing Businesses and Investments

For divorcing couples who own a business or have significant investments, one of the most complex issues is the accurate valuation of these assets. Business interests—whether a family-owned company, partnership, or corporation—can be difficult to value because they involve intangible factors such as goodwill, future earnings potential, and market position.

Forensic accountants are experts in business valuation. They apply specific methodologies to determine the worth of a business, including:

• Income-based approaches: These methods value a business based on its expected future earnings, applying a multiplier to projected cash flows or net income.

• Market-based approaches: This method looks at comparable sales of similar businesses or industries to assess the value.

• Asset-based approaches: This method values the business based on its tangible assets, such as equipment, inventory, and real estate, minus liabilities.

In divorce cases, a forensic accountant can also evaluate the financial health of any business interests, ensuring that the valuation is accurate and reflects the true value of the asset.

3. Establishing Financial Support and Alimony Calculations

Determining how much alimony (spousal support) is appropriate in a divorce case often requires a deep understanding of the parties’ financial situation. Forensic accountants help establish accurate financial profiles for both spouses, taking into account income, expenses, assets, and liabilities.

Forensic accountants assist by:

• Assessing earning capacity: Forensic accountants evaluate the earning potential of both spouses, including potential future income and lost opportunities (e.g., career sacrifices made for the benefit of the family).

• Determining financial need: They can also help determine a spouse’s financial need by analyzing their lifestyle, monthly expenses, and necessary financial support.

• Reconstructing income: In cases where one spouse has attempted to hide or underreport income, forensic accountants reconstruct a more accurate income history, ensuring that alimony is calculated based on the true financial circumstances of both parties.

The goal is to ensure that alimony calculations are based on accurate financial information, and that the spouse in need of support receives a fair amount.