Jerome McDonagh, Forensic Accountant and Iain Potter, Forensic Accountant, Matson Driscoll & Damico Ltd
During the course of matrimonial disputes, there are often situations where solicitors find it helpful to engage specialist investigators and appraisers. In particular, forensic accountants can help to provide the court with a clearer view of the true financial position and uncover assets and value concealed by one party or their associates. In this article, we explore two case studies, based loosely on a number of past cases in which we have been involved.
Anne and Tim: Asset Investigation and Appraisal
Anne and Tim had been married for approximately 20 years and have two adult children who are no longer being supported by their parents. Tim petitioned for the divorce, having lived apart from Anne for several years, and Anne believes that he also intends to re-marry. Since separating from Tim, Anne has been financially supported by him, and she has mainly dealt with his personal secretary when requesting funds.
Tim is a majority shareholder and sole director in a Hong Kong-based private company with subsidiaries throughout the Asia-Pacific region, Europe and the Middle East. His assets include yachts, art and a substantial wine collection in addition to the three different lines of business. Some of the subsidiaries are Cayman Islands and BVI entities. Tim claims his businesses have been suffering over the last few years and the value of the group has been greatly diminished.
Anne, now in her early forties, has not been working for the duration of the marriage and has little knowledge of Tim’s business affairs. Her lawyers, concerned that neither they nor she have a full understanding of the couple’s separately and jointly held assets or the value of the businesses, engage forensic accountants.
Although there are two parts to this engagement (determining the extent of assets and valuing the business interests owned by Tim), they are closely inter-related. In order to conduct an accurate and appropriate business valuation, the structure of the group, its subsidiary companies, and assets and liabilities held must be known. In this case, Tim is a shareholder in a private entity. The information publicly available is likely to be limited, and given that there are subsidiaries in the Cayman Islands and the BVI, it is likely that there will be significant assets held offshore.
The first task will be to look into how open Tim has been with the disclosure of his business holdings and what has been disclosed in the court filings (Form E in Hong Kong or Form 206 in Singapore). From these filings, it is possible to start to build a picture of the group structures and the companies within them. Typical sources of information that would reveal details of the company structure include:
- Audited financial statements – The notes to the financial statements should reveal the details of subsidiaries. However the information disclosed is dependent upon requirements of the jurisdiction in which the company’s accounts were filed.
- Management accounts – Management accounts, whilst not audited, often contain more detail than the audited financial statements, as management will use them to conduct business decisions.
- Government filings – Business / Companies registry filings – There will be publicly available information in government regulated bodies, such as the Companies Registry in Hong Kong or ACRA in Singapore. The amount of information available from the authorities very much depends on the jurisdiction.
- Bank documents – Assuming there are bank documents enclosed with the court filings, the bank statements and supporting documents to bank transfers may reveal other companies in the group or the acquisition of undisclosed assets.
- Data aggregators and subscription-based online research tools – These can enable relationships between individuals and companies to be identified without having to manually cross-reference filings at different international registries.
When faced with a wealthy spouse such as Tim, whose assets are distributed in a number of jurisdictions, it is vital to have individuals on the investigation team who are familiar with those jurisdictions or to have associates working in them who can assist. With widely differing filing and reporting requirements for businesses around the world, knowing what information is likely to exist and where to look for it is essential if the true extent of the parties’ assets is to be established. A forensic accountant with the relevant experience and global network of offices can be of assistance to solicitors in helping obtain, analyse and interpret the information. Thereby providing solicitors and their clients with a clearer picture of what can be a complex financial situation.
Before taking any further steps, it would likely be helpful to discuss the results of the above research with Anne. She’s likely to have some knowledge of his travel plans, his social engagements, properties he resides at or hobbies (like yachting) in which he might have made significant investments. These may reveal where he either has held assets or conducts business and, though it may not reveal directly the information required, it may provide some insight into the lines of enquiry the forensic accountants could explore to gather the information required and help to explain the research and financial evidence collated.
After exhausting the sources above, it is likely that further clarification from Tim would be sought regarding his business affairs, whether through a court filed questionnaire or correspondence with his solicitors.
If the evidence obtained contradicts Tim’s submissions to the court, then private investigators could be used to obtain further evidence and observations on the ground.
With a robust and complete assessment of Tim’s assets and those of his companies, the next step will be to place an accurate value on his business interests. The valuation methodology used would depend upon various factors including the type, age, industry of the business and the information available.
The forensic accountants would also look to test Tim’s claims that the value of the businesses had been diminished by assessing the relationship between their values and the external factors identified by Tim as being to blame. If other factors were found by the accountants to be causing the loss of value, such as the businesses having suddenly begun entering into unfavourable contracts with third parties, then it may indicate an effort was being made to extract funds from the businesses. Investigating further might then shed light on other entities connected with Tim, or as is often found to be the case, his new wife-to-be!
The forensic accountant’s report on these matters would shed light on whether there has been any purposeful transfer of assets to other parties by Tim. Given that the report would be prepared on a non-contingent, independent basis it could be served as expert witness evidence to assist the Court and the parties involved in determining the full extent of Tim’s assets and the value of his businesses. The forensic accountant may even be able to reduce the costs of the proceedings if appointed as a single joint expert, removing the need for two accounting experts.
Sarah and Jeremy: Lifestyle Analysis
Sarah and Jeremy have been married for five years and have a two year old son. Sarah is the bread winner, while Jeremy works part time and looks after their son. Jeremy’s earnings are not sufficient to maintain his current lifestyle, which is dependent on Sarah’s income.
The couple has been having difficulties for just over two years, and Sarah has petitioned for divorce.
Sarah suspects that Jeremy, knowing they would be going through divorce proceedings, has increased his spending beyond what he spent prior to their separation. Sarah’s legal advisors have therefore engaged forensic accountants to conduct a lifestyle analysis exercise in respect of Jeremy, comparing his pre- and post-separation expenditure levels and calculating the cost of sustaining his pre-separation lifestyle.
As with Anne and Tim above, the starting point of the assignment would be to look at the court filings (Form E in Hong Kong or Form 206 in Singapore). Jeremy would have stated his expenditure requirements by categories in the court filings and would have hopefully provided bank statements and credit card statements to support these facts. Considering the marriage has been having difficulties for the last two years, in the ideal scenario, Sarah’s lawyers would secure the disclosure of four years of bank statements so as to enable an assessment of the pre-separation expenditure levels to be prepared. Of course this may not be always possible; the client may not wish to spend funds on such a long exercise, or acquiring the bank documents may require a significant amount of time. In such cases, sample months could be looked at or assumptions could be made based on key categories of expenditure.
During the analysis of transactions, the accountants will likely need to make further enquires, particularly when looking at bank accounts. Often the bank account statement may not reveal the recipient of the payment, in which case further supporting documents will be required in order to determine whether funds were being expended or assets accumulated. The most accurate and reliable form of information would be bank remittance advices and cheque copies, which should clearly show the recipient of the payments, however these are usually only available at the bank and requesting these copies may require further time. In the absence of these copies, other information that could be relied upon would include cheque stubs, which may have the name of the recipient or invoices and receipts in which the amounts could be exactly matched to payments made in the bank statements.
Another problem that might occur is there may be joint bank accounts with transactions for both Sarah and Jeremy intermingled and with some expenditure benefiting both parties. In these instances, it is typically only the client who can advise as to the nature of the payments.
Once Jeremy’s expenditure has been analysed, the accountants can start to compare the pre- and post-separation periods, as well as compare their findings to the declarations made in Jeremy’s court filings. After completing this exercise, it should become clear whether there has been any inflation or falsification of post-separation expenditure.
The last step the accountants are likely to be asked to assist with is the preparation of a Duxbury Calculation. The purpose of the Duxbury Calculation is to arrive at a lump-sum payment that could be paid by Sarah to Jeremy, which would support Jeremy’s expenditure requirements for the remainder of his expected life. The Duxbury calculation will be based upon the following factors:
- Jeremy’s remaining life expectancy;
- Jeremy’s monthly or annual expenditure requirements; and
- The expected capital appreciation and income that can be generated from the lump sum.
Jeremy’s remaining life expectancy can be estimated using publicly available data. The accountant’s analysis should provide a starting point for his monthly or annual requirements, and, with some research, the accountants should also be able to provide forecast growth of the capital sum. Some issues that the accountants and Sarah’s legal advisors are likely to need to consider include:
- Whether Jeremy is likely to work part-time or full-time in the future;
- Will that change once their child is 18;
- How will his future salary change;
- Will his expenditure requirements reduce after the child is in employment; and
- Who will provide for the child’s education?
All of these matters will affect the calculations.
Some forensic accountants have developed complex models for performing the Duxbury Calculations, which can be used to compare a number of scenarios prior to preparing settlement offers. For example, how would an undertaking by Sarah to meet all future education and maintenance costs of their child reduce the lump sum payable? By taking into consideration these factors, an experienced forensic accountant can tailor the calculation to properly account for the various requirements of the parties involved, and in the case of Sarah and Jeremy provide assistance when considering various settlement offers.
The complexity of a spouse’s assets and the acrimonious nature of matrimonial disputes can often mean that there are difficulties in uncovering the full extent of a spouse’s financial situation. Forensic accountants familiar with divorce proceedings know where to look for information and how to assist legal teams to ask the right questions to get to the true financial position as soon as possible. They can also help the parties to weigh up differing settlement proposals and the short-term and long-term financial implications that each might carry.