PROBLEM:

The debtor shows you some accounts from his business, and business is bad. However, that is because he is putting off booking income this year to make himself look worse-off financially than he is. Once the divorce is final, all that income that should have been booked this year will come rolling in.

[light]

SOLUTION:

Searching for assets isn’t just looking down a laundry list of possible hits (bank accounts, boats, Swiss watches) and checking off whatever we find.

Even though many spouses come to us with no real knowledge of how their other half has accumulated a certain level of wealth, an asset search is often the time to find out not just what there is, but how it was financed.

A good appreciation of how the other side’s business operates can be critical, because having a nose for accounts that seem out of whack can turn up income that ought to appear and be divisible – but isn’t.

This kind of asset concealment can take several forms: a business can set up reserves to help understate profits in one period (during settlement talks) so that there may be a larger profit later on (once the separation agreement has been signed).

The objective is to give the impression that the owner has less cash on hand than is the fact, and that the value of the business is currently lower than it actually is.

This is where being able to sniff out improper reporting is critical. Is it plausible that the business took a sudden turn down? We once looked at a real estate investor who claimed to have been all but wiped out in calendar year 2010. While plenty of people were wiped out in 2008 and 2009, someone in the best of business health in January 2010 and essentially broke in December of that year raised flags because the industry had somewhat stabilized by then. It turned out that he had withheld dozens of companies from his original net worth statement.

We sometimes recommend that a forensic accountant reviews expense statements. Can you calculate an imputed income from monthly spending or yearly spending that suggests that the business actually earned a different amount  — in this case more — than was declared?

Before you depose employees, a cheaper and often effective route is to talk to former employees who can tell you about the state of the business. People who no longer work there are often surprising happy to talk about the company. While they may be reluctant to trash their old employer, they may feel freer to talk about how good business was in the past year when they were still employed there.

[/light]