Documents Needed to Investigate Business Interests

Tracy Coenen and Miles Mason, Sr. discuss documents needed to investigate business interests in a divorce case.

Tracy Coenen, CPA, CFF is a forensic accountant and fraud examiner with Sequence Inc. Forensic Accounting in Chicago and Milwaukee. She practices exclusively in the area of forensic accounting, investigating embezzlement, financial statement fraud, family law matters, securities fraud, Ponzi schemes, white collar criminal defense, insurance fraud, and civil litigation matters. Tracy is the author of several books.

Miles Mason, Sr. JD, CPA practices family law exclusively in Memphis, Tennessee with the Miles Mason Family Law Group, PLC and is the author of  The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers, published by the American Bar Association.  The following is an excerpt from that book:

Chapter 5 – Discovery—Documents, Details and Transactions

Document review is the lifeblood of forensic account­ing. Obtaining the right documents in a timely fashion is often the single most important task the family law­yer can perform to help the team win. With the necessary documents, forensic accountants have a chance at finding important needles within stacks of needles. Without all of the necessary documents, the entire exercise may be a waste of time. The important “smoking gun” document may have been withheld.

Tracing financial transactions from one account’s monthly statement to another account’s monthly state­ment can be like following a trail of bread crumbs. The transactions are the crumbs. The account statements are the trail. Removing one monthly statement can remove both the crumbs and the trail. A single missing broker­age statement could be the very statement the opposing spouse does not want you to see.

The Impact of One Missing Statement

If the ending balance of a brokerage account statement from a particu­lar month, say January, matches the beginning balance for March, it is not necessarily true that there was no meaningful financial activity during the intervening month for which no record has been produced—February. No can really know what happened during February by look­ing at the March statement. The same could be said for a single missing page from the February statement. Any particular amount, say $60,000, could have been deposited and the exact amount withdrawn. The non-producing spouse’s claim that the statement was misplaced and there was no activity must be treated like any other red flag.

If the brokerage account balance was reduced by $45,000 during the month of the missing statement, the reason might be simple and important. For example, the payment of $45,000 could be a transfer to a local jeweler for a girlfriend’s engagement ring—a clear case of dissipation. Uncovering these crumbs requires discipline and patience. Poring over statements to make sure that everything has been pro­vided in discovery is tedious. But uncovering the particular transaction the nefarious spouse wants hidden can be a devastating blow to that spouse’s credibility, materially altering the relative negotiating position of the parties.

Always obtain documents quickly. Discovery, unlike fine wine, never ages well. If a key document has not been produced and you have not figured that out, the non-producing spouse gains more confi­dence and boldness as time passes. In a pinch for time, you can always ask the forensic accountant to help review discovery for thoroughness. This is an important, although boring, aspect of what forensic accoun­tants call “litigation support.” If needed, call the forensic accountant for help. Do not let an opposing party breathe a sigh of relief rolling into mediation knowing that you have overlooked a missing document that has not been produced. That single missing document may be the most important one of all.

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Interrogatories and Requests for Production of Documents

All attorneys handling divorce cases should assemble a standard set of forms for both interrogatories and requests for production of documents. Then, as required, these forms should be tailored for specific situations, including divorce, post-divorce child support actions, and post-divorce child support matters for self-employed obligors. Creating (or borrowing) a great set of standard interrogatories is an important, but often boring, task. Almost all experienced family lawyers have really sweated over their forms and are comfortable with them.
Consider assembling two sets of discovery interrogatories: one for documents where the opposing party is an employee of a company owned by a third party, and another for documents where the opposing party is self-employed.
Lawyers understand that there are basic documents that must be reviewed in every case. Your forensic accountant can help with ideas for categories of necessary documents in particular cases.

. . . .

For most divorce cases in which your opposing party is self-employed or a business owner, the CPA may want the following:

1. federal and state business tax returns and supporting schedules and worksheets;
2. K-1s, 1099s, and W-2s issued to the owner and related parties;
3. all contracts between the business and its owners, including employment and loans;
4. all business-organizing documents, including but not limited to corporate charters, minutes, stock transfer logs, partnership agreements, and membership agreements; all operating agreements, including but not limited to all ownership records; and recordings showing all directors, officers, stockholders, partners, members, and their respective percentages of ownership;
5. financial statements;
6. general ledger;
7. appointment book or professional calendar;
8. access to accounting software;
9. all business loan documentation;
10. bank statements and canceled checks for all accounts;
11. employment manual and benefits summary;
12. pension plan, profit-sharing plan, or other retirement plan documents and all current benefits statements and summaries;
13. expense reimbursement policies and summaries for owner;
14. documentation of all real estate owned, securitized debt associated thereto, and associated contracts, such as leases;
15. billing from CPA and business attorney;
16. lawsuits involving the company and/or the spouse in his capacity as owner, partner, officer, etc.; and
17. appraisals.

Note: For a more detailed list of documents needed for business valuation, see Shannon Pratt, The Lawyer’s Business Valuation Handbook (American Bar Association, 2000) Exhibit 4-1 at pp. 53–54.

Beyond these basic documents, there are always specific additional documents you’ll need, depending on the type of business owned by the opposing party. For example, if the opposing party is a personal injury lawyer, your forensic accountant may want to review a sched¬ule of all cases listing costs advanced and work in progress. For den¬tists, their equipment can be important. For doctors, do their medical records themselves have value? Do they own part of an MRI or CT scan? Construction company owners may have contracts where they are paid based on the progress of the project. Many forensic accoun¬tants already know what is important or can figure it out quickly. One of the many benefits of having a forensic accountant on board with the team early is being able to tailor discovery early in the case rather than supplementing the pleadings later in the case. Seeking additional documents is part of family law, but to the extent it can be reduced, you will save your client time and money.

The foregoing is an excerpt from The Forensic Accounting Deskbook: A Practical Guide to Financial Investigation and Analysis for Family Lawyers. Reprinted by permission. Copyright © 2011 American Bar Association. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Footnotes may be omitted from the original text.

Resources, References and More:

• BISK presentation, CPA SERVICES IN DIVORCE AND FAMILY LAW
• Business Valuation in Tennessee Divorce Law
• When Professionals Divorce in Tennessee: Valuing Professional Practices
• Hidden Income and Hidden Assets in Tennessee Divorces