Being Skeptical About Financial Information in Tennessee Divorce

https://youtube.com/watch?v=RQJuZuu4AxQ

Tracy Coenen and Miles Mason, Sr. discuss lawyers and forensic accountants being skeptical about financial statements, income and asset disclosures, tax returns & supporting documentation in divorce cases.

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 4 – The Hunt for Hidden Assets – Red Flags, Schemes, Scams, Lies, and Damn Lies

Many books and articles have been written for lawyers and forensic accountants about searching for hidden assets in divorce. Experienced forensic accountants know what to look for and where to look for them. This chapter is crafted to help lawyers obtain needed documentation, to explain why certain documents are essential, to demonstrate how to listen for red flags from clients, to make it easier to interface with the accountant working the case, to aid in explaining the work to the client, and to enable lawyers to understand the role of the forensic accountant’s report.

At their most basic, like any other type of lie, finan­cial lies come in two forms: commission and omission. Financial statements can be false because of both types of lies. A very simple lie of commission is lying on an inter­rogatory concerning the balance of an investment account. Lies of omission constitute nondisclosure. An example of nondisclosure is a failure to disclose that a brokerage account exists. Nondisclosure can be the most challenging type of lie to explain to courts. Without a brokerage account state­ment, how do you prove the account exists? Understanding lies and their overall importance in divorce cannot be separated from an under­standing of human nature. Evidence comes from documents. Many documents come from discovery. Without discovery, there may be no evidence. What comes first, the chicken or the egg? It may well be the documents.

In divorce, some bad actors refuse to provide even basic discov­ery, such as credit card statements and cell phone records. In a motion to compel, a judge may ask you why certain documents are needed. Your opposing counsel might claim the document search is a fishing expedition or is otherwise unduly burdensome. The judge may then go one step further, asking whether there is evidence of wrongdoing or an affair. This is human nature—curiosity. At its most basic, where will the evidence of adultery or dissipation most likely be found? In credit card statements and cell phone statements. Then it’s up to you to be a strong and relentless advocate for your client.

The Continuum of Lies

Some targets lie. For the purposes of this book, business owners and their businesses are collectively referred to as targets. The two cannot be separated because of the control owners have over their businesses. The target is capable of coordination. Is deferring income recogni­tion hiding assets? What about inappropriate expenses? What if the IRS does not object to deduction of travel and entertainment expenses paid by the target at a conference? What if the target’s girlfriend is an employee? The forensic accountant’s investigation must take into account all of these aspects. One of the first steps to putting the inves­tigation into context is understanding that there is a continuum of lies. Some lies are worse than others. If caught, some lies come with harsher penalties than others. You need to ask your client early on this impor­tant series of questions: Is the target is bold enough to:

  • Lie on company expense reimbursement forms?
  • Manipulate company books?
  • Conspire with a low-level employee to alter company books?
  • Lie on state sales tax returns?
  • Create dummy vendors and pay expenses from the company to the dummy?
  • Enlist co-owners’ help to secrete nontaxable income in cash?
  • Form offshore legal entities to hold siphoned cash?
  • Conspire with the company’s inside CPA?
  • Conspire with the company’s “independent” CPA?
  • Lie on financial statements to banks providing credit facilities (overstating income and net worth)?
  • Lie on financial statements to banks providing credit facilities (understating income and net worth)?
  • Lie on written discovery under oath?
  • Lie on tax returns (with or without help from a tax preparer)?
  • Lie at deposition while looking in the eye of opposing counsel?
  • Lie at trial in front of a judge?

Some lawyers may have a hard time understanding that targets per­ceive certain lies as more dangerous than others. For example, some targets believe that failing to report cash receipts (understating income) on a federal income tax return is much more egregious than claim­ing exaggerated personal meal deductions and entertainment expenses. Some may say IRS agents expect some fudging on “business” dinners. That’s why they are only partially deductible. But if the cash receipts are not recorded and the amount is meaningful, the agent may consider initiating criminal prosecution.

One serious dividing line for targets is the deposition. Will the tar­get lie in deposition? Some won’t. The involvement of their spouse’s forensic accountant may keep the target honest. If the forensic accoun­tant has been through the general ledger and examined canceled checks and invoices, that may be enough to keep the target honest. That is why it can be beneficial to disclose the expert’s existence as soon as pos­sible. For other cases, a target’s honesty may depend on the reputation of the forensic accountant. If word gets back to the target that the CPA is very talented, the target may throw in the towel, admit the manipula­tion, and salvage what credibility remains.

Some targets will continue to lie even when caught. If the manip­ulation is not detected prior to the deposition, you can bet the farm the target will lie. The target may even be emboldened to lie. In those circumstances, the mere act of getting the target on the record and under oath creates a benchmark to work against. One concept resonates with clients: “Even though your spouse may lie, we are going to ask him the right questions under oath and make him commit perjury to do it.” Proving the perjury may be a tremendous challenge. But if the lie is ever proven, there will likely be hell to pay.

. . . .

Severity of Lies

Not all lies are equal. Some lies are more important than others. To borrow a baseball analogy, an example of a “home run” lie might be an interrogatory answer denying infidelity, combined with finding in the car glove compartment of the spouse a jewelry store receipt for a Rolex Lady-Datejust (with diamond dial and bezel, of course), complete with a Christmas card including a sexually graphic thank-you note that predates the interrogatory answer. An example of an uncovered lie that is a “double” is the good old business credit card statement with the Victoria’s Secret charge. Finally, an example of a “single” lie might be a business owner deducting personal meals and entertainment expenses through the business. “Single” lies are illegal, unethical, and dishonest. But, unfortunately, judges hear a lot worse every day and are not moved by them. For small “single” lies, there are two keys. First, proving any lie with a document, especially a document signed by the target, is more powerful than any other proof. And second, if you string enough “sin­gle” lies together with a meaningful amount of dissipation, your client can achieve the same credibility destruction as with a “home run” lie.

Financial Lies Come in Many Flavors

Targets usually have very specific predictable objectives. In commit­ting fraud in a divorce, the target’s goals are to

1.   Hide, understate, or undervalue certain assets;

2.   Overstate debts;

3.   Report lower than actual revenue; and/or

4.   Report higher than actual expenses.

. . . .

“What Is Best in Life?”

In Conan the Barbarian, the Wu Master asks Conan, played by Arnold Schwarzenegger, as they sit around a roaring campfire, “Conan, what is best in life?” Conan replies, “To crush your enemies. To see them driven before you. And to hear the lamentation of their women.” In the court­room, catching the target in a lie made under oath is good. Catching the target in a lie with an obvious intent to lie is great. But ultimately, the best in life is for the trier of fact to crush the business owner spouse in a rul­ing. Trial courts can vindicate the non-business-owner spouse by:

  • Granting the non-business-owner spouse substantially more than 50 percent of the assets,
  • Valuing the assets in favor of the non-business-owner’s valua­tion expert, and/or
  • For alimony or child support, declaring the target’s income much closer to the target’s real income rather than the target’s purported income.

The foregoing text 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.

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