Some years ago, I represented a client whose husband ran a company they co-owned. On the surface, the corporation's books and records looked fine. Then the forensic accountant I had on my team noticed something odd. Two expense categories had been reported in round numbers.
Real businesses do not produce round numbers. Invoices, payroll, utility bills, insurance—they all show up as uneven figures. The husband had simply made up the entries, loading those two categories with invented expenses to reduce the business's value. Once our forensic accountant caught it, the case changed. We could now show the husband was not telling the truth, and the company was worth considerably more than he claimed.
Doctoring the record books is a clear no-no, and that's why attorneys rely on forensic accountants in complex divorce cases.
The Law Requires Full Disclosure
California law clearly requires financial disclosure. Family Code section 721 requires spouses to act with "the highest good faith and fair dealing" and to share "true and full information" about anything affecting community property. In a divorce, both parties must exchange preliminary and final disclosure declarations listing every asset, debt, and source of income, signed under penalty of concealment.
Lying carries real consequences. In In re Marriage of Rossi, a wife who hid a $1.3 million lottery win from her husband during their divorce had the court award him every dollar of those winnings. The court relied on Family Code section 1101, which allows a judge to award 100 percent of a fraudulently concealed asset to the other spouse.
Remember, a signed disclosure form is under penalty of perjury. However, the court does not audit it, and neither does opposing counsel. Someone has to read the books, and forensic accountants are the experts.
Assets Can Be Difficult to Value
People often assume a forensic accountant is an auditor, or a detective hired to find hidden money. That is not really true. A forensic accountant can only find hidden assets when there is a trail to follow.
On the surface, they are not dealing with hidden money; they look for the perquisites, which are expenses paid by a business that are really personal in nature and that should be added back to determine the value of a business or cash available to pay support.
Of course, in the process of analyzing and understanding the books and records of a company or companies, if they see things that don't connect, they point it out. But again, they are not auditors. Forensic accountants also don't always value assets; sometimes they do, sometimes they don't. Sometimes the team will use specific appraisers to do the valuations.
The larger job is making sense of a complicated financial life. Most of the people I represent own businesses, hold equity, or earn income that never arrives as a simple paycheck. Or their spouses do. For the clients, a tax return tells only part of the story. What does their real family income look like? How much cash is actually available for support? California defines income for support broadly, including income "from whatever source derived," such as business income, under Family Code section 4058.
Forensic accountants prepare the schedule of assets and debts and build the income and expense declaration. These documents are essential, as they drive every subsequent support and property decision. When they are wrong, everything built on them is wrong too.
What a Trained Eye Catches
Certain warning signs recur in my cases involving business owners and executives.
The most common is declared income that could not possibly support the life a family actually lives. When someone reports modest earnings while paying for private schools, multiple homes, and first-class travel, the obvious question is: Where does the money come from? Sometimes the answer is cash. Sometimes it is a second set of books, which I have seen more than once.
Round numbers are another tell, as that husband I mentioned earlier learned the hard way. Legitimate business records are messy and specific. A category showing exactly $50,000 year after year deserves a closer look.
Personal spending run through a company is a third red flag. Listing a car, a vacation, or a remodel as a business expense lowers the company's reported profit and, with it, the income available for support. A forensic accountant knows what belongs in the general ledger and what doesn't.
Assembling the Team from Day One
I bring in a forensic accountant from the very beginning. I hold an initial meeting to lay the foundation, then start gathering documents.
From there, we work in parallel and stay in constant communication. If we file a request for support and attorney's fees, the forensic accountant prepares a declaration to support it. We collaborate on the preliminary and final declarations of disclosure. The accountant helps decide which documents to request, informally or through formal discovery, and helps shape our deposition and trial questions.
There is a practical benefit, too. A forensic accountant speaks the same language as the other spouse's accountant or forensic expert. When both sides cooperate, the experts can often resolve what might otherwise take months of motions in conversation, saving clients time and money.
My forensic accountants are part of the team, and they are indispensable.
Where I Draw the Line
Full disclosure applies to my own clients too. I have fired clients who kept two sets of books. For example, one client had $40 million in a second set and refused to list it on his Income and Expense Declaration, insisting his wife already knew. And even if the wife knew, I could not sign off on a document my client was signing under penalty of perjury that I knew was false.
Another client once told me he had $1 million in a bank account he didn't want to disclose. I will not help anyone lie under penalty of perjury.
Courts take this seriously. In In re Marriage of Feldman, a husband who failed to disclose a $1 million bond, a $5.8 million home, and several new business entities was ordered to pay $250,000 in sanctions plus $140,000 toward his wife's attorney's fees. The court did not require her to prove she had been harmed.
When a client's books are a mess, I counsel them to have their finance team clean them up. Accurate numbers protect my clients far better than hidden ones.
The Question of Cost
Clients sometimes ask whether they can skip the forensic accountant to save money. They ask because the cost can be substantial, typically driven higher by the complexity and number of assets involved.
However, forensic accountants bill less per hour than attorneys, and they do work I cannot do. If a prospective client with a complex estate refuses to work with one, I decline the case.
At this stage of my career, I will not handle a case without a forensic accountant unless the case is incredibly simple. And I do not handle simple cases. I work with forensic accountants for my own peace of mind, but mostly because it best serves my clients’ cases.
Please note: The content and views expressed here are my own and do not reflect or represent the positions, strategies, views, or opinions of Blank Rome LLP.