Litigation

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Planning and Coordinating Discovery

Discovery is, for our purposes, the process used to identify and quantify the assets of a party in a divorce. This is necessary for obvious reasons: it would be impossible to accurately and adequately divide up assets if you weren’t aware of them or of their worth. 

Discovery can vary in complexity depending on the specific case taking place, but in almost every case, it follows a standard four-step process. First, the assets must be identified. After that, the assets must be assigned values reflective of their worth. Next, they must be placed into one of three estates: the wife’s, the husband’s, or the community/joint estate. 

The final step is to determine the distribution of all assets. This part of the process is the most complex. Things that must be taken into consideration include the nature of the asset and the laws in the jurisdiction in which the divorce is taking place. 

If the discovery process is left incomplete, it can be difficult or impossible to create a fair settlement. Thus, this process is of great importance. Various items are utilized to complete and verify the discovery process.

Documentation

To find information about assets, it is necessary to have documentation of their existence. Documents such as tax returns are invaluable to this end. These provide a record of the nature and value of assets such as investments, business interests, and bank and brokerage accounts, as these types of assets are reflected on the tax return.

Other types of useful documentation include:

  • Net worth/financial statements
  • Retirement plans and plan descriptions
  • Life insurance policies and account statements
  • Employment agreements, shareholder or partnership agreements, and/or buy/sell agreements

In order to procure these documents, it can be necessary depending on jurisdiction to create a disclosure form, filed under oath. This is not the case everywhere, so understanding local laws is as important as always. 

Liabilities

Among the necessary things to identify are any potential liabilities. These can be understood through a process of scouring the aforementioned documents, as well as other documents such as mortgage and loan applications, credit card statements, and personal guarantees.

Income Vs. Expenses

The income and expenses of the divorcing parties are other aspects that need to be investigated. Income can be verified using documents such as tax returns. The approximate budget of the couple’s expenses (which include things like food, housing, medical payments, etc.) can be investigated via documents like bank account statements and credit card bills.

A thorough understanding of the couples’ income and expenses is necessary to determine things like spousal and child support. 

Forms of Discovery

There are a few different ways information for discovery can be obtained. These are:

  1. Interrogatories- written questions answered under oath by the litigant.
  2. Demands for production of documents- demands that the litigant show copies of documents that reflect notable financial realities.
  3. Subpoenas- if the documents demanded are under control of a third party, then a subpoena may be filed in order to compel the production of that information.
  4. Depositions- oral testimonies made under oath in the event that further clarification of finances is needed

The Role of the Financial Expert

A financial expert should be called into the game as soon as possible in order to aid in the discovery process. Their role includes drafting discovery requests. Typical sorts of experts who come into play include Certified Public Accountants, financial planners and analysts, and economists. 

Whether the divorce is simple or complex, a financial expert should be involved. They provide a variety of services in these cases, including but not limited to:

  • Evaluating assets
  • Determining income
  • Analyzing the parties’ lifestyle
  • Structuring settlements for ideal tax results
  • Counteranalyzing the opposing expert

The expert can serve multiple legal roles, depending on the needs of the case. These include the role of the consultant, who is protected by privilege, neutral expert, who is stipulated by both attorneys, or mediator.

The knowledge and information held by the consultant is protected by privilege, whereas that of an expert witness is not. Knowing your role in your specific case is vital.

Adverse Experts

Oftentimes, you will find the financial reports produced by the opposition in a case to be unacceptable. When this occurs it is sometimes necessary to pull in another opinion and set of eyes, in the form of another financial expert. Clients are sometimes wary of putting money into the hiring of a secondary expert, but doing so in a timely manner can be critical.

Takeaways

All aspects of the discovery process require planning and careful thought. A thorough understanding of the process, your client’s needs, and the requirements present in your jurisdiction, is crucial to creating the most favorable outcome possible for your client.

by Miod and Company Miod and Company No Comments

Establishing Yourself as the Financial Expert in Divorce Cases

When you first engage with an attorney, you want to establish yourself as a confident, competent expert in your field. The very first phone call is the foundation of the relationship you’ll have with the attorney and with the case. In order to make the right sort of impression on an attorney, you’ll want to remember a few key strategies.

The Modus Operandi

Firstly, avoid selling yourself. You want to sell your experience, not your personality. While some attorneys may respond to a sales-pitch-type call, most are going to be more impressed with you if you come across as someone who actually knows what they’re doing.

Secondly, keep your focus on the details of the case. Once again, this isn’t about you. It’s about the situation at hand, the attorney you could be working with, and the client you’re hoping to land. Talking through the case looks good on your end: it shows that you’re invested in your work and that you understand what’s going on. Furthermore, it will help you determine if this particular divorce is a good case for you. 

Finally- and these are very important- is making sure that the financial backing of the client is suitable for you, that there are no conflicts of interest between you and the attorney or client, that the expectations of the client and attorney are within the scope of your expertise, and that you will be of value to the case. Of course, you will be. You’re a CPA for a reason; you couldn’t have gotten this far without being good at what you do. However, establishing what your role will be will help both you, the hiring attorney, and the client to feel secure in your partnership.

The Power of Recommendations

If there’s some discrepancy with any of the above, you should probably decline the case. This does NOT mean simply waving the attorney away. Rather, you should do your best to refer the attorney to a different expert who might be better suited to this particular divorce case. Should your referral prove to be of value to the case, then you’ve established yourself as reliable and trustworthy, and that attorney is likely to call upon you again for future matters.

Conflicts of Interest

The aforementioned conflicts of interest are important to understand. Should you have any kind of relationship, be it professional or personal, with someone involved in the case (one of the spouses, the attorney, etc.), you should decline the case, as that relationship could impair your objectivity and cause you to err in your judgments. Stay away from those cases!

Varieties of Engagement

There are several types of engagement available to you as an expert, each presenting unique opportunities and challenges. They are:

Neutral/Court Expert

The expert in this position can be appointed through a couple of different scenarios. One scenario involves the expert being appointed through agreement by both parties of the divorce, such as in a situation where they decide that neither of them wish to field the cost of their own expert. The neutral expert can also be assigned by the court itself, such as if the divorcing couple’s finances are highly complex. This expert works primarily on tasks such as parsing and explaining the intricacies of the case to the court.

Consultant to Attorney

This expert works for an attorney in consulting, rather than testifying. This sort of arrangement allows for a privileged relationship between attorney and accountant, and as such, the accountant cannot be called upon by the opposite attorney to disclose confidential information. What is said between the attorney and the accountant remains between them.

Expert Witness

This is an accountant who understands the ins and outs of the case and is called upon to testify. It’s possible to be initially hired as a consultant and later asked to switch gears into the expert witness role. Be cautious with this one: in testifying, you may lose your privileged relationship with the attorney, and be compelled to give up previously confidential information.

Client Acceptance

As noted above, it’s critical that you be able to discern things such as potential conflicts of interest, the client’s ability and limitations regarding pay, and their expectations of your work. You need to be on the same page as they are on all these things if you want to make the casework. 

Understanding the case and what the attorney is looking for from you is necessary. Keep your eyes open and make sure that each case you take on is a good fit for you and your practice, lest you fall into a case that you’re not going to get paid for, that you’re not staffed to handle, or that you’re not going to be able to maintain objectivity with. Stay sharp!

by Miod and Company Miod and Company No Comments

Introduction to Property Law in Divorce Cases

Divorce rates have been on the rise for years, and with them has arisen a need for more and more forensic accountants with expertise in property law. Property is one of the most contentious points in any divorce case, and each state in the union has different laws and policies regarding how these cases should be addressed. 

While it would be too complicated to explain state-by-state how property is handled during divorce, there are similarities to be found between states, and a few healthy generalizations to be made. With that in mind, let’s start with some background on the development of this area of law.

Development of Property Law

Property law in the United States has evolved in multiple directions over the course of time. In most areas of accounting, there are some fairly fixed Generally Accepted Accounting Principles (GAAP) which guide most accounting. 

Family law hasn’t followed quite that same path. In family law, the GAAP are in many ways made irrelevant by legal constructs that define what property is, and what ought to be done with it. It’s vital for accountants to understand the ways in which divorce cases should be handled differently than other accounting tasks.

Property Systems

The two main systems of property are Community Property and Equitable Property. 

Community property is the system used in nine states, primarily those further to the West. In a community property system, property of a married person is established as either marital or separate property. Marital property is the term used for property gained by the couple during the duration of the marriage, and separate property refers to property that was owned by only one party prior to the marriage or after the separation. Property that was inherited by one spouse is also considered separate. 

Under this paradigm, community property is split equally between the two parties, and separate property belongs to whoever owns it. 

Every other state operates under equitable property systems. In such systems, property is divided in a way that the court determines is fair. Now, this does not necessarily mean that it is divided equally. Under this system, separate property of one spouse may be called upon to make the settlement fair for both parties.

Fault in Divorce

Fault in a divorce refers to any behavior by one party that the court determines to be unacceptable: a fault, just as the name suggests. 

In some states, such as California, no fault is required for the dissolution of a marriage. In these cases, community property must be divided up equally between both parties. Other states’ laws allow for differing divisions of property that favor one party based on the faults of the other.

Support

Of course, parents are obligated to support their children. However, there are no set standards for what level of support a parent should provide. This question is usually answered by asking a few questions: namely, questions of custody agreements and of income. As a forensic accountant, it’s common for you to help determine factors like income insofar as they’re necessary for determining child support. 

Spousal support, or alimony, can be a little trickier. Alimony typically involves the higher-earning spouse paying a set amount to the other party for a set amount of time. There are even more factors determining this than there are for child support. Things like the standard of living held by the couple when they were married, the length of the marriage, the needs of each spouse, and other factors come into play, in addition to the obvious ones like income.

Property Valuation

All assets of both parties come into consideration when determining how to split up property. Each type of asset, from businesses to stocks to retirement plans and more, has to be dealt with separately and with care. Forensic accountants are tasked with valuing each asset.

Property Division

Once the assets have set values, it’s time to figure out what goes to whom. This process requires an intimate knowledge of property values, income tax rules, and family law. Financial planning for the future can also come into play.

Marital Fraud

When divvying up property in a divorce, it’s not uncommon for one spouse to attempt to hide some asset from their spouse and the courts in order to avoid having to give it up. In addition to being questionable ethically, this type of fraud is illegal. In some states, this sort of action can come with severe legal consequences. 

Marital fraud sometimes involves a continuation of tax fraud that was committed during the union, which, as we all know, is also illegal. So, that’s something to keep in mind.

Income Tax

All of the intricacies of property involve some consideration of income and other related taxes. This can cause various problems to pop up, and it’s key that you be ready to deal with them. 

All the forms of spousal and child support have an impact on income tax. While child support isn’t considered deductible, spousal support is deductible as alimony. Taking these pieces into account is crucial to financial planning for accounting clients.

Here we’ve covered some of the basic principles of the accounting that goes into a divorce. Later on, we’ll be delving into some of the more complex artifacts associated with this process, so stay tuned for more.

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