Document Sample

By William J. Morrison, CPA/ABV

Accountants are utilized at the negotiating table and on the witness stand to provide the
information needed to negotiate an equitable division of property or to obtain a decision
from the court. In this regard, accounting services include the marshalling and evaluation
of assets and liabilities subject to equitable distribution. Often, this involves the
valuation of closely held businesses and the determination of the true income of the
owner spouse. In addition, the recent boom in the stock market has caused us to focus on
the evaluation of the income and assets derived from employee compensation and
benefits packages in publicly held corporations, including stock options, phantom stock
and the like. Other services that can be performed include pension valuation and the
preparation of Qualified Domestic Relations Orders (QDROs).

Much has been written about the above functions which are primarily those of an expert
witness1. This paper will focus on the role of an accountant as economic consultant and
resource throughout the divorce case, who can provide you with technical expertise and
sound financial judgment. In this regard, the accountant’s duties should begin on the day
you are retained. Consequently, the earlier you hire an accountant, the more useful
he/she can be to you. The services which accountants provide include:
        Preliminary evaluations
        Lifestyle analyses
        Preparation of Case Information Statements
        Disposable income analyses
        Tax analyses for alimony, child support and equitable distribution
        Pendente Lite applications
        Assistance in discovery and depositions
        Assistance in negotiations

Preliminary Evaluations
Often, I am called by an attorney and advised that they are in negotiations. If the matter
cannot be resolved, they will retain our services in order to value the business and
determine the business owner’s income. This is a very dangerous process. It is
 In addition, the evaluation of stock options, employee benefits and pension plans require special training
and knowledge, not possessed by all accountants. You should hire an accountant who specializes in these

equivalent to “Fire, Aim, Ready” instead of “Ready, Aim, Fire” because you are
negotiating before you have marshalled the assets and determined the income. This
process may work for W-2 wage earners who have a few assets; however, today most of
our clients have a house, stock portfolio, pension accounts and employee benefits. If
these assets are present in your case, you need an accountant.

In order to negotiate, you must understand the assets and liabilities subject to equitable
distribution and income available for support. At the very least, the accountant should be
allowed to perform sufficient work2 to reach preliminary conclusions of value, so that
proposals can be evaluated if the client insists on settling at this juncture.

It is also important to engage the accountant early, so that the client may begin to deal
with the actual economic realities. Often, figures may be presented which may be
artificially high or low. As a result, clients may have unrealistic expectations. In
addition, even if you are not in negotiations, it is helpful to perform a preliminary
analysis of the income and the marital estate in order to understand the magnitude of the
income, assets and liabilities.

Lifestyle Analyses
We prepare a lifestyle analysis to:
1. Determine the lifestyle enjoyed by the parties during the marriage.
   Based upon New Jersey’s statutes, the standard of living enjoyed during the marriage
   is a factor to be considered in the determination of both alimony and child support.
   As a result, a lifestyle analysis is extremely important for the preparation of the Case
   Information Statement (CIS). The analysis provides the necessary information to
   negotiate or try the issues of alimony and child support.

       To determine the lifestyle enjoyed during the marriage, we:
           Inquire as to how the family paid for their lifestyle
              - Checks (how many accounts)
              - ATM machines / cash (reported and unreported)
              - Credit cards (how many cards)
              - Barter
              - Business perquisites (perks)

       Assuming the family lived off a paycheck which was deposited into one checking
       account, the lifestyle analysis is very straight forward. In this case, we might input
       the checkbook and credit card information into a computer using customized
       programs to analyze the data.

2. Investigate allegations of cash or unreported income.
   To investigate unreported income, we require several years of personal bank account
   and credit card statements of the parties, including checkbook registers, canceled
   checks and deposit slips. We then proceed as follows:

    We take no position on what is sufficient work.

           A. Interview the non-working spouse. Have them be specific and provide
              documentation. If it is asserted that the couple lived on more than the
              reported income, fill out the following:
                  i.     Lifestyle Questionnaire3
                  ii.    Hidden Income Questionnaire

           B. Input bank and credit card information into the computer. Set up categories
              based upon the line items used on the CIS. (When requested by attorneys we
              input the results of our analysis into a spreadsheet format that mirrors the
           C. Conduct an inspection of the business premises and interview the working
           D. Perform perquisite analysis based upon the interviews and analytical review of
              business tax returns.
           E. Draw preliminary conclusions.
           F. Re-interview non-working and working spouse, if warranted based upon
              preliminary conclusions.
           G. Finalize your conclusions.

      One way to test this analysis for reasonableness is to compare the Case Information
      Statements of the two parties to see if they are in agreement. This step may also serve
      as a proxy for a full lifestyle analysis if the CIS comparison shows the parties to be in
      agreement on their lifestyle.

Case Information Statements
Accountants can prepare Case Information Statements (CIS) based on the actual spending
of the parties. CIS preparation is a subset of the lifestyle analyses discussed above. In
essence, the accountant interviews the client and inquires as to how the family lived:
through a checkbook, unreported cash, barter, and/or personal payments of expenses by
the business (perks). By inputting the family checkbook and credit card statements into
the computer, a CIS which presents the actual lifestyle and needs of the parties can be

Disposable Income Analyses
Accountants can prepare analyses which calculates the net after-tax income available to
each party based upon different levels of alimony and child support and/or different
amounts of actual or imputed income. We use several computer programs to prepare
these analyses. Exhibit B shows the net disposable income available to parties under the
following parameters:
     payor spouse earns income between $300,000 and $350,000
     payee spouse earns or has imputed income of $30,000
     alimony between $78,000 and $26,000
     child support at a constant $26,000

    These are questionnaires we use to uncover unreported income.

As shown in these exhibits, the net disposable income ranges from $110,400 to $168,700
for the payor spouse and $72,700 to $108,700 for the payee spouse.

Tax Analyses
Probably the most basic service an accountant can provide is an analysis of the tax
consequences for different amounts of alimony and different forms of equitable
distribution. For example, accountants analyze the tax effects of alimony, pensions, the
transfer of assets and equitable distribution. An often overlooked area is the tax liability
associated with a partnership interest. The purpose of this paper is not to argue
hypothetical versus actual tax consequences, but to explain that tax consequences can be
calculated and presented by an accountant. Because there are tax consequences to
alimony and equitable distribution, you need to know these consequences to make
reasoned decisions. For example, a pension plan distribution of $100,000 with a 40%
federal and state tax rate due upon distribution is worth $60,000. A savings account of
$100,000 with no tax consequence is worth the full $100,000.

Enclosed for your review is a tax chart (Exhibit C) and an alimony overview (Exhibit D).

Pendente Lite Applications
The accountant’s determination of the business owner’s income, net disposable income
and lifestyle analyses, are all very helpful to ensure a fair award of support. If the judge
awards support on the tax returns, the award may be too low. If he awards it on
unsubstantiated allegations of spending, it may be too high. An accountant is best able to
fairly represent the parties’ income and spending, and is needed to calculate the taxes on
any taxable award of support, so that the non-earning spouse will have sufficient funds to
pay taxes. In fact, one of the biggest issues I have faced in matrimonial cases is the
award of Pendente Lite support, which does not include a tax factor.

The role of an accountant in economic discovery cannot be over emphasized. The most
critical function of an accountant in discovery is to perform the required accounting,
financial, economic and valuation analyses, to determine the extent to which you must
investigate the books and records (and, consequently, incur fees) in order to verify the
income available for support, and the assets and liabilities subject to equitable
distribution. The most costly and time consuming part of our cases is the actual work of
obtaining information and pouring over records. The accountant should be able to tell
you which records you need and the manner in which they need to be analyzed so that he
can verify the assets and liabilities subject to equitable distribution and the income
available for support.

Sometimes, each check in the checkbook must be analyzed, at other times the same result
can be obtained by analyzing completed documents, such as financial statements and tax
returns. Your accountant should advise you when and how the work should be
performed, so that the marital estate can be marshalled and you have sufficient evidence
to present your case in court.

The most difficult issue I have faced revolves around the following statements:
      “We always lived well, now we have nothing,” OR,

       “The business always made money, but now that we are getting
       divorced, he says, the business is doing poorly.”

These statements prompt the use of an accountant. First and foremost, the accountant
must be a financial analyst. Second, the accountant needs an understanding of economics
in order to advise you if the business down turn is caused by economic factors beyond the
owner’s control, or if on a preliminary review he believes the owner is underreporting
income and/or hiding assets.
In depositions, accountants can provide questions and guidance on economic matters. In
fact, it is very dangerous to take a deposition on economic matters without the assistance
of your accountant.

Your accountant is a valuable tool in negotiations because he can:
       1. Analyze the other side’s position and determine if the position is reasonable in
          light of the overall assets, liabilities, income, liquidity and tax consequences.
       2. Help you prepare your own position.
       3. Help you prepare creative solutions using tax consequences, liquidity and the
          value of money to structure a settlement.

Enclosed, as Exhibit E, is our Divorce Settlement Checklist.

Accountants should be your consultant throughout a divorce case. They can provide
technical assistance, as well as guidance and judgment on financial matters at every phase
of the case.

The technical assistance includes preparation of:
        Case Information Statements
        Net disposable income analyses
        Tax analyses
        Discovery requests
        Deposition questions

These judgments include:
        How much discovery is required?
        What work should be performed to analyze the records?
        What position is reasonable and attainable in negotiations?

As shown in this report, accountants can serve as your consultant to provide both
technical expertise and financial guidance. Thus, while you may not be able to work with
an accountant, you certainly can not work without one.