In every divorce matter, whether it is resolved by mediation, litigation or an alternative dispute resolution method, it is always necessary to calculate the value of each divorcing spouses’ estate (or their joint estate) and the spouses’ monthly income and expenditure prior to divorce.
Whilst this may – at first glance – seem like a relatively simple exercise, there are a number of factors which can (and do) complicate the situation.
A Complicated Process…
Divorces tend to bring out the worst in people. Even people who are ordinarily fair minded are often affected by the strong emotions evoked by a divorce. As a result, the honest and open disclosure of the documentation required to calculate the values of estates are not readily forthcoming.
In addition, many estates take the form of complicated structures - and an analysis of business assets, trusts and off-shore holdings becomes critical.
Adding to this complexity, spouses are usually loathe to rely upon the “say-so” of their partner’s business or company appointed auditor - as the perception is that the results will be skewed.
The first step in the process of sniffing out assets and ascribing values is what is known as the discovery process in litigation – this takes place once all pleadings have been filed. Essentially, each party is required to produce all the documents that are relevant to the issues which have arisen in the divorce action. In a mediation, collaboration or negotiated settlement, these documents are likewise produced. However, in these environments, the documents are given on a “without prejudice” or privileged basis - and cannot be used in subsequent litigation if the negotiated process fails.
The Role of a Forensic Accountant
The forensic accountant appointed on behalf of the spouse in the litigious process will then assist in compiling a further list of documentation, which may be relevant. The accountant will work through all of the documentation for the purposes of calculating the necessary values.
These calculations will include: the calculation of business assets and share options; the investigation of trust assets; any tax implications applicable to the assets; the tracing of potential assets that have not been disclosed and the calculation of the income available for the purposes of meeting monthly expenditures.
The forensic accountant also plays a vital role in valuing the estate, be it of the opposing spouse or the joint estate of the parties, in accordance with their marital regime. It is important to remember that even in a relatively simple estate with the inclusion of the accrual system, the valuation of the estate can become very complicated.
Parties in a mediation, collaboration or negotiated settlement will ordinarily appoint a neutral joint financial expert (which is a great cost saving approach, particularly for the poorer spouse). However, in litigious matters involving large estates it is usually advisable to appoint independent forensic accountants for each party.
It is, of course, important for the attorneys who represent parties in a litigious environment to appoint a reputable and well-respected expert who will prepare a report and assessment which will stand up to objective scrutiny in court. The expert evidence led in court is vital to the success or otherwise of a spouse’s claim or defence to a claim.