Divorce is in the air everywhere you look around!

 27 January, 2014

Divorce is in the air everywhere you look around!

(Apologies to the late Peter Allen)

Christmas is over, it’s time for a divorce!

Every year, we see the rate of divorce increase during January to March.

Too often, in circumstances, where one of the parties to the relationship runs and controls a business, we see the onset of (“RIDS”) – Reduced Income Deficit Syndrome once Divorce Proceedings Start.

When its clear that a couple will be divorcing, each spouses outlook becomes more self protective. The focus shifts from the fate of the marriage to each spouses future, and naturally, each spouse begins to guard his/her own financial self – whether that means trying to make sure that the assets will be divided equitably in a settlement or trying to make sure that they’re not.

In my years as a Forensic Accountant, I’ve observed that, all too often, the husband is much quicker than the wife to assume this financially protective stance (and sometimes he does so long before divorce is actually filed).

Why? Well, contrary to popular belief, husbands today are still most commonly the “monied” spouse, and wives, the “non-monied” or supported spouse.  In addition, many women are more committed to family responsibilities and not the finances, however, they probably ought to be as knowledgeable.  This leaves women vulnerable to some of the financial manoeuvring husbands do to reduce their losses in a divorce.

Owning a business presents several opportunities for just this kind of manoeuvring. For example, once the divorce gets underway, the husband might claim that, lo and behold, the business actually has little or no income or value! Despite what he’s always proudly led the wife to believe, and despite the lifestyle the business has provided to both parties, sudden poverty now conveniently prevents him from paying a fair settlement.

Here are some symptoms of RIDS.

The business is supposedly in trouble, but his lifestyle does not show a loss of income.

I’ve seen situations where the husband’s business has supported a very nice lifestyle for a lengthy period of time.

Indeed, he may even be supporting a new girlfriend in high style. Can his reported income support this? If not, where’s the money coming from?
Surely it would be difficult to get a bank loan, if the business were suffering as badly as he says.

The business pays his personal expenses.

If the husband’s business pays his personal expenses, then he doesn’t need to take a paycheck – and can claim he has “no income.” In absorbing his expenses, the business also appears to take a hit, both in its net income and in its valuation.
His loss of income began just as the marital troubles were intensifying.
It could be that the husband has planned in a self-protective way for longer than the other spouse imagined.
Was there a turning point in the marriage that could have set the husband down that path? Was there a split, and then the parties got back together, before ultimately deciding to divorce? And did the business lose value right about the time of the first separation?

The Husband stalls or stone walls when asked to turn over financial documents or allow a business valuation.

It’s likely the husband will be very reluctant to turn over third-party data, such as bank and credit card statements and copies of cheques, all of which are difficult to manipulate. He’ll want to buy time, and to drive up the legal bills by forcing the solicitor to make repeated requests and demands for documentation that the wife is legally entitled to. The sooner the wife is out of money to pay the divorce team, the sooner she will settle for less than she deserves, just to finalise the proceedings.

It can be difficult to prove that someone is under reporting income and/or misrepresenting the value of a business, particularly when the monied spouse has control of all the financial information. To support the wife’s case, and create a credibility issue for the husband, it maybe enough just to prove that the picture the husband is presenting to the Court is inconsistent with the documents examined.
The only way to catch these types of scams is to analyze the details. It is essential that the income tax returns and relevant financial information (business and personal) are obtained and reviewed as the truth will always be found in the numbers.

Experts in forensic accounting and family law matters, Forensic Accounting QLD is often called upon to provide our expertise in assisting with analyzing financials and detecting inconsistencies to get to the truth of the financial situation and determination of an independent value for the respective business.

If you suspect that the monied spouse has developed RIDS, then contact Forensic Accounting QLD.

Steven Ponsonby is a Chartered Accountant FCA, a Certified Fraud Examiner CFE and Insolvency Practitioner RITP and is the founding Director of Forensic Accounting Pty Ltd, a leading independent forensic accounting practice, providing forensic accounting services and expertise to a broad spectrum of clients across Australia.