Family Law – Blame it on the GFC
I have been amazed at the number of family law matters that our firm has been involved in recently where the answer to the “Significant” decrease in turnover and/or loss of profitability has been to attribute this to the GFC.
As forensic accountants, in undertaking a valuation of a business for family law purposes, or any purpose for that matter, we have a professional responsibility to consider all the facts and circumstances surrounding the particular business to ensure that our expert reports are relevant, appropriate in the circumstances and take into account ALL relevant factors to ensure meaningful advice is provided to a wide range of stakeholder and other parties, including the Court.
Therefore, whilst, it would be remiss of us not to consider any legitimate effects of the GFC on a business, equally, we also have a professional obligation to GFC, i.e. Get it Fundamentally Correct.
Typically, we find that one party to the relationship is the key business driver and it is this person who often seeks to “minimise” the value of the business in conjunction with their professional advisors, to the detriment of the other party to the proceedings.
Where are we seeing “adjustments” being made or closer scrutiny being required?
- Acquisition of items of plant and equipment that are subsequently expensed,
- Pre-payment of expenses, i.e. rent and other lease commitments,
- Deferment of sales to impact on turnover,
- Loss of interest and drive in the business, (note, this maybe a genuine loss),
- Purposely running the business down, thereby causing the business value to be eroded,
- Manipulation of inventory items, i.e. running down stock levels or writing off stock that may not be obsolescent,
- Putting private expenses thru the business,
- Cash sales not being recorded,
- Non-commercial rates of salary, super and other benefits being provided,
- Sale of the business for undervalue and/or to a non-arm’s length purchaser,
- Adoption of the tax depreciated written down value of plant and equipment, rather than looking at the “going concern” value.
I am also seeing situations where the value of the business (if the proprietor accepts that the business has a value), then the value is solely attributed to the Proprietor and without,the proprietor, no value can be attributed. Whilst, this is an interesting theoretical argument, in the interests of assisting with any matrimonial proceedings, I suggest that the Family Court will not adopt the same view in this regard.
I would also caution professional advisors (i.e. the accountant to the business as an example) should consider carefully a situation where they purport to act in both parties interest, when clearly they are not.
I cannot emphasis strongly enough the importance of seeking independent professional advice, i.e. a solicitor specialising in family law to ensure the interests of all parties to family law proceedings are looked after.