Likelihood, perpetrator, timing, formula, economic reality
By Nicholas L. Bourdeau
Excerpted from The Determination of Income for Child Support
- Steps for Successful Investigation
- Where to Look for Hidden Assets
During the course of a divorce, claims of spouses hiding assets are common. One or both spouses may claim that there was significant worth in the marital estate and the other spouse has taken it. They may also claim that the couple earned significant amounts of money during the course of the marriage and those earnings are not reflected in the value of the marital estate.
These claims may or may not have validity. The emotions inherent in dissolutions do not tend to foster logic or reason. However, it puts the divorce attorney in a position where some action must be taken. If the attorney does not take action, then claims of failing to exercise due diligence may follow. The action taken by attorneys is usually to conduct some type of investigation themselves, or to engage the services of a financial investigator or a combination of the two. In either case, there are guidelines that investigators can apply to facilitate the process.
The first step in seeking hidden assets is for investigators to recognize an underlying and limiting factor: The possibility of hidden assets has to exist before hidden assets can exist. Simply put, and by example, if a couple made $50,000 during a year and spent $50,000, no part of the $50,000 can be hidden. One problem with these situations is that all too often the divorcing party, and sometimes the attorney and the financial investigator begin work under the sole assumption that hidden assets exist. This approach is, at best, frustrating. It is frustrating for the individuals seeking the assets because they may have no idea where to begin and may have little proof on which to base their allegations. It may also be frustrating for those attempting to defend against the allegations. They may not know how to respond because they have been placed in the position of having to prove a negative, “I’m not hiding assets; how do I show you something I’m not doing?” Working under the assumption that hidden assets exist may also lead to accusations of conducting fishing expeditions or subjecting a spouse to undue burden in the discovery process. Another problem is that, ultimately, hidden assets may not exist. If this is the case, then both sides have wasted time and money attempting to solve an imaginary problem. Illustrating the possibility of hidden assets gives an investigation credibility and direction. Illustrating the unlikelihood of hidden assets curtails expensive investigations and discovery and also protects attorneys and investigators from accusations of inadequate performance. Therefore, the investigator’s work should always include a mindset that seeks an answer to the question, “Is it possible that hidden assets exist?”
The next step in pursuit of hidden assets is for the investigator to understand the environment in which he or she is working. There are numerous ways that married couples handle their finances. These range from either the husband or the wife controlling everything, to the couple making every financial decision together. In between there can be arrangements where the husband or the wife is given a household allowance to manage the living expenses of the family. There can also be agreements where the couple has three checking accounts: his, hers, and joint, with the joint account being used to run the household. No matter what system has been devised by the couple, the investigator must have an understanding of its workings. This understanding provides the investigator with some basic information such as who had control of the assets and income of the couple. Essentially, control equals opportunity. If one of the parties had exclusive control of an asset or income stream, then the possibility that it might be misdirected exists.
The investigation then moves from the general financial operations of the couple to the specific. Investigators will seek to educate themselves on what income was available to couples and how they spent it. This education process should be shared with the spouse making claims of hidden assets. In a large percentage of the systems that might be devised by couples, one person will have more knowledge of the couple’s finances than the other. For example, assume that a husband and wife have developed a system whereby the wife handles the finances of the couple. The husband’s paycheck is directly deposited into the joint account of the couple and he is given an allowance of $100 per week for lunches and miscellaneous expenses. The wife pays the mortgage, the credit cards, groceries, retirement savings, and makes all of the financial decisions. The husband, therefore, has very little idea of how the couple spent their money or even how much it costs to live. Claims of hidden assets are most often brought by the spouse who did not have control of the couple’s assets. Educating this spouse on the financial realities of the couple will, in many cases, make accusations of hidden assets evaporate. In other cases it will fuel the accusations, but provide investigators with a direction for pursuit of the missing assets.
Finally, all assets have lives. They are purchased (or traded for), insured, taxed, appraised, maintained, repaired, and finally traded, sold, or scrapped. Each stage of their existence can leave evidence as to their existence and perhaps value. This type of evidence is typically referred to as a paper trail. Mentioning a paper trail to anyone (client, attorney, or even some investigators) may elicit images of massive investigations, teams of CPAs working in unison and Congressional inquiry. This is usually not the case. Let’s take a simple example. Let’s assume that a husband bought an unmounted diamond with the intent of having the asset excluded from the marital estate. The husband wrote a check for the diamond. At the time of purchase, the jeweler provided a receipt. After the time of purchase, the husband asked for an appraisal so that he could insure the piece in an insurance rider. The husband then dropped the rock into his new safety deposit box. The paper trail consists of the check written for the diamond, the receipt from the jeweler, the appraisal, the insurance policy with rider, and the payments for the safety deposit box. Each of these items, if found, provides evidence of the existence of the asset. The “if found” of course is the problem. Fortunately, most parents are not criminals. This means that they are inherently unpracticed in the art of deception. Consequently, picking up the ends of paper trails is often not a challenge. However, getting the information necessary to perform a competent investigation is often a problem. If an investigator requests everything that may turn up a hidden asset, he or she will undoubtedly end up facing accusations of conducting a fishing expedition or indications that the discovery request is overly burdensome. Judges often buy into the argument saying essentially, “If you can’t tell me what you are after, you can’t have the information.” This, of course, frustrates the investigative process. If the investigators knew exactly what they were after, they wouldn’t have to ask for the information. Therefore, this type of investigation entails building from what is known, to that which is not; from the information that is available, to that which is not; and sometimes, from the simple to the complex.
Most hidden asset cases will involve husbands hiding assets from wives, not wives hiding assets from husbands. There are two basic reasons for this tendency. First, even though our society has made huge advances in the equalization of the sexes, there is still a tendency for males to earn more than females. The person generating the income normally exerts more control over the income. Therefore, the person in control of the finances has the opportunity to keep them from the person who does not have access. Consequently, men will be more likely hide assets from women because of opportunity.
Another reason men will be more likely to hide assets than women is the differences in the way men and women handle problems. Generally, men are more aggressive than women. When a man has a problem, he attacks it or otherwise tries to bring the situation under his control. When control isn’t possible, he will seek to salvage what he can. The salvaging may include taking what he can whether or not he is entitled to it. When a woman has a problem, she analyses the situation and seeks solutions. Therefore, women are more likely to put everything on the table and then attempt to deal with it.
HEADS UP: Exceptions to these sweeping generalizations abound. However, when faced with parties making identical claims of hiding assets I understand the tendencies described and play the odds in order to keep the investigation focused. The wife will probably protect items of sentimental value. There may be nothing more valuable to her than the Christmas tree ornaments her mother spent her whole life amassing. Alternatively, her husband is probably very sentimental about the $5,000 cash hidden in the glove compartment of his car. In addition, and contrary to the generalizations, the gender bias described is trumped by control and the opportunity it creates. That is, a husband or wife cannot act on his or her need to protect assets if the means to do so is unavailable.
Hiding assets during a divorce is a type of fraud. Therefore, some of the basic rules that govern fraud investigations can be used in the discovery of hidden assets. For example, frauds perpetrated on an employer have a beginning that is usually small and then escalates. Assume, for example, that an employee discovers a duplicate paycheck she accidentally wrote to herself and that the duplication is not caught by her employer. That initial, accidental check is the starting point of the fraud which eventually escalated into the employee duplicating all of her paychecks. Investigators understand that there is a high probability that investigative efforts focusing on periods prior to this check are unlikely to yield additional fraudulent activities. Investigations into hidden assets have a similar pattern which, for purposes of this discussion, is referred to as the date of first indication. Essentially the concept proposes that there is a date at which one or both of the parties were likely to have begun hiding assets. That is, investigations after this date are likely to produce worthwhile results while investigations focusing on time periods before this date are not.
This date is usually the point that one or both of the parties recognize that the marriage is unlikely to continue. The date can be obvious, such as the date when an affair is discovered, or the date of an argument where physical violence erupted. Of course, the date can be more subtle, and the husband and wife normally do not reach the conclusion that the marriage is over at the same time. However, seeking changes in behavior on the part of either party will give investigators clues as to when to begin the search.
Identifying and therefore limiting the investigative time period is important. First, there are very few cases in which clients will be happy to pay for the services of an investigator without the production of results. Second, the discovery associated with the investigation of extensive time periods becomes onerous for the producing party. That party may protest (with justification) that such discovery is overly burdensome and seek protection from the court. If the court agrees, then the investigator may lose valuable information to the sweeping protection of the court. For example, assume that an investigator asks for credit card statements and receipts from a husband for the last ten years. The husband protests and the court agrees that the request is excessive protecting all of the information from production. However, under the assumption that the husband’s affair was discovered two years ago, he was likely to have been hiding assets only since the date his marriage was in jeopardy. Limiting the request for detailed documentation in the example may have escaped the protection of the court. In addition, if expenditures are discovered in the limited discovery that lead to hidden assets, additional discovery requests for periods prior to the date of first indication are given credibility.
The preceding discussion relates to the detailed discovery that is often required in the establishment of income for child support as well as the search for hidden assets. It does not apply to summary documentation that is required for comparative purposes. The prime example of summary documentation is balance sheets. These documents, often consisting of no more than one or two sheets should be sought for periods before and after the date of first indication. See the Financial Statement section for further discussion.
There is a formula that can be used in illustrating the possibility of hidden assets or that may be used as the basis for an accusation of missing assets:
+ Assets (including income)
= Hidden Assets
The first part of the equation requires that the existence of an asset must be established. That is, in order to be hidden an asset must first exist. For example, assume that a wife won $10,000 in a state lottery according to a list of winners published in the newspaper. The first part of the equation has been satisfied. That is, there is evidence of a $10,000 asset.
The second part of the equation indicates that in order to be hidden, the asset cannot have been spent. Continuing with our example, assume that the bank statements of the couple had been received in the normal course of discovery. A review of the bank statements did not show a $10,000 deposit had been made to the couple’s joint bank account. We know that an asset exists, and we know that the couple did not spend it. Therefore, the asset existed under the control of the wife and is missing.
The formula also applies to the income or earnings generated by a couple. The income of the parties is determined, the expenditures of the parties are determined and the difference either confirms or denies the possibility of hidden assets.
The formula can be as simplistic as the example provided or encompass dozens of assets and numerous income streams. It can be used to provide the basis for a continuing investigation. That is, the formula may indicate assets are missing and that further work should be performed. The formula can also be used to curtail an investigation when it illustrates that hidden assets are unlikely. Finally, the formula can be an end in itself. In our example, a court may deem that the completion of the formula is enough to assess the wife the $10,000 in the marital estate division. That is, the existence is shown, expenditure is not, therefore, the wife is assumed to have the asset.
There is a correlation between the amount of money an individual or a family earns and how much money they spend on their standard of living. Simply put, the more money earned the more that is spent to increase the standard of living. There are exceptions of course, but couples must make extraordinary efforts to break this pattern. For example, a couple can agree that all salary increases from a particular date will be placed into savings for the children’s education. They may succeed in this endeavor, but there will be significant pressure on the couple to use the money for emergencies, perceived emergencies, or other expenditures that can be rationalized as being for the children. Therefore, investigators might expect that a large proportion of hidden asset claims will be nothing more than a skewed perception of the amount of money earned versus the amount of money spent.
The other economic reality involves the nature of the people involved and the environment. People seeking a divorce are not usually career criminals. Therefore, their attempts to conceal assets will probably not be sophisticated, elegant, or hard to detect. They are likely to be simplistic, direct, and at times merely desperate. Consequently, investigators pursuing the obvious will probably have better results than those looking for (or expecting) convoluted schemes. The environment is one of limited time and high stress. Complex plans often take time and logical thinking to put into play. A person under high stress with little time may not be able to formulate schemes that will avoid detection. Again, looking for the obvious first will increase the odds of finding hidden assets.
Nicholas L. Bourdeau has been practicing in the area of forensic accounting since 1986. He has appeared in court over a 150 times on issues associated with the valuation of marital estates, businesses, child support, maintenance, pensions, fraud, and damages. He has been a contract instructor for the State of Montana Child Support Enforcement Division and consulted with the Division’s Guideline Revision Oversight Committee. In addition to being a CPA, Bourdeau is accredited in Business Valuations by the AICPA and is a Certified Fraud Examiner under the Association of Certified Fraud Examiners. He is the author of The Determination of Income for Child Support, from which this article is excerpted.