Forensics: bookkeeping the break-up
Co-authored with Henry Brookman, founding partner of Brookman Solicitors
The increasing complexity of some divorce cases, and particularly the separation of assets has opened the door for forensic accountants to work with solicitors.
When Scots gather on Burns Night, they toast the “immortal memory”. When forensic accountants gather, their toast is to “Mrs White”, the doyen of divorce. Her case enshrined into English law the principle that in a medium to long-marriage, the starting point to calculate a divorce settlement is equality – which means the division of assets on divorce can be increasingly complex.
Prior to the White v White case, the role of accountants in divorces was limited – an obtuse tax point, an overinflated budget and an annuity were the only occasions on which accountants were invited in to the mysteries of ancillary relief claims.
However, the need to apportion the marital assets has created the need to establish their existence, to ascertain their value, to assess their reliability and divisibility and to understand how to achieve tax efficient liquidity. And these are just the basic issues before the need to consider inherited wealth, special contributions and marital acquests.
It is not too difficult to see that these issues are areas for which family lawyers have not generally been trained – any more than accountants are qualified to draft wills or trusts – which is where the expertise of a forensic accountant comes to the fore.
Call in the experts…
The above considerations are particularly important in cases where either parties’ future income may alter substantially.
For example, should Ashley and Cheryl Cole divorce and issue financial proceedings, calculations would need to be made to take account of Ashley’s time-limited career (particularly in light of his current ankle injury), and his need to build a fund for the long term. Meanwhile, Cheryl’s career is predicted to be on the up, with stated plans to break into the US music market. If proven, this would mean that, while Ashley’s future earnings will decrease Cheryl’s may dramatically rise. Various projections need to be made to try to achieve fairness in any settlement.
The accountant often first learns of the demise of his client’s marriage when he is asked to help complete the notorious ‘Form E’ financial statement. This form is the bedrock of family law proceedings. The objective is to give the courts a clear and concise overview of each party’s financial situation. Lawyers often naively assume that this is simply a matter of setting down the facts. Accountants, however, know that figures are not necessarily facts; a great deal depends on how they are applied. This is where the accountant needs to be clear, from the outset, as to what objective his or her client is trying to achieve in the divorce proceedings. Are they trying to increase a settlement from their ex-spouse or are they trying to reduce the amount they themselves will have to pay out?
A key way in which solicitors and accountants can further work together is in the drafting of financial questionnaires for the other party to answer and the subsequent evaluation of the answers – or indeed incomplete or inadequate answers. Another is by providing the solicitor with a list of the essential financial information that needs to be obtained.
Hidden assets are not unusual in ancillary relief cases. If the solicitor can provide the client’s account of the marital lifestyle, together with evidence of income, then a broad analysis and reconciliation by the accountant can see if any assets have slipped over the abyss into a black hole.
Disclosure apart, a key note for the accountant can often be to bring a touch of commercial and financial reality into the proposed settlement process. Businesses may be profitable and cashflow positive: this does not necessarily mean that they are realisable or capable of funding substantial cash payments in one fell swoop.
Similarly, an all-round familiarity with investment techniques and bespoke banking arrangements – as well as taxation issues – can provide solicitors with constructive ideas that they can introduce into their settlement proposals. Experience suggests that sometimes providing a ‘how to achieve’ methodology may bring about the desired objective.
The best outcome
When solicitors and accountants work together as a seamless team, the client benefits.
The key is for the solicitor to have an early discussion with the accountant – often with the client present. The accountant will assess the financial significance of the client, personal statements, the other party’s Form E and provide the solicitor with a view on the parties’ overall income and capital – both at the current time and in “the reasonably foreseeable future”.
From the above it can be seen that the accountant’s role almost inevitably is partisan. No matter how fair-minded the accountant wishes to be, inevitably he or she will to some extent be an advocate for the client. It is therefore wise to avoid any attempt to co-opt the accountant to be some form of impartial expert. That is best reserved to someone truly independent.
Ironically, it is not always the ‘big money’ cases which require the largest accountancy involvement. Where a family’s wealth is tied up in property, businesses, financial instruments, pension funds and trusts the issues surrounding separation and division can be complex. The accountant can provide the solicitor with a route map through the minefield.
Hints and tips
* Get an overview of the case as soon as possible:
* What sort of case is it?
* What are the key financial drivers?
* Consider statutory and other time limits,
* Avoid valuation “ping-pong”
* Consider materiality
* Remember that investing costs earlier may save costs later.
When is a single joint expert appropriate?
* Where a physical asset, eg. a property or an art collection is being debated;
* Where there may be agreed numbers but differences in relation to taxation occur;
* When both parties are active in the business;
It’s always worth remembering that ‘one may be cheaper than two but three are more expensive.’