Case Studies can offer a better understanding of how our Forensic Accounting services can be used.
While definitions and descriptions can provide useful information regarding forensic accounting, business valuation, and the calculation of economic damages, placing those services in a real-world context facilitates a better understanding of how those services can be used or combined to conduct an in-depth financial analysis.
The following case studies represent fictitious situations that align with various cases we have worked on over the years. If you would like more information regarding how our professional services may be helpful to you, please contact our office.
Following the digital breadcrumbs…
Fact Pattern –
Hans and Rosa had worked hard during their marriage to maintain a comfortable lifestyle. When cryptocurrency became mainstream, Hans knew that Rosa would be skeptical about tying up their liquid assets in what many considered a volatile investment. However, Hans’ curiosity outweighed his trepidations and he delved into the cryptocurrency market. At the time he mentioned to Rosa that he’d done so, but the only term that registered with her was “Coinbase”. As their marriage deteriorated, Rosa began contemplating divorce and, when her attorney asked whether the couple had any cryptocurrency, she remembered back to the brief conversation she’d had with Hans. While she’d managed the couple’s finances during marriage, she’d never paid much attention to the cryptocurrency transactions and was therefore concerned that her lack of involvement might allow Hans to hide assets during the divorce, particularly with the help of his sister, Greta.
Important Considerations –
In a situation such as this one, a forensic accountant could help by assessing the various areas in which a tracing analysis might be helpful (for example, reviewing transactions in potential sourcing accounts for cryptocurrency purchases) and where a computer forensics expert might add value (for example, examining or reconstructing digital records to identify transactions). With the help of an attorney and subpoenas, Coinbase could be made to provide information that would be useful in a tracing analysis. Unfortunately, while cryptocurrency tracking tools are available, their effectiveness is limited. As such, a combination of curiosity, accounting fluency, and tenacity are helpful in these engagements – all of which are the currency of a good forensic accountant.
For more information regarding forensic accounting, please visit our services page or contact us for assistance with a specific issue.
Hide and seek…
Fact Pattern –
Jill was flummoxed. For the last five years of her marriage to Jack they’d enjoyed a great lifestyle, never wanting for anything and taking multiple vacations each year. However, coincident to their pending divorce, Jack was now claiming that their savings were depleted, that they had lots of debts, and that they were on the verge of bankruptcy. During their marriage Jack had overseen the community finances, leaving Jill uncertain about his current assertions.
To compound matters, throughout their marriage Jack had boasted about various business investments he’d made with Phil, an old college buddy. When Jill recently asked Jack about the status of those business investments he told her that Phil had bought out their interests in those business investments and that the money from Phil had paid for their lavish lifestyle. This sounded plausible, but Jill’s unfamiliarity with community finances and Jack’s dire assertions of their financial situation in contrast to their recent lifestyle made her nervous that she was missing something.
Important Considerations –
In a situation such as this one, a forensic accounting analysis could gauge the extent to which Jack’s financial representations are reasonable, evaluate whether Phil had actually bought out Jack’s interests, and verify that the proceeds paid by Phil to Jack had benefited the community. A business valuation analysis may also be warranted to assess whether Phil’s alleged purchases of Jack’s interests were at a reasonable price.
For more information regarding forensic accounting, please visit our services page or contact us for assistance with a specific issue.
Waste, by any other name…
Fact Pattern –
During the last eight years John had consistently worked between 49 and 50 hours a week at his medical practice. Nevertheless, within two months of receiving a complaint for divorce from his wife Anne, and despite experiencing no change in his physical condition or ability to work, he had cut his work time down to only 30 hours a week, citing the change as a lifestyle choice, and had also stopped accepting new patients even though he had the capacity and ability to treat them.
In the meantime, while gathering documents to provide to his divorce attorney, John noticed that one of his bank statements reflected frequent and sizeable cash withdrawals from a community account. He thought this was strange since almost all of the community’s living expenses were paid using bank transfers, checks, and credit cards. He also noticed that there were quite a few checks issued in large, round amounts but since his bank didn’t provide cancelled check copies, and neither he nor Anne maintained a check register, he didn’t know who the payee had been on those checks.
Important Considerations –
In a situation such as this one, a forensic accountant could assist in reviewing potential claims for community waste. If Anne alleges that John has intentionally reduced his work time to deprive the community of income during the divorce process, then a forensic accounting of the impact of John’s reduced work time and freeze on accepting new patients could assist the trier of fact in determining the difference between John’s reasonable income and his depressed/allegedly temporary income.
Further, a forensic accountant could also trace bank and credit card activity to gauge whether one or both parties removed funds from community accounts that did not ultimately serve to benefit the community, since such activity may also form the basis for a community waste claim.
For more information regarding forensic accounting, please visit our services page or contact us for assistance with a specific issue.
Things look a little different in the rear view mirror…
Fact Pattern –
Meg and Gerald were contemplating a divorce. They knew that as a result of their disparate income-generating abilities, Meg would likely be obligated to provide Gerald with some amount of spousal support after their divorce. After consulting with an attorney, Meg was informed that the amount of spousal support would depend, in part, on the lifestyle that Meg and Gerald had enjoyed during their marriage. As a result, Meg needs to assess Gerald’s reasonable post-divorce living expenses, bearing in mind the impact that Gerald’s income-generating ability could have on the ultimate determination of spousal support.
Important Considerations –
In a situation such as this one, a forensic accountant might be expected to assess not only how much the parties spent in the recent period leading up to their divorce, but also how much the parties (individually) might reasonably expect to spend to maintain a similar lifestyle after the divorce. Invariably, since most couples tend to turn a blind eye to their collective spending, one or both of the parties may be surprised by how much it costs to run their household. As such, a forensic accountant can help to provide objective determinations of both historical and projected costs. During lifestyle analyses there are certain issues that require particular attention, such as reasonably delineating between the living expenses of the spouse and children (since child support arrangements are typically separate and apart from spousal support determinations), gauging when historical living expenses may not be reasonably expected to continue, and assessing whether new expenses may be necessary post-divorce.
For more information regarding forensic accounting, please visit our services page or contact us for assistance with a specific issue.
Keep your friends close…
Fact Pattern –
Rachel knew something was wrong but she couldn’t put her finger on it. Her four-year-old dental practice had enjoyed a great couple of years and with positive online reviews and a growing referral network her practice should have been doing well by now. But Rachel was constantly in overdraft territory with her bank and she hadn’t been able to take a reasonable salary from her practice for almost half a year. By contrast, her office manager, Jane, who oversaw both the billing and collection processes, had just bought a new house and a particular luxury car that Rachel had mentioned wanting to buy herself, if things got better.
Fortunately, Jane never took vacations so she was always on hand to help out with administrative duties. Jane had even offered to loan Rachel some money to help with the practice’s current cashflow deficiencies, and Rachel was thankful that her friend was willing to use a recently acquired inheritance to help Rachel out of a bind.
Surprisingly, when Rachel met with her banker to discuss how she could tap into her home’s equity to help with the practice’s rough patch, Rachel’s banker asked her if it was possible that one of her employees was stealing from her, since the practice’s growing patient base didn’t comport with the reduction in revenues being deposited into the practice bank account.
Important Considerations –
In a situation such as this one, a forensic accountant might suggest various procedures to gauge the potential for employee theft. Important considerations in these types of analyses include testing the segregation of job functions to assess the ability of a single employee to remove funds from the company without detection, reviewing the integrity of the accounting process (which can encompass either an expansive or a restricted review, depending upon the scope of engagement and the existence of “red flags” or troublesome observations), and correlating trends in business activity with reported financial performance.
While the scenario presented above appears to lead to a possible culprit in dependable office manager Jane, this exact same fact pattern could still exist in a scenario where Jane is no more than a well-meaning friend and the real culprit is mismanagement or changes in insurance reimbursements. As such, a forensic accounting analysis may also be able to provide peace of mind by process of elimination.
For more information regarding forensic accounting, please visit our services page or contact us for assistance with a specific issue.
A lifestyle undercover…
Fact Pattern –
Emma and Jake had been married for 12 years. Jake had worked his way up the corporate ladder in a large company while Emma worked part time managing a local clothing store. The couple lived a very frugal lifestyle even though Jake’s salary significantly increased throughout the years. Eight years into their marriage, Jake took on a new position in his company that required him to travel more frequently and, as a result, Emma and Jake spent considerable time apart. While Emma was somewhat familiar with the community’s financial situation, within the last year she had started receiving phone calls regarding bank accounts that were not familiar to her, which she found unsettling but not too worrisome since Jake managed the administration of most of their finances. While most community expenses were paid by Jake because of his larger income, Emma also supported the community with her salary as well.
When Emma took a closer look at the couple’s financial accounts, she realized that Jake had transferred money from their retirement account to newly opened accounts without her knowledge. She also noticed large and suspicious banking transactions in Arizona even though the couple lived and worked in Nevada. Emma decided to dig further into the account activity and discovered that the nature of the transactions seemed to support a lifestyle much more extravagant than the one they had been living together.
Important Considerations –
In a situation such as this one, a forensic accounting analysis could be performed to determine if the funds Jake used to source and replenish the additional bank accounts and extravagant lifestyle had originated from potentially community funds. If the sourcing funds were deemed to be community and were benefitting one party to the detriment of the other party, a forensic accounting expert could determine the amount of potential community waste not only regarding the funds in question but also any other assets that may have been purchased with the funds during the period of marriage.
For more information regarding forensic accounting, please visit our services page or contact us for assistance with a specific issue.