When Do You Need A Forensic Accountant In An Illinois Divorce?

Forensic Accountants are necessary in an Illinois divorce when your spouse controls the money and won’t adequately provide documents verifying their income and assets. This scenario is most common when a spouse owns a business, uses cash, or whose financial documents don’t reconcile with each other.

What Is A Forensic Accountant In An Illinois Divorce? 

Divorce is replete with buzzwords like forensic, commingling and dissipation. Gaining a new vocabulary is the last thing you want to do while facing a divorce.

Luckily, breaking down these buzzwords is as simple as opening a legal dictionary and discovering that “forensic” is just “used in or suitable to courts of law”. Black’s Law Dictionary (11th ed. 2019). “Forensic accounting” is “[t]he application of accountancy principles to monetary issues that arise in courts, as in the apportionment of funds and of financial responsibilities upon a divorce or dissolution of a partnership.” Black’s Law Dictionary (11th ed. 2019

A forensic accountant is an accountant who involves themselves in a court case. That’s it!

Why Do You Need A Forensic Accountant In An Illinois Divorce?

A forensic accountant would be hired if there is some matter which is unclear or uncertain that needs clarity and certainty that the layperson cannot arrive at.

Finances are unclear and uncertain in a divorce because the party who must pay support or divide assets wants their assets and income to be unclear. An asset or income that is uncertain is difficult or impossible to divide…and invariably remains with the party who has complete knowledge of that income or asset.

A forensic accountant can pore over that party’s financial documents and ask pointed questions through the attorney that hired them via subpoena, interrogatory, notice to produce and deposition. Finally, the forensic accountant can prepare expert testimony as to what the forensic accountant believes the party’s assets and income truly are notwithstanding any obfuscation by the party that controls them. 

Putting aside the mechanics of how a forensic accountant arrives at that expert opinion, this article seeks to answer whether you even need a forensic accountant.

The Different Red Flags That Indicate A Forensic Accountant Is Needed In A Divorce

Tracy Coenen, CPA, in her book, “Lifestyle Analysis in Divorce Cases” identified four increasingly detailed (and therefore, concealable) red flags that a spouse should consider when deciding on whether to take on the expense of adding a forensic accountant to their divorce legal team.

1) Behavioral Red Flags – Obvious actions of a spouse that seem secretive or, at least, suspicious. 

2) Documentation Red Flags – Items in shared financial documentation that indicate hidden assets, income or at least require follow up questions. 

3) Personal Financial Red Flags – A spouse’s personal expenditures that indicate hidden sources of income or assets. 

4) Business Financial Red Flags – A spouse’s business activities which reveal hidden income and assets.

Let’s consider each of the red flags in order as we weigh whether hiring a forensic accountant for your Illinois divorce is the appropriate choice at this time.

Behavioral Red Flags When Considering Hiring A Forensic Accountant In An Illinois Divorce

Even if a party has zero access to their spouse’s finances, there are obvious “tells” which indicate further investigation may be warranted into the spouse’s finances (perhaps even before documentation is requested).

1. Exclusive or excessive control over bank information, statements and the online access to these accounts.
2. Making large expenditures (boats, cars, business ventures) without the knowledge of the other spouse. 
3. A history of deceptive behavior (sexual infidelity almost always includes financial infidelity).
4. The mentality that for one person to win, another person must lose. Always looking for an angle.
5. Using a post office box. Having multiple emails. 
6. Insisting that a spouse sign a document without independent advice from a professional. 
7. Engaging in unnecessarily complicated transactions. For example, accepting a Venmo payment and transferring the Venmo payment to a bank and depositing money in a Paypal account from that bank account (people don’t really do business this way).
8. Forging a spouse’s signature (or anyone’s signature)
9. Filing joint income tax returns without a spouse’s signature, consent or even knowledge (this is the most common). 

Behavioral red flags don’t require a forensic accountant but they should alert your divorce attorney to request documents to confirm or deny whether the couple’s finances are clear and traceable.

Documentation Red Flags When Considering Hiring A Forensic Accountant In An Illinois Divorce

The document collection process in a divorce is called “discovery” and is usually mandatory to an extent. There is no harm in requesting initial discovery to answer basic questions that are probably necessary to properly populate a Marital Settlement Agreement. The documents you receive from the other side in discovery (and, especially, the documents you do not receive) will give you great insight into whether you need to hire a forensic accountant in your divorce.

1. Does the financial affidavit match the supporting documents? This is barely arithmetic. The numbers on the financial affidavit match the supporting documents or they don’t. Sadly, when this occurs the answer is usually “idiocy” rather than “deception.”
2. Unsigned financial affidavits. A deceptive spouse tells on themselves when they refuse to sign the financial affidavit. 
3. Missing supporting documents. In this digital age, documents are always available. 
4. Delay in producing documents. Again, in this digital age it takes anyone less than an hour to download their entire financial life through their various accounts. 
5. Piecemeal production of documents. Providing documents at different intervals is always an attempt to appear to be complying in good faith while hiding the documents that are not produced. 
6. Not providing an affidavit of completeness. This is actually exceptionally common and should only be seen as a sign of deception if the spouse will not sign an affidavit of completion after you have requested it of them.
7. Documentation Red Flags can usually be resolved by simply requesting the missing documents or, if also held by third parties, subpoenaing those documents from a third party.
8. If these additional documents are, upon receipt, incomprehensible in whole or in part, a forensic accountant may be needed to assemble a report of what is known about the parties’ finances, what remains unknown and what questions can best resolve those unknown issues. 

Personal Financial Red Flags When Considering Hiring A Forensic Accountant In An Illinois Divorce

A party may have some knowledge of a spouse’s personal assets and income (after all, they lived with them). A spouse’s personal financial behavior will reveal deception even if they are a W2 employee with little opportunity to manipulate their income.

1. Cash transactions. No one uses cash anymore. Every credit card purchase is either cash back or airline miles. The only reason to use cash is to hide where you got the cash and what you’re spending the cash on. This is especially true if the cash transactions are recent when previous transactions were done via credit card. 
2. Not depositing paychecks (it definitely got cashed somewhere). 
3. Saving money as cash or precious metals instead of depositing the money in a bank. 
4. “Loans” to friends or family members. Especially in cash. 
5. Any undisclosed or secret accounts. 
6. Suddenly revealed assets. A once secret, now revealed asset is like seeing a mouse in a house…there is never just one. 
7. Suddenly revealed debts. Especially when they’ve only recently been incurred. 
8. Spending of marital assets while leaving non-marital assets untouched. 
9. Drug use
10. Gambling
11. A sudden decrease in income. 

Personal Financial Red Flags are relatively simple and can usually be resolved via a Notice for Dissipation of Assets which declares that missing assets will be deemed “dissipated” and, therefore, the spouse who had access to those assets must reimburse the other spouse for their half with no explanation required as to where the missing assets may have gone.

An Illinois divorce court “shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors, including:

…

the dissipation by each party of the marital property” 750 ILCS 5/503(d)(2)

“Dissipation is defined as the use of marital property for one spouse’s sole benefit for a purpose unrelated to the marriage at a time when the marriage is undergoing an irreconcilable breakdown.” In re Marriage of Tietz, 605 NE 2d 670 – Ill: Appellate Court, 4th Dist. 1992

Unfortunately, missing income for the purposes of establishing support is not this simple and requires an evidentiary hearing to impute the spouse with missing income at their actual income.

“The court may impute income to a party only upon conducting an evidentiary hearing or by agreement of the parties. Imputation of income shall be accompanied by specific written findings identifying the basis or bases for imputation using these factors.” 750 ILCS 5/505(a)(3.2b)

Building that notice of dissipation and preparing that evidentiary hearing to impute income may require the expert advice and/or testimony of a forensic expert. Most competent divorce lawyers should be able to adequately navigate these financial issues and trap their opponent in their own lies at deposition. 

Business Financial Red Flags When Considering Hiring A Forensic Accountant In An Illinois Divorce

Ironically, business financial records are usually the clearest of all the documents so far discussed. While the business financial records are in the sole, exclusive control of the business owning spouse, the business owning spouse never thought their spouse would get this far into their finances. The business’s records usually remain clear if the business is any kind of success. 

1. Income taxes cannot be reconciled against the business’s financial statements.
2. Any unreported income in the business. 
3. A decrease in business income while business expenses remain the same. 
4. A decrease in revenues that correspond to the same approximate date when the divorce was filed. 
5. An increase in expenses that correspond to the same approximate date when the divorce was filed.
6. An increase in liabilities that correspond to the same approximate date when the divorce was filed.
7. Improperly valuing assets on the business’s balance sheet.
8. Moving money in between the business and the owner. A successful business has money move only one way: from the business to the owner. An unsuccessful business has money move only one way: from the owner to the business. Money going both ways is illogical and the sign of some kind of deception. 
9. Personal expenses paid by the business. Whether personal expenses are being paid by the business before the divorce or after, the business owner’s true income must be determined. 
10. Related party transactions. Relatives and close friends as employees or vendors raises the opportunity that those parties are funneling money for the business owner spouse. 
11. Commingling funds between multiple businesses. Business owners love owning multiple businesses. Moving money between those businesses is usually illogical. The business owner should be funding the businesses exclusively. 
12. Creation of new business entities. Starting a new business entity during a divorce is highly illogical as that new business will be a divisible marital asset. Why is the business owner opening new businesses?
13. No more paycheck. Business owners are supposed to pay themselves “reasonable compensation” for their efforts. Business owners often eliminate their own check as a way to eliminate or obfuscate their true income. 
14. Transfer ownership or control of a business. Businesses held between partners will often see a divorcing partner “walk away” from the business. Alternatively, a business owner will put the business in a relative’s name. Either way, this is always a fraud and grounds for dissipation of assets at the very least. 

Virtually any of the business financial red flags are sufficient to warrant hiring a forensic accountant. Judges will make the final calls regarding assets, debts and incomes. 

Why Business Owner Divorces Need Forensic Accountants

Businesses are a completely foreign territory to a judge who has eschewed the world of finance for the higher principles of justice. Judges will be frustrated with a lawyer laboriously taking them through each step of a business transaction. A lawyer cannot definitively say, “it’s my opinion that this fraud,” while presenting evidence. Only an expert can opine.

“The expert may testify in terms of opinion or inference and give reasons therefor without first testifying to the underlying facts or data, unless the court requires otherwise” Ill. R. Evid. 705

Judges love to defer to an expert such as a forensic accountant who can accurately summarize what money is missing, why they think it’s missing and what should be done about the missing money. 

Is A Forensic Accountant Worth The Cost In An Illinois Divorce?

Forensic accountants are a significant expense but at the end of the above analysis, you should have an estimate of what hidden money is at stake. My rule of thumb is that a forensic accountant should not cost more than 1/6 of what you believe the hidden money is worth. You will only recover half that money (your marital share) and the highest possible fee for that recovery (if this was done via contingency) would be 1/3 of all moneys recovered. 

For example, if you believe $ 300,000 may be missing from your spouse’s financial records, you will likely recover at most $ 150,000. That easily justifies a forensic accountant’s fee of $ 15,000 but anything over $ 50,000 (including the associated attorney’s fees) may not be worth the expense of uncovering possible hidden assets.

Who Pays For The Forensic Accountant?

It will come to great surprise to the spouse hiding assets and income that they will likely have to pay for the forensic accountant. 

“Interim attorney’s fees and costs may be awarded from the opposing party, in a pre-judgment dissolution proceeding in accordance with subsection (c-1) of Section 501” 750 ILCS 5/508(a)

“In assessing an interim award, the court shall consider all relevant factors, as presented, that appear reasonable and necessary, including to the extent applicable:(A) the income and property of each party, including alleged marital property within the sole control of one party and alleged non-marital property within access to a party;(B) the needs of each party;(C) the realistic earning capacity of each party;(D) any impairment to present earning capacity of either party, including age and physical and emotional health;(E) the standard of living established during the marriage;(F) the degree of complexity of the issues, including allocation of parental responsibility, valuation or division (or both) of closely held businesses, and tax planning, as well as reasonable needs for expert investigations or expert witnesses, or both;(G) each party’s access to relevant information;(H) the amount of the payment or payments made or reasonably expected to be made to the attorney for the other party; and(I) any other factor that the court expressly finds to be just and equitable.” 750 ILCS 5/501(c-1)(emphasis mine)

The party needing a forensic accountant invariably does not control the money in the relationship and the court needs to be reminded of that.

“This…interim fee system [is] an attempt to address the problem of the “economically disadvantaged spouse,” where one spouse uses his or her greater control of assets or income as a litigation tool, making it difficult for the disadvantaged spouse to participate adequately in the litigation.” In re Stella, 818 NE 2d 824 – Ill: Appellate Court, 1st Dist., 2nd Div. 2004

Do You Want A Court’s Expert Or A Controlled Forensic Accountant In Your Illinois Divorce?

There are two types of forensic accountants that can be hired. You can independently hire a forensic accountant or you can ask the court to appoint a 503(l) financial expert to get to the bottom of the finances in your divorce. 

A court can appoint its own forensic accountant.

“The court may seek the advice of financial experts or other professionals, whether or not employed by the court on a regular basis. The advice given shall be in writing and made available by the court to counsel. Counsel may examine as a witness any professional consulted by the court designated as the court’s witness. Professional personnel consulted by the court are subject to subpoena for the purposes of discovery, trial, or both.” 750 ILCS 5/503(l)

The advantage of a 503(l) appointed forensic accountant is that the court will definitely split the cost between the two parties and will be partial to the 503(l) forensic accountant because they are the court’s witness.

A 503(l) forensic accountant is under no obligation to investigate your spouse’s finances per your requests. At any time, a 503(l) forensic accountant can say “that’s not worth looking into, in my opinion.”

In contrast, a controlled forensic accountant is your employee and must investigate anything you request. A controlled forensic accountant is more likely to be paid for exclusively by the party controlling them. 

The Difference Between A Business Valuation Expert And A Forensic Accountant In An Illinois Divorce

If the business was started during the marriage, the business is a marital asset and can be divided. 

“‘[M]arital property’ means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 5/503(a)

Valuing a business requires an expert.

“Placing a fair market value on the professional corporation is an art, not a science, and the court must rely on expert witnesses to assist it in this difficult task. There is no exact formula that can be applied, so the trial court must rely on experts who may differ significantly in both methodology and valuation. The trial court must consider the relevant evidence before it; determine the credibility of the experts, the reasonableness of their testimony, the weight given to each of them, and their expertise in the particular area of valuation; and then determine fair market value.” In re Marriage of Gunn, 233 Ill. App. 3d 165, 183 (Ill. App. Ct. 1992)

That valuation expert must determine ALL of the businesses assets and income. That includes any hidden assets or income. Therefore, an expert business valuator is a perfect substitute for a forensic accountant. The only caveat is that if hidden assets and income are suspected, the business valuator should also have forensic accounting experience.

If the business is non-marital, establishing a value on the business may be necessary for determining an equitable division of assets but a precise valuation is probably no more illuminating than an approximate valuation. In that case, a pure forensic accountant alone may be sufficient to properly establish the income of the business owner for support purposes. 

After confirming that a forensic accountant should be hired, the next step is to determine who should be hired as a forensic accountant which will be the subject of a future article. 

If you are considering or are currently in complex financial divorce litigation, contact my Chicago, Illinois divorce law firm to speak with an experienced Illinois divorce lawyer. 

Russell Knight is a divorce and family law attorney based in Illinois with 20 years’ experience focusing on complex, business owner divorces.