The Quality of Business Valuations Depends on the Strength of Forensic Accounting
By Stanley Foodman - Foodman & Associates, P.A.
When a business is part of marital assets in a divorce proceeding, the level of complexity can multiply along with the financial stakes. Both sides want a fair distribution of assets, whatever each party believes that to be. With so much at stake — the financial security of children and the parties’ quality of life — nowhere is a good business valuation more important than in family law. The actual value and quality of that valuation depends on the breadth and depth of the forensic accounting used in the process.
Key information discovered through forensic accounting can affect the valuation, and even alter case strategy. Experienced family lawyers and CPAs know that marital dissolution could also be described as complex commercial litigation in the venue of the family courts. To be sure, much more than assets are involved in the ending of a marriage, and the two practice areas are vastly different. However, assets are as central to every divorce as they are to disputes between corporations and business partners. Where human beings, money and emotions are involved, things may not be as they appear — even numbers.
At times, business records available for the purpose of business valuation are not without “creative” bookkeeping. For example, small business owners routinely enhance their personal income by paying themselves personal perks from their business accounts. They use those perks as expenditures, a practice not allowed under the Internal Revenue Code. This practice and others like it can lead to bigger discoveries that can impact the valuation and the case.
Take the case of a divorce attorney in the U.S. Virgin Islands who was attempting to win a fair and equitable financial distribution for his client, who happened to be the wife. Her husband was the principal of a company registered under the island’s Economic Development Company statute. The company was filing taxes as an S corporation.
A closer look at the business revealed that the only other shareholder was a foreign individual, a violation of U.S. Virgin Islands S corporation regulations. The husband was hiding cash flow from his wife by transferring it to his foreign partner as prohibited shareholder distributions. He was also hiding assets by investing corporate funds in the construction of a large home in the name of the company.
These discoveries effectively turned the case on its head. The husband, now facing potential tax code violations, was now more willing to negotiate. Both sides agreed that the business valuation was no longer important.
Based on the value of forensic accounting, the wife’s attorney was able to negotiate a pre-trial settlement of $2 million — $1 million in cash and the corporate home valued at $1 million.
Cases like this one illustrate the game-changing potential of forensic accounting in cases involving business valuations.
By Stanley Foodman
Foodman & Associates, P.A.
1201 Brickell Ave., Suite 610
Miami, FL 33131
South Florida Legal Guide - Midyear 2011 Edition