August/September 1998

Dealing with Dishonest Spouses

While most people are not inherently dishonest, divorce sometimes brings out the worst instincts in some spouses. The average financial crime is motivated purely by the perpetrator's desire for financial gain. The motivations to be dishonest in a divorce environment are often more complicated. A spouse may have the desire to cheat his or her spouse out of their fair share of marital property, to hurt, humiliate, and to emotionally or financially devastate the soon to be ex-spouse.

How do Spouses Cheat?

The most common situation related to underreporting of assets and income occurs when a dishonest spouse controls a closely held business. Ways to manipulate financial information and results are only limited by the spouse's imagination. There are, however, recurring patterns in how business owners understate income, assets, and the related value of their closely held businesses. These patterns generally fall into two broad classifications.

Questionable Transactions

• Unreasonable owner salary levels
• Automobile write-offs
• Personal expenses written off as business expenses
• Petty cash abuses
• Inventory abuses
• Large one-time purchases written off
• Things that temporarily drive a business into decline

• Self-dealing and inter-family dealings
• Sudden increases in cost of supplies
• Sudden appearance of new suppliers or new customers
• Sudden decrease in gross income
• New or hidden bank accounts
• Delaying income until after the divorce
• Fraudulent bad debt write-offs
• Unreported cash transactions

Personal Lifestyle Investigation

A personal lifestyle investigation can be thought of as a "sanity check" to financial representations made by a dishonest spouse. Could the spouse live at the level that he or she is living on the level of reported income? Any shortfall between reported income and lifestyle expenditures should sound a warning.

Forensic Accountant's Role

When dealing with a dishonest spouse, the attorney and accounting expert need to work together closely from the outset of a case. The types of data needed will often exceed information regularly obtained in mandatory disclosures and the methodologies used by the accounting expert will need to be cost effective and coordinated with the discovery process. Successfully uncovering the omissions of a dishonest spouse requires a high level of experience and tenacity by the accountant/attorney team.