Slow economy helps divorcing business owners hide assets



Ken Froese for The Lawyers Weekly

Divorce Lawyers Help Protect Business Assets

Understanding what Fraud is aids in Discovering Hidden Business Assets

Many people do not understand what fraud is, particularly when business assets are involved. Divorce Lawyers realize that the lack of knowledge that you may have about business assets makes you an easy target during a divorce. Consequently, your ex-spouse may take advantage of you by hiding business assets through false claims and lies. So, in order to protect business assets your Divorce Lawyer lets you know when it is best to consult a forensic accountant.

Divorce Lawyers normally help you understand the value of tangible and intangible business assets with the help of forensic accountants. They will also aid in helping you recognize what fraud is. Experienced Divorce Lawyers typically assess your current situation and show you how to protect business assets strategically. Even if you are not familiar with the business world, Divorce Lawyers will help you know when you are being led astray and whom to consult. Through the help of a Divorce Lawyer you can avoid harming yourself economically in this delicate matter. Use Canadian-Lawyers.ca’s FREE online legal directory to find a Divorce Lawyer that is qualified to ensure that your entitled business assets are split fairly during your divorce.

Divorce Lawyers Ensure Fair Settlements of Business Assets During Hard Economic Times

During unfortunate economic times, it is even more challenging to recognize what fraud is and to guarantee a just settlement. Even if the economy is slow, business owners tend to cut management layers to increase profit in an attempt to make the same profit as before the slow economy hit. The value of some business assets may also increase. As a result, Divorce Lawyers make the best effort to assess every business asset agreement thoroughly before having you commit to it. The Lawyers Weekly article by Ken Froese explains that Divorce Lawyers successfully help identify what fraud is with the aid of forensic accountants when business assets are involved. For more information about how to protect business assets contact your local Divorce Lawyer.

September 25, 2009

Lawyers need to understand the changing nature of fraud in a slow economy, as many of the trends affect the assets of individuals involved in divorce proceedings.

Consider a condominium tower developer who pays part of its fee to the contractor not in cash, but in condominium units. This lets the developer conserve cash and point to more units as having been pre-sold. It may be good for the contractor too, who can flip those units for cash when they rise in price. It's a legitimate business practice.

However, it has the potential to become fraudulent if the contractor fails to declare the income from the unit sales, defrauding the income tax authorities - and also hiding assets and income in a divorce proceeding.

But if the condominium market softens and prices go down, rather than being able to flip the units at a profit, the contractor may be forced to take a loss on their sale. It's hard to hide that kind of loss, particularly when the contractor is suddenly scrambling for cash to meet obligations.

Like rocks in a tidal pool emerging when the tide goes out, a slow economy tends to expose some types of fraud.

Typical of this are Ponzi schemes, which count on new participants' money to cover disbursements to earlier-joining participants. In a slow economy, fewer people have money to invest so it is harder to find new participants to keep the scheme afloat. It is also more likely that current participants will want to withdraw their investment to meet a need for cash - causing the Ponzi to collapse more quickly than it would in a better economy.

Blame it on the economy

In a divorce situation, setting a value on the marital assets is done through establishing the difference in value of assets held at the date of marriage and the values as of the valuation date, which is most commonly the separation date.

Forensic accountants see a wide range of means by which one spouse will attempt to show minimal assets as of the valuation date. The slow economy can be blamed for many things - real estate that has declined in value, stock portfolios that have wilted or artwork that is now worth a fraction of its former worth. It is important to verify such claims of decreased value, through independent valuation in some cases, to see if there is an attempt to hide assets.

If one spouse has a high degree of control over a business either through being sole owner or a controlling shareholder, the possibilities for further "losses" in both assets and income are much greater. While in good economic times it might be harder to credibly argue that the business is worth much less than it was before, a slow economy makes such claims more believable.

Given the difficulties faced by may businesses in Canada today, it may very well be the case that the company has fallen on hard times and is not worth as much as it was even two years ago. But in a divorce proceeding, it pays to look closely to see if the claims of hardship are exaggerated.

For example, the business owner may decide to move some future expenses into the present, perhaps by paying in advance for a marketing campaign that will not launch until the next fiscal year. Or the company may arrange with a customer to make a purchase now and the product will be booked as sold - with payment purposely delayed as a way to conceal income.

Employees further down the organizational chart may also have increased opportunities to benefit from fraud, with income that they may attempt to conceal. In a slow economy, management layers tend to disappear, along with the oversight function that the individuals in these roles used to provide. There may have been some downsizing, causing people to be overstretched in their responsibilities, leaving fewer people to reconcile inventory, check accounts and perform other verification functions.

As well as having increased opportunities for fraud, employees may be more motivated to indulge in it. They may rationalize that "The company may go out of business - I'd better take what I can before I lose my job" or "I'm working harder and getting paid less - I deserve more."

In such situations, the person with an illicit income supplement may be concealing that income from his or her employer, the tax authorities and spouse.

Digging deeper

Because spouses with control over a company have some of the greatest opportunities to conceal income, it often pays to dig deeper into the corporate records to find unusual or questionable transactions. A sense of the business is often helpful when considering, "Does this business expense make sense?" If not, it may be because of an attempt to hide income or assets in a divorce proceeding.

Bear in mind that a slow economy means that the business may be going through legitimate hardship - but that hardship may not be as much as is claimed. It may be appropriate to ask the court to agree that to build an accurate picture of the marital assets, investigators should have access to the accountants' working papers. This record may provide a paper trail leading to a fraudulent attempt at asset or income hiding.

Working with a forensic accountant

In working with a forensic accountant to uncover the truth about marital assets, it may be best to take a phased approach. The first phase will take a quick look at the situation to determine if there is a good chance that further investigation is warranted, and if appropriate develop a work plan for the investigation.

The next phases, if they are found necessary, can look deeper. It is helpful to build an understanding with the accountant about regular reporting of results during the investigation.

Forensic accountants with long experience offer the benefit of having worked on many similar cases. Their strength comes from the fact that many people trying to commit a fraud usually must learn as they go, "reinventing the wheel" each time. The accountant, on the other hand, has the benefit of training and experience with similar cases to help uncover the truth.

Ken Froese is senior managing director of Froese Forensic Partners Ltd. in Toronto.


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