May 17, 2017

The Effect of Forensic Accounting and Business Valuations in Everyday Life

Barry Pulchin
May 17, 2017  |  Forensic Accounting

One of your friends and/or clients got married twenty-five years ago when they were twenty.  Along the way, the couple jointly purchased a beautiful ten room home in which they and their five children lived.  The children, who are of various ages, are still in public school and two are in college.  As an entrepreneur, the husband, with a group of friends, opened a car wash business five years into the marriage which grew to consist of six locations. 

The car washes are mainly a cash business which generated many perquisites for the couple enabling them to go on lavish vacations and to drive expensive cars.  The husband, who will be called the titled spouse, got involved with the wrong people and through his many indiscretions caused his wife file a suit for divorce.  Of course, at the same time, he was not showing up for work and his partners wanted him out of the businesses.

The titled spouse was now in a predicament.  He had to hire counsel for his divorce and separate counsel for his owner dispute.  As competent counsel frequently does, they both called in an experienced forensic CPA accountant who is also a business valuator. 

Obtaining the couple's personal income tax returns, the forensic accountant found that the couple was reporting taxable income of $32,000.  Their cost of living was in excess of $150,000.  This happens when a person utilizes unreported cash income for their lifestyle.  Of course, the businesses had to be appraised for the divorce and the owners' lawsuit against the husband.

During the course of the engagement, the forensic accountant found unreported income, undisclosed distributions to the partners, perquisites paid for by the business for personal expenses and even assets hidden from the untitled spouse.

The moral of the story is that you never know what life will bring and that you may win in the short term but, under adverse conditions, you may lose in the long term. In other words, the car wash owner got taken to the cleaners.