In simple cases, identifying and valuing assets and determining the income available for support is generally a straight forward process. This article addresses cases with complex financial issues which may or may not involve large marital estates with funds to pay fees. A complex case exists when:
These cases generally require the services of a forensic accountant to render an opinion on the financial issues in dispute. Often, the issues involve income, cash flow, lifestyle and the valuation of assets. If testimony is required, the expert must render an opinion based on sufficient evidence and sound accounting, financial and valuation theory and prepare a report that can withstand cross-examination. In complex divorce litigation, expert witness services are difficult to provide in a timely and cost effective manner. First, because of its adversarial nature, matrimonial litigation is time consuming and costly. Second, protracted discovery including the investigation of allegations of unreported income and perquisites make the process even more costly. Third, the parties sometimes have unrealistic expectations which cause them to take unreasonable positions thus protracting the proceedings even further. If the experts form very differ opinions of asset value and available income, the time and costs multiply.
Litigants often complain that reports take too long to prepare and are too costly. However, litigants also want a thorough, well-documented accounting review set forth in a report, which the expert can defend in court. The challenge is to do the work required to form an opinion in this most difficult setting within the time frames prescribed by the Court and with reasonable costs considering the size of the marital estate and the issues in dispute.
In these matters, litigants complain that accounting and legal fees are out of control. The professionals complain that they are not paid. Courts hold frequent case management conferences, appoint forensic accountants, mediators and Blue Ribbon Panels, but nothing seems to work. No one seems satisfied with the process. We believe that a process we term “Forensic Mediation” can be part of a solution. Forensic Mediation is an interactive process in which the discovery, income determination and valuation are broken into manageable pieces and the forensic investigation is integrated with the mediation process. This process will work for matters with complex issues even if the parties wish to limit discovery based on a cost benefit analysis.
Appoint a mediator at the start of case so that discovery, asset valuation and income determination can be addressed in an interactive fashion. The mediator could or could not be formally appointed as a discovery master depending on the circumstances of the matter. The mediator, joint or individually retained forensic accountants, attorneys and parties, communicate frequently to address the forensic and valuation issues in stages. In the traditional forensic investigation, the forensic accountant works independently to accomplish his/her tasks while the Judge, mediator, parties and attorneys await the results. In Forensic Mediation, the forensic accountant works in stages and involves the mediator, attorneys and parties at each step in the process. Their involvement should be to define the discrete issues to be addressed, approve funding for each phase of the process and accept or reject each stage of the investigation.
Yes, with the guidance of the mediator, the parties, attorneys and the joint or individually retained forensic accountants determine the work needed to mediate or litigate the matter.
Where appropriate, the forensic accountant can perform a preliminary assessment of the case. The goal of the preliminary assessment is to determine the complexity of the matter and the budget required to address the issues to be resolved and to ultimately prepare a report. Based upon this assessment, the forensic accountant can then explain the cost benefit of moving forward. This explanation can form the basis for the parties’ decisions on litigation strategy, but it also can enhance the prospects of settlement. For example, a litigant may claim that their spouse has hidden $25,000 over three years totaling $75,000. The forensic accountant should explain the cost to investigate this allegation and the maximum equitable distribution benefit to the party of $37,500 (50% of $75,000). In a case involving allegations that a spouse who used to earn more but now earns less, the records may not exist to determine whether the decrease is voluntary and/or caused by market forces or the cost of performing the analysis may exceed the benefit. Under this scenario, the parties may decide not to proceed with an investigation.
For instance, if an individual admits to earning $60,000 a year and it can be determined through the interview process and analytical review that the outer range of his income approximates $100,000, the differences in alimony and child support can be determined.
Similarly, the forensic mediation process can be used when the value of a business is in dispute. Typically, valuation experts form their conclusion of value independently before advising the mediator, attorneys and parties of their opinion. If the difference is extremely large, it may be difficult to compromise. To reach their final opinion of value, the experts draw conclusions on the critical components of a business valuation such as reasonable compensation, income to capitalize, discount rates and growth rates. These decisions can lead to a large difference in the conclusion of value . In forensic mediation, these critical components can be addressed separately before the entire valuation is completed. In this regard, the difference in the conclusion of value between the two experts can be reduced, making resolution easier. For instance, if one expert concludes that the income to capitalize is $1,000,000 and the other opines that it is $600,000, there will be a large difference in the conclusion of value between the two experts based on this one issue. The difference increases because the same holds true for each of the critical components. Thus, if each of the critical components is addressed in forensic mediation, the difference between the two valuations can be eliminated or reduced.
It is critical to quantify what is in dispute and to do so as early and as inexpensively as possible. Cost benefit analyses can be performed throughout the case so that the litigants can choose the level of service they can afford. In many cases, a limited financial investigation is warranted because the issues involved are not material. Under this arrangement, the forensic accountant should advise the parties whether sufficient data gathering and analysis have been performed to prepare a report for court. If the expert believes that professional standards cannot be met, it should be indicated that the work product is for settlement purposes only.
Dividing the process into stages can also increase the efficiency of the discovery process. For instance, if income is to be the first issue addressed, those documents would be produced first. The documents could be further segregated into time periods: one or two years could be analyzed first and the results reported. If all parties agreed with the findings, the forensic accountant can move on to the next issue.
Forensic Mediation involves a mediator in the discovery, analysis and valuation stages of a case rather than when this process is complete. In so doing the process can be divided into pieces and short circuited where appropriate. This strategic approach allows the attorneys to be in control of their matter and enables the litigation process to proceed faster and facilitates the resolution of the matter at an earlier stage. This will help attorneys and experts provide high-quality, timely, cost effective services.
Author: William J. Morrison, CPA, ABV/ CFF | email@example.com
Reprinted with permission from the January 22, 2018, issue of the New Jersey Law Journal. © 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.