Divorce assets hard to hide

DIVORCE generally leads to financial misery. In a common scenario, a married couple with two children and above-average household earnings may have needed most, if not all, of their disposable income to maintain the lifestyle to which they were accustomed.

After the divorce, the same level of income and wealth (the latter perhaps reduced in respect of legal costs) may have to support two households. The pressures will be great, and for a reasonable solution to be achieved, it is essential that both parties provide full disclosure of their income and assets.

The court may take into account in determining the final settlement various factors, including the financial needs, obligations and responsibilities of each of the parties to the marriage and the standard of living enjoyed by the family prior to its breakdown.

But whether the final settlement takes the form of a lump sum or periodical payments, the aggregate level of income and wealth of the divorcing couple will be the crucial factor. Therefore, in an acrimonious divorce, the husband may have a strong incentive to conceal financial resources.

If solicitors acting for the wife suspect that there is deliberate understatement of income or wealth, they may instruct an accountant to investigate the husband's financial affairs. An accountant will be entitled to inspect financial documents of the husband going back over a period of several years, and will prepare a report on the husband's financial affairs.

Unsophisticated methods of sheltering wealth include the transfer of assets overseas and the making of a substantial gift to a third party. Unless the gift or transfer is made over a long period of time in small cash instalments, it may be a relatively straightforward task for the investigating accountant to obtain the required evidence.

Possible indicators of such actions include a sale of investments or withdrawals from bank or building society accounts, an increase in a residential mortgage, or taking out a loan to provide the capital for the gift or transfer. Where there is sufficient evidence of this nature, the court may consider it to be unreasonable conduct and make due allowance in the final settlement.

The husband's theoretical opportunity to hide income and wealth may be considerable if his principal assets include a controlling interest in a company or an unincorporated business. It is unlikely that the court would require a sale of the business, particularly if it represents the husband's main source of income. However, the potential earnings of the business and perhaps its ability to raise new capital, which may be largely determined by earnings, are likely to be the most important factors. Hence, the husband may attempt to suppress the recorded profit levels in the accounts of the years immediately prior to the divorce proceedings.

Auditing is not an exact science, and an audit may not reveal all matters of significance to the divorce settlement. Therefore, the investigating accountant will look behind the accounts and consider their consistency, particularly in terms of recorded turnover and profit levels, with his own knowledge of the business and accounts relating to earlier periods.

Hallmarks that may alert the investigating accountant to a deliberate attempt to suppress recorded profit levels include:

o A reduction in recorded turnover levels. This may imply unrecorded cash takings or the diversion of funds to an entity in which the husband does not have a disclosed interest.

o Sales of assets at less than full value to an individual connected with the husband.

o Increased remuneration, bonuses or one-off payments to third parties who are not on an "arms- length" basis. These will also reduce current and potential future profits.

o Decreasing stock levels. The effect of progressively reducing recorded stock values in the accounts would be to defer the recognition of profit to later periods.

Michael Taub is senior litigation support partner at chartered accountants Casson Beckman.