Hot Topics

Forensic Accountants Role in the Cost-Benefit Analysis in Divorce
By Matt James, CPA/ABV/CFF, MAFF


Forensic Accountants Role in the Cost-Benefit Analysis in Divorce
By Matt James, CPA/ABV/CFF, MAFF

Most attorneys aren’t numbers people. They are strategists, networkers, brawlers—answering a myriad of client demands while always considering the cost of each approach. Forensic accountants help cut through the fat to answer the driving question, “is this claim or case cost effective for the client from an accounting standpoint?” If a forensic accountant is asking, “what are we doing here?” It’s time to ask, “does the cost outweigh the benefits of the claim or case?” A forensic accountant assists the legal team and the client in making an informed cost-benefit decision, which is a critical step towards maximizing results while ensuring the cost of the process does not outweigh the benefit.

The cost-benefit analysis should begin at engagement and continue throughout the case as the facts change and additional information is obtained. Keep the forest in mind and don’t get lost in the weeds! Passionate clients can bring so many details to the attention of attorneys and forensic accountants, a clear-headed filter is vital. Stay focused on the analysis. The numbers speak to the best interest of the clients as well as the legal team. From engagement to discovery, to hearings, mediation, and most especially before trial, the cost-benefit analysis can play a major role in progressing and/or settling the case—as it is always important to avoid incurring unnecessary time and expense in court when similar results can be obtained in a more time and cost-efficient manner.

So when should one hire a forensic accountant? Well, it is important to first determine what financial issues exist. Is alimony and/or child support at issue and is a spouse or parent’s income going to be disputed? How much discovery is involved? Do assets, such as a business, need to be valued? Are there marital portions of non-marital accounts that need to be valued? Is active appreciation of a marital asset at issue? Depending on the attorney’s firm’s billing structure and internal procedures, forensic accountants could be more cost effective getting involved from the start of the case in handling discovery organization, requests, responses, financial affidavit, and missing documents lists. For example, it might be best for the forensic accountant to prepare the financial affidavit, instead of the attorney’s firm preparing a preliminary one that a forensic accountant has to amend later.

One suggestion in keeping costs down while maximizing results is to retain a forensic accountant for a limited scope analysis or calculation. The client could save money by investing in a forensic accountant early in the case for a limited task, instead of litigating for months and spending more on legal fees because the parties are unable to determine the financial unknown of an issue without assistance of a forensic accountant. . The forensic accountant doesn’t have to handle discovery, financial affidavits, equitable distribution schedules, income, alimony and child support calculations if the scope is limited to specific tasks. Many cases have one or two issues that make up the case and the rest of the pieces of the case fall into place once those issues are resolved.

Stay within the relevant ranges of outcomes in court, then factor in the cost of the process and risk of those outcomes. As attorneys and forensic accountants perform their analysis of each issue, think of the realistic outcomes of best day and worst day in the courtroom. Clients like to push the professionals outside the relevant ranges of outcomes, but the professionals must guide the clients back into the relevant ranges to avoid giving false hope of an unlikely outcome. Manage expectations. After factoring the best day, worst day, and cost of the process, both sides of the case should start narrowing closer to a reasonable settlement that avoids unnecessary fees, lost time, and negative emotional impact on themselves and children by not settling the case.

The attorney and forensic accountant should assess the following in their cost-benefit analysis (sometimes at a high level, knowing that the exact numbers are not available to assess):
(1)Equitable distribution. Ballpark estimate the total assets, liabilities, and marital vs. non-marital in the client interview. This will help guide the areas of focus and what is needed from a forensic accountant. How complex? How many components? Business involved? Non-marital assets and calculations? What is the value of any claims that will be argued? Include the cost to do the work necessary to support the claim and defend it. What is the likelihood of success? Draft a game plan and steps needed to achieve the game plan. Focus on the big-ticket items if the cost-benefit doesn’t make sense for the smaller issues or issues that have little chance of success in court. As the case progresses and estimates become real numbers, reassess the game plan as necessary.
(2)Alimony and child support. After estimating the incomes and imputations of income for the parties, figure out the alimony term exposure, how many kids and child support length. Estimate expenses. Do we have an ability to pay issue? Is the focus going to be on percentages of income and not need? If so, run a couple scenarios at different percentages levels. How many years and total exposure? What is the total value of all alimony and/or child support payments? Compare the alimony and child support numbers at different levels of income and alimony levels.

After the numbers are run, the realization of what is worth battling for starts to become clearer. That, in turn, makes the job easier for the attorney as well. Manage client expectations; don’t give false hope. Giving an honest analysis predicting realistic expectations assist clients in making informed decisions for their best interest. Come up with a game plan and stick to it.

Attorneys are the quarterbacks of the case; forensic accountants are the wide receivers. The wide receivers help move the ball down the field but need good communication with the quarterback and the client to maintain efficiency. That is why it is also important to establish reasonable expectations for the client as to the costs of an accountant, as surprises are seldom a good thing. Maintain case efficiency with forensic accountants’ assistance in continuous cost-benefit analysis. Your client will thank you.