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How To Find the Cash - The Abandoned Spouse And The Family Business
It's common procedure to utilise the services of an independent expert, be they accountant or property valuer, to provide a report on the value of items included in an asset pool. This report can then be used to support claims for division of assets either through mediation or application to the Family Court.


INTRODUCTION


INDEPENDENT REPORT BY ACCOUNTANT OR VALUER 

We certainly have experience in this type of request and are more than happy to provide our services; however, we believe that there is a service that we can provide that is not always provided by other experts, and that is the valuation of undisclosed and undervalued assets.

UNDISCLOSED ASSETS NEED TO BE IDENTIFIED AND VALUED

Where there is a suspicion or indication that assets and income have not been disclosed to the other side, we are often called upon to provide an opinion as to both the existence of these assets and an indication of their possible value.

The ease with which these assets may be located and valued will depend to a large extent on the methods that have been used to hide them. It's a bit like tax planning - the more resources you have at your disposal such as professional advisors, access to international facilities and so on, the better the scheme!

DISCLOSED ASSETS NEED TO BE ANALYSED TO REVEAL THEIR TRUE VALUE

One thing we've come to know over the years is never take anything at face value, and carrying out a valuation of assets is no exception.

We look at the assets that have been disclosed and determine as a starting point whether or not:

  • The value given seems fair and reasonable; 
  • There would be any circumstances which would change the value of this asset; 
  • Other parties are involved with the asset, eg partners, shareholders 
This enables us to "weed out" those assets that require further investigation and then plan our approach to the valuation as a whole. It also enables us to obtain instructions from the client as to whether to proceed with such an investigation as it would of course increase the costs.

HOW DO WE FIND THE CASH?


INITIAL INFORMATION PROVIDED BY BOTH SIDES

There will be some assets which are known by both sides and there is no dispute on the existence of these items. There may, however, be a large discrepancy between, say, the husband's estimated value of the family business and the wife's value. We try and determine straight off why there is a large discrepancy as this often leads to areas that need to be investigated. For example, the wife may have a larger value in mind for the shop, because she knows that the husband pockets $200 cash per week. The husband may have a lower value because he is basing the value on declared income shown in tax returns.

In the first instance, such information may only be allegations with little evidence; nevertheless it provides a starting point.

RESEARCH INTO ALL ENTITIES

Once we have an outline of what entities are involved - companies or individuals - we conduct full past and current corporate and business name searches, land titles searches, as well as searches of directorships and shareholdings.

ANALYSIS OF FINANCIAL INFORMATION

Where possible we try and obtain as much financial information as possible - financial statements, tax returns, budgets, loan applications are all good sources of information regarding the financial affairs of a company or individual. We also like to review financial information for at least the past five years where possible, since this gives us a feeling for where that company or individual should be positioned now.

The types of review we carry out, especially in regard to a business, might include:

  • Comparison of formal to informal financial figures (eg income tax return to budgets or loan applications) to determine whether there are any sources of income not declared; 
  • Review of financial performance over the last five years - 
  • has income dropped recently without a corresponding fall in expenses; 
  • have wages increased substantially without a corresponding increase in productivity (are there ghost employees?); 
  • do the accounts show the debtors not being collected (with perhaps collections being diverted); 
  • Use of benchmarks to compare the financial performance with other businesses in the industry. 
  • Are the results and accounting methods consistent - in other words can we rely on the financial statements? 
  • Has the business been efficient in its operations or use of profits/assets, or is there room for improvement? 
  • What is the true value of assets disclosed in the balance sheet? 

REVIEW AND CONSIDER INFORMATION PROVIDED BY THIRD PARTIES

The difficulty in valuing undisclosed or undervalued assets is often that third parties are unwilling or unable to provide you with the required information. We don't have any direct legal standing in regard to those entities and we therefore rely on information that is either on public record or is supplied to us by the other side.

Once we can show a link between these assets and the party who did not disclose them, the next step would be to request this information via the solicitors.

In some cases, and to be frank if we're lucky, there will be assistance from third parties. These may even be friends or relatives who feel one side is being hard done by, and who are quite happy to provide additional information. This is sometimes inaccurate, and even the result of "Chinese Whispers", but again gives us an indication of the areas to review.

CALCULATE VALUE OF UNDISCLOSED ASSETS OR INCOME

The final step is to provide a valuation of the undisclosed or undervalued assets or income. This may be difficult, since the fact they have been previously undisclosed will probably mean that there is little documentation around to support a value. Even a demand from one side's solicitors to the other for production of documents may not be successful in obtaining all relevant information. In these cases, we would at the very least include a mention of the assets in our report and perhaps a range of values that would be applicable in the circumstances.

CASE STUDY "F"


FAMILY LAW MATTER

This was a Family Law matter, with Mrs. F not employed, and Mr. F being a sole practitioner with a couple of accounting practices and interests in other businesses. 

POSSIBLE UNDISCLOSED INCOME

We were told by Mrs. F that Mr. F was diverting income through trust accounts of his and other colleagues' practices and we were asked to see whether we had reason to believe this was the case. We were also asked to advise whether a sale price that had already been achieved for one of the accounting practices was, in fact, a fair price.

PRODUCTIVITY REVIEW OF ACCOUNTING PRACTICE

The records kept by the 2 accounting practices were at most adequate. They did not distinguish the income and expenses of either practice and it was impossible to isolate the income and expenses without a lengthy reconstruction of the accounts. We did not feel that this was warranted in light of the costs of same.

As part of our review of the records, it became obvious that the main accounting practice was not earning as much as it could. We compared the expected productivity of the principal and staff to the declared income and found that there could have been as much as $200,000 variance. We attributed this to the principal, who was the only professional who didn't maintain formal timesheets, and came to the conclusion that either he was diverting funds from the business or was not working very hard.

In fact, it turned out to be the latter. From discussions with Mrs. F and other parties, it was clear that Mr. F was running pretty much a "lifestyle" practice and essentially spent his time in the office managing the rest of the staff and marketing.

The result was that our valuation was higher than under an ordinary cents/$ approach to fees, because the firm had substantial unused capacity.

CASE STUDY "S"

LIQUIDATION

This was a liquidation of a car importer. It became obvious that we had a good chance of recovering some preference payments that had been made to creditors if we could show that the company was insolvent at the time the payments were made. We also decided to take action against a former directors for insolvent trading.

BOOKS AND RECORDS DESTROYED OR CONCEALED

The difficulty in establishing the insolvency of the company was the fact that the company's books and records were in a complete mess. The company in fact maintained at least 3 general ledgers, none of which agreed with each other, and most of the source documents were either mislaid, concealed or destroyed by the current director.

COMPLETE REWRITING OF ACCOUNTS

We ended up reconstructing the accounts for the company, based not only the documents that were provided to us but also:

  • Copies of bank statements obtained from the company's bankers; 
  • Copies of police statements (the director was convicted of fraud at around the same time); 
  • Correspondence with various external parties; 
  • File notes and facsimiles between staff members describing monies received and how to disburse them; 
  • Claims by creditors 
  • Discussions with creditors and other parties regarding various transactions; 
  • Post-it notes, faxed memos and scraps of paper contained in various files 
  • Trashed hard disks were recovered by specialists 

IDENTIFICATION OF QUANTUM AND TIMING OF LOSSES

From the reconstructed accounts we were able to identify the quantum and timing of losses incurred by the company as well as acts of fraud committed by the director and other offences committed under the Crimes Act and the Corporations Act.

From an in-depth analysis of these accounts we were able to:

  • Compare sales with purchases to calculate gross profits from year to year. In the 2 years before liquidation the company was suddenly making gross losses, indicating that cars had been sold for cash and not put through the company's books; 
  • Compare monies paid for registration and compliance fees with actual sales declared - this showed that the company paid for more vehicle registrations and compliances than were shown as being sold; 
  • Review registrations of vehicles and compare them to sale records and other documents - we found a number of vehicles that had deposits taken for sale from more than one customer at a time. 
  • Compare apparent assets/lifestyle of director and wife with the declared salary drawn from the company and determine whether this came from undeclared sales. 

We were then able to continue legal action for recovery of preference payments and for insolvent trading.

CASE STUDY "C"


REVIEW ON BEHALF OF ASIC

This was a request by the Australian Securities & Investments Commission to review the records of investments undertaken by a financial planner and determine whether funds had been misappropriated, so that ASIC could establish a framework for further enquiry to be carried out by them.

SUSPICION OF MISAPPROPRIATION OF FUNDS

We obtained from the financial planner all files relating to his clients. Comparison of these files with a list of clients and commissions indicated that a large number of files were missing, and our review of the existing files showed that they were maintained in a haphazard state. This straight away rang a few alarm bells, and we attempted to reconstruct the clients' investment portfolios and compare them with records held by the fund managers.

We found a number of client files where documents purportedly signed by the clients, ie giving authority to deal with funds, had what can only be described as inconsistences in the signatures, leading to a suspicion of misappropriation of funds.

AUDIT OF DOCUMENTATION RECEIVED FROM VARIOUS PARTIES

Our audit of the documents received from the fund managers as well as the files taken from the financial planner revealed substantial discrepancies in approximately 60% of the portfolios. The details of the discrepancies were provided to ASIC and they were advised to contact the individual clients to confirm the transactions and then build any case against the financial planner.

This case is a good example of "thinking beyond the square" and using a variety of information from a number of sources in order to build up the total picture. For example, we obtained copies of commission remittances paid to the financial planner. The commission was calculated on the transactions entered into by the planner and we were able to use the remittances to trace those transactions.

CASE STUDY "G"

FAMILY LAW MATTER

This was a family law matter where Mr. G claimed that various properties and cash holdings should be included in the asset pool, even though they were ostensibly in the joint names of Mrs. G and 2 children from a previous marriage, as it was claimed that the funds to acquire these assets were contributed by both parties.

ASSET BETTERMENT PRINCIPLES

Since the parties involved were individuals, records were incomplete and consisted only of some bank and investment transactions records and documents arising from the purchase and sale of properties. Accordingly, our review meant taking the assets as they presently stood and going back to the time of acquisition to try and reconcile where the funds for acquisition were sourced.

TRACING OF FUNDS IN AND OUT OF AUSTRALIA

Part of the investigation also included funds that had been transferred from Australia to Greece in the name of the wife, with some of those funds subsequently transferred to other members of the wife's family living in Greece.

CONSTRUCTIVE TRUSTS OVER A NUMBER OF YEARS

Most of the value of the assets was attributable to capital growth in property and investment values over a number of years. It was therefore a matter of determining where and when the initial funds had been sourced to acquire the assets. It was determined that the wife had in fact held the 1st property in a constructive trust for the 2 children of the first marriage. The funds had come from the husband who had died intestate, leaving 2/3 of the estate to the children and 1/3 to the wife.

The assets were therefore excluded from the asset pool, although the Judge did order an amount of $75,000 to be paid to the husband.

CASE STUDY "J"

BANKRUPTCY

Mr. J was made bankrupt as a result of his refusal to honour a personal guarantee made by him in relation to a family company which went into receivership. Mr. J was a man of apparent substantial means and it was thought that we would be able to trace the source of his income and enable sufficient funds to be paid to the trustee and in turn to the creditor.

OVERSEAS TRUST DISTRIBUTIONS

The major source of Mr. J's private income was as a beneficiary under a long-established family trust based in South Africa. Annual distributions were made to various bank accounts of beneficiaries located in Europe and the U.K. Mr. J denied at all times that he was entitled to the distributions.

TRACING OF FUNDS IN AND OUT OF AUSTRALIA

Our investigations involved tracing the flow of funds from South Africa to the banks in Europe and the U.K. and then to Australia. These distributions, at least for Mr. J, stopped at the time of bankruptcy. As part of our efforts to establish Mr. J's right to these funds, we made application for the trustee to be recognised as such in the U.K. which would have made it substantially easier to get access to the relevant banking documents etc.

TRACING OF BLOOD LINES FOR RACING STOCK

We were aware that Mr. J and his wife had apparent interests in a number of racehorses but we were told by Mr. J that the most valuable horses had been sold off prior to bankruptcy and that the remaining stock was not of any value. We obtained details of all horses held by Mr J and his wife through the Australian Jockey Club. These records in fact show the bloodlines of dams and sires and we recognised that in fact he had horses with a very healthy lineage and there was a good chance that these horses were worth considerably more than stated.

UTILISING INFORMANT TO OBTAIN BACKGROUND KNOWLEDGE

A very useful source of information was the bankrupt's son-in-law who obviously had a grudge against Mr. J or believed that honouring a financial commitment was more important than good relations with his wife's family. The son-in-law would ring our offices from America each week to check on the progress of the investigation and to let us know when monies were being paid out of the South African trust, etc.

We made a comment earlier about the direct relationship between the resources you have available to you to structure your financial affairs, and the difficulties encountered in unravelling those affairs. This case is a perfect example of that relationship - the trust had been established for many years with annual distributions of around $1 million, so was not insubstantial. As we got closer to recovering Mr J's assets, the matter was settled. While the settlement was less than we could possibly have recovered, the costs of unravelling Mr. J's affairs were becoming prohibitive.

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