Reprint from Family Lawyer Magazine with permission.
In this podcast, Florida forensic CPA Rod Moe is here to discuss the role of the forensic CPA in divorce cases – and the problem with taking a position that aligns with the party who retained the CPA (and is paying their bill).
Press the green “Play” button, below, to listen to the podcast.
My name is Diana Shepherd, and I’m the Editorial Director of Family Lawyer Magazine. My guest today is Rod Moe, a Certified Forensic CPA from Lake Worth, Florida, and he’s here to discuss the role of the forensic CPA in divorce cases. Rod Moe has 45 years of experience in tax and accounting, and he provides consulting services related to legal matters, including divorce, business damages, personal injury, and wrongful death. Aside from being a Certified Forensic CPA, Rod is also an accredited Business Valuator who serves as an expert witness in Dade, Broward, Palm Beach, Martin, and St. Lucie Counties in Florida.
What does being a forensic CPA mean? And why is that important for family lawyers?
Rod Moe: When the word “forensic” is attached to any expert, it means that their testimony is suitable before a court of law, and that that expert is an advocate for the truth and the facts, rather than taking a position solely based upon the client’s desired outcomes. The forensic CPA – or any other expert – should not be a hired gun; it is extremely important that we be credible and unbiased in the eyes of the court.
In your experience, do expert opinions often align with a party who retains them – even if that opinion stretches credulity to the breaking point?
Unfortunately, it does, at times, but it should not. My opinions do not vary from the facts that we have seen, and taking a position that is not supported by the facts, demonstrates to the court that you are not objective, that you are not credible, and that your opinion should probably not even be used by the court.
Have you found that this practice is rampant in family law litigation in your area? And if it is, what do you think could be done to ameliorate or even eliminate it?
There is enough of that kind of behavior that occurs, but the correction of this problem occurs in each particular trial. Because the judge listens to a testimony, and they can tell if it’s biased one way or the other. And also, reputation gets around [about] who is a credible, objective witness and who isn’t. And so that is the mechanism for the judges. And the lawyers involved in family law are the correct enforcers.
When added to the already high cost of family litigation, do you believe that the expense of biased competing expert opinions is a significant barrier to justice for clients without extremely deep pockets?
Absolutely! If a position is taken that is not realistic, based upon the economics of things, it just protracts litigation and just wastes an awful lot of money. A divorce is like a business break up with emotions. Not only does this protracted litigation cost a lot of money, but it also is very emotionally damaging to both parties – and if they have children, to them, too. Stretching the truth or taking an unrealistic position does not benefit anyone.
What skills does a forensic CPA have that other CPAs might not possess?
Understanding the issues that the court needs to decide based upon the law, and the ability to recognize what the determining facts are, and presenting that information to the court in a clear, understandable, objective manner. All of which needs to be done at the layperson level. We don’t get unnecessarily technical when we present our opinions, we’re there to help the court make a decision.
When it comes to determining alimony, child support, and other expenses or fees, couldn’t a divorce attorney just look at a tax return and know what a person’s income is?
No. And the question of income is really one of what cash the parties have on a monthly basis. And on a tax return, there are certain deductions that are allowed by the tax laws which don’t affect the income. For example, depletion allowance on oil well rights. And there’s a number of different items that are deductible expenses on the tax return, but they do not necessarily reduce the cash available to the parties.
Some divorce cases have a business as one of the major marital assets. Why couldn’t the attorney just look up on the internet and see what other similar businesses are selling for or apply a “Rule of Thumb” as a multiple of revenues or reported income to determine what the business is worth?
There isn’t a one size fits all business valuation method. Each business is different. And the information reported for that business or on tax returns or financial statements, in many cases has no basis in the reality of income and cash flows of the business. You need a detailed review and understanding of the business in order to avoid shortchanging a client as to the business value, as well as overstating the business value causing the case not to settle.
The income that a business provides to the owner is clearly shown on the business tax returns. Why can’t an attorney just use those figures to determine that party’s business income?
For the same reason that you just can’t accept a personal tax return. In the case of a business, there are far more areas for understating what the income of the business really is: paying personal expenses through the business reduces the income of the business, and if a business does not report all of its income, that also reduces its income. The client has little or no knowledge of the legal system or taxation or financial statements. It is the job of the attorney to make sure that his client receives the needed information from an experienced forensic CPA.
If one spouse is hiding money to cheat the other out of what they’re entitled to, why would it take a Forensic CPA to detect those hidden funds when all transactions subject to government reporting would appear on the tax return?
All transactions reported to the government do appear on the tax return. But there are many account transactions that are not reported to the government that would never appear on the tax return. For example, transferring money between accounts, there would not be any of that reported on the tax returns. In the case of credit card transactions, there could be a recurring monthly payment that was not a business expense, but it was paid as a business expense. This ends up reducing the income of the business owner, which reduces their ability to pay alimony and child support. You can’t just look at the tax return.
How important is it for a family lawyer to use a forensic CPA who has a great deal of experience in matrimonial matters?
It’s extremely important to have experience in accounting, business valuation, tax preparation, and the presentation of that information to the court in a proper forensic manner; we need to be able to focus on what issues need to be dealt with and what we need to do to document the facts. Because of our experience, we continually apply the “sniff test.” If something does not smell right or seem right, we know that we need to investigate that area. The biggest thing that an attorney or [a professional who lacks the proper qualifications] who tries to do the work requiring an expert should know is this: experience is what you get just after you need it.
Could you give us some examples of how you can help attorneys with their divorce cases because of your training and experience that they might otherwise overlook?
Yes. There is often a business that one or both of the parties are involved in, but the true income and expenses from the business are not necessarily what they report on their tax returns or financial statements. The income of the parties is important, as I said before, for alimony and child support. It requires a thorough analysis of the detailed accounting transactions in order to be able to add back personal expenses paid and transfers to other accounts that may have been recorded as a business expense but were actually personal.
We had a case where the wife owned a dance studio, and she would deduct all payments to the American Express card as business expenses. These expenses reduced the wife’s income from the business and resulted in a significant reduction in her personal income.
There was a recurring charge on her Amex statement for privileged assets. And because of another case I was involved with, I knew that privileged assets were an annuity program that American Express offered to its customers. For several years, the wife had been charging her credit card to invest in this annuity. This investment was improperly recorded as a business expense, which reduced her income, and the build-up of funds in the annuity represented significant marital assets that had not been previously disclosed. Finding this resulted in the marital pie being much bigger, and the husband received a significantly larger portion of that pie.
When it comes to dividing retirement plans, isn’t it pretty straightforward in that you just give each party one-half of the retirement plan balances?
No, not necessarily. And I would say in all cases, that is not the case [because] retirement plans sometimes have started prior to the date of marriage. Contributions made before the date of marriage would be non-marital. Only the contributions after the date of marriage would be considered marital and, and in all cases, contributions to a retirement plan after the date of filing for divorce is also a non-marital asset. In all cases, you need to make a differentiation between the marital and the non-marital portions. The income of that retirement account would need to be allocated between the marital and non-marital portions from the date of the marriage to the date of filing.
We had a case of a husband who had a significant premarital retirement account, and this account was a major asset of the husband. The husband made significant borrowings and repayments to the plan. He contended that those loans were from his premarital portion, and any repayments were a return of the premarital money that he had borrowed. The trial exhibit that we prepared for the court showed that the borrowings from the plan were in fact from the significant premarital amount. However, all loan repayments were from marital funds, which resulted in a conversion of all nonmarital portions to marital. This resulted in the wife receiving several hundred thousand dollars of additional retirement funds.
What are some of the issues that you have to look out for when dividing marital assets?
One particular issue is the values assigned to assets. For example, we had a divorce case where there was a small real estate lot that was worth less than $20,000, and no appraisal was obtained. But the wife claimed that the parcel of real estate was worth $20,000. The husband said he had purchased it a number of years before for $3,000. The wife was adamant, and what ended up happening, we suggested to the judge that based upon the value that the wife was saying the asset was, to give that asset to the wife. And so that significantly increased the balancing payment to the husband. And also, if in that particular case, the value of the asset assigned to the wife was at that high value that she claimed was correct, that reduced the amount of real assets and cash that she obtained via equitable distribution.
What mistakes have you seen regarding commingling of assets in divorce cases?
One big mistake is during the marriage, the earnings of either of the parties is considered to be marital earnings. What happens in many cases is that [one spouse] may have an individual account that was pre-marital, but they deposited marital earnings into that account, which caused the account to be converted to being marital, and the reason for that is money is a fungible commodity. You cannot tell $1 from another and by mixing the marital and the non-marital together, it loses its non-marital characteristics.
How do you set the valuation date for marital assets and liabilities in a divorce?
That depends. In Florida, the judge has great discretion and can use the data filing, date of distribution, date of separation, or any other date necessary to achieve equitable distribution of the assets.
Is the valuation date the same for all assets?
No. Changes in asset and liability values from the data filing to the days of equitable distribution can be different for many reasons. Passive changes in market value or the misuse of data filing funds beyond what expenses required for normal living expenses are treated as being non-marital. For example, if you have a stock portfolio, that as of the date of filing is worth $100,000, as of the date of the final dissolution, that portfolio is now worth $50,000. You need to value that portfolio for equitable distribution purposes at the value of $50,000. So the value of assets for what the party is receiving is actually worth that amount of money when they were divorced.
Thank you, Rod, for taking the time to share your knowledge with our listeners! My guest has been Rod Moe, a Certified Forensic CPA, an accredited Business Valuator, and an expert witness who has worked with many divorce and family lawyers in Florida. To learn more about how his Rod and team assists family lawyers with complex financial cases, please visit www.rodmoecpa.com.