Warning Signs of Fraud in Divorce

By Martin Mathias, CPA, CFE

Divorce cases involving closely held businesses can present unique challenges.  Determining business value and income available for support are often the primary considerations which need to be addressed.  However, in some cases, it may be prudent to consider if a spouse is using the closely held business to either hide marital assets or fraudulently deflate the business value.

Financial fraud can be difficult to detect.  It can also be a time-consuming and costly effort to go on a “fishing expedition” that is just based on a hunch that some malfeasance may be taking place.  However, there are certain warning signs that should be considered.

  • Sudden changes in profitability – Does a business that was historically profitable begin to experience a downturn that coincides with problems in the marriage?
  • Control and secrecy over business affairs – Does the spouse who is most involved in the business withhold financial information from the other spouse? 
  • Owner distributions – The equity distributions made to an owner are not typically reported on the couple’s individual income tax return (but can be found on Schedule K-1).  Equity distributions should be traced to corresponding deposits in the couples’ personal bank accounts.  If the distributions do not match the personal deposits, it could be an indication that assets are being concealed.
  • Unexplained business loans – Has the business recently started to loan money to others or borrow money for unknown reasons?  This type of unusual lending and borrowing activity could be an indication of hidden assets and typically shows up on the Company’s balance sheet as new Notes Receivable or Notes Payable.
  • Use of business credit cards – Does the spouse most involved in the business have access to business credit cards?  The business credit card statements and activity should be reviewed for indication of personal use.
  • Condition of business records – Are the business financial statements regularly reconciled and reviewed by either independent employees or by an outside accountant?  Sloppy business records by their nature can be both an indicator of, and means to conceal, financial fraud.

If financial fraud is a concern in a divorce case, you should consider engaging a financial expert, such as a Certified Fraud Examiner, early in the process.  These experts can assist in defining the scope of the investigation, determine the records to request in discovery, and conduct a thorough review to address your fraud concerns.

As always we are here for you as a resource. Contact us if you would like to discuss your specific client situation.

Marty Mathias is a Business Valuation Analyst and Certified Fraud Examiner at Capital Valuation Group, Inc., headquartered in Madison, WI. Capital Valuation Group has been helping business owners across the country understand, increase and unlock the value of their businesses for over 45 years through keynote speaking, valuation analysis, determining damages and providing expert witness testimony. Marty would welcome your questions and can be reached at mmathias@capvalgroup.com.