A forensic accountants’ back to basics approach

A FORENSIC ACCOUNTANTS’ BACK TO BASICS APPROACH image by Rushmore GroupSince the earliest days of my forensic accounting career, I’ve always thought of forensic accountants as operating at the intersection of the law, accounting, technology and mathematics.

I see this as a unique approach as it opens ones thinking to the idea that the solution to one particular problem may use more of one particular discipline than another. Another problem will rely on a greater percentage of another discipline. Over and over again, I see that this approach opens up solutions that would never have been possible had the forensic accounting practitioner simply relied on their background in accounting.

In a previous matter, I was involved in a family law property settlement dispute and mid-way through the first day of the final hearing I recalled the above principle. I was spending hour upon hour watch the two opposing barristers make back and forth settlement proposals, however I could see that these proposals if they were going to be successful would be more likely down to luck than any “system” or methodology. Another way of putting this was that I knew that in mathematical terms each side had a range of scenarios that they would accept and a range that they wouldn’t accept. Each “line” of solutions could in effect be plotted on a graph. The intersection of these lines would result in a negotiated settlement.

So with pen and paper, I sat down outside the Court and tried as best I could to convert houses, cars, superannuation, businesses, and various other assets into a mathematical form and then try and see whether I could force a solution.

This approach and re-defining the problem immediately changed my viewpoint and also the viewpoint of my client. It was as if we put down our career and personal bias for a moment and looked for a solution with a different viewpoint. Moments later, I revealed an anomaly in my clients thinking that made sense from a personal point of view but didn’t make sense from a mathematical point of view. It was at this stage that I was quietly confident that clear, precise, and mathematical thinking would find a solution that the divorce lawyers would take much longer to get to.

I then realized that to make progress I would need to make a couple of simplifying assumptions. This is a technique that I use in other forensic accounting engagements. Once a solution has been found, any simplifying assumptions can be relaxed and the solution can be recalculated without these constraints. So the first simplifying assumption was that my clients’ former partner would need to keep the business in the property settlement for there to be any chance of agreement. I could see that from the opposing sides point of view this was absolute. My client, whilst happy to take the business could also have quite as happily forgone its ownership. This may appear to be obvious reading this post, but it was far from clear leading up to this point.

The next major asset was the house and the mortgage over the house. My client for a variety of personal and financial reasons (which were completely logical) to keep the home and mortgage. So by this stage, my analysis tentatively proposed one partner keeping the business and the other keeping the home and mortgage. There was also a personal loan mixed up in the marital assets that was used to finance the business. So given this connection, I assumed that these naturally “went together”. I put this loan on my clients’ ex-partners side of the property settlement ledger.

At this stage, I felt that I was making progress and I wondered if it was this simple, why hadn’t a settlement been reached in the previous two years? I reviewed some of the other associated issues and at this point I realised that one of my clients nonnegotiable items was inconsistent with a related but different part of the case. This had been a key stumbling block to reaching earlier agreement. Again, I thought of the item from a logical position, I realised that even if my client pursued this angle, there was a fairly strong likelihood that my client wouldn’t financially benefit from it.

Once I got this clarity in my own mind I was able to “translate” this thinking into a simple statement for my client. We needed to drop that item from our proposal as it was preventing a property settlement from being made, it was going to be a waste of legal fees and in the end it was quite possible not to have resulted in additional funds to my client. So now that I had sorted out that logic, I came back to the draft proposal.

To recap, one side had the businesses and a loan that related to the business and the other party had the house and the mortgage. I then worked out what in my own mind was a logical division of the assets in percentage terms. This was based on assets and liabilities at the beginning of cohabitation and the various contributions throughout the relationship. It’s important to note that this was based on my own analysis and didn’t refer to either what the divorce lawyers and counsel were thinking or any other factor. Looking at the assets and liabilities, I thought that there appeared to be greater risk on the part of the other side in terms of the type of assets and liabilities that they had. For this and a number of other reasons, I thought it would be equitable to split the pool 60:40 in favour of the other side. I didn’t share this thinking with the client or anybody else, as I reasoned that it was better to present the proposal in totality. These numbers were required so that I could calculate which remaining assets and liabilities needed to be allocated to each side of the property settlement.

I then starting with the next biggest asset and slotted this into one column. A number of other assets were slotted into the other column, so that the totals approximated the 60:40 assumption I made based on the net marital asset position. I now had a draft proposal that was grounded in logic (including a number of rough assumptions). Around 4 hours later, I got a call to say that agreement had been reached and the division of assets was largely the same as the above proposal, with some small variations and a couple of assets that I had excluded due to their relatively small size.

For me it was satisfying to be part of this process where agreement was reached. I believe it is safe to say that basic maths and logic played a part in the overall solution. It also makes we wonder how many other disputes are battled out in expensive litigation when there may be a simple way of getting to that magical intersection?

Rushmore (Author)

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