Black’s Law Dictionary tells us that "forensic" means, "Belonging to courts of justice" (1990, p. 648).A recent term coming into wider use is forensic accounting, which has been described as the application of financial expertise to legal disputes and investigations (Bologna, Lindquist & Bologna, 1995).Consequently, forensic accounting is accounting that involves litigation. "In such circumstances, accountants may be called on to provide expert investigations and evidence" (Hussey, 1999, p. 170).According to Marc A. Siegel (2001), the first step in conducting a forensic investigation is to gather as many details as possible about the facts of an alleged misappropriation; however, CPAs must be systematic to guard against "information overload," which can lead to important factors being overlooked.
Siegel offers the following tips for CPAs and others involved in forensic accounting activities:
- CPAs, investigators and attorneys need to develop a work plan and pool what they learn about the core facts every day.
- Forensic consultants should expect their work to be scrutinized in litigation since it is impossible to know whether a case will be tried or settled out of court. The lead attorney may consider at the beginning who on the financial team would make the most suitable expert witness.
- Understanding business customs before commencing a forensic investigation in another country will help an investigating CPA. Knowing the language is an important asset.
- A simple but effective way to track the developing understanding of the normal movements of cash in an organization is to use a flowchart. Once CPAs know how cash was supposed to move between all the parties, they can more readily see how the process was circumvented.
- The final report should clearly show that the CPA consultants in the investigation exercised objectivity. It should describe both sides of any issue, and document that the conclusions reached were based on data to which both sides in the dispute had equal access (Siegel, 2001, p. 45).
According to William M. Michaelson (1996), the process of locating hidden assets is one of components of forensic accounting, which he describes as being a fairly new discipline for CPA firms. Because forensic accounting involves applying financial facts to legal situations, it is becoming an important litigation service that practitioners offer to attorneys. However, in order to be effective, a forensic accountant must command a thorough understanding of the legal process, its unique language and the rules of evidence used in both federal and state courts (Michaelson, 1996).
Accountants are uniquely qualified to assist lawyers with searches for hidden assets in divorce cases in particular because of their knowledge and experience in financial document analysis, accounting principles and auditing techniques and our awareness of common schemes to secrete property. In order to be effective, searchers for hidden assets must analyze numerous financial documents and specific transactions, reviewing public and private records and discovering relationships and patterns among the data that indicate the existence of additional assets.Some of the sources of public records that will help reveal the business and personal background of someone suspected of hiding assets include the following:
- Clerk of the courts, for all lawsuits and judgments involving the spouse.
- Department of Motor Vehicles for automobile and boat registration.
- Federal Aviation Administration for airplane registration and pilot records.
- Tax assessor for property registered in the spouse's name.
- Departments of state for business entities in which the spouse is involved and associates connected to those businesses.
- Voter registration records.
- Uniform Commercial Code filings with the state.
- Securities and Exchange Commission for public filings and entities in which the spouse is involved.
- Professional licensing authorities (Michaelson, 1996).