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Chapter 10 – Forensic Accountants – Jerome McDonagh and Eddy Lee

Jerome McDonagh and Eddy Lee
MDD Forensic Accountants

Role of a Forensic Accountant in Divorce

During the course of matrimonial disputes, there are often situations where solicitors and their clients find it helpful to engage specialist consultants. Forensic accountants can assist at various stages of divorce proceedings, in order to provide a clearer picture of the financial position of the parties, whether there are any undisclosed assets and their maintenance requirements.

In this article, we explore the typical situations when a forensic accountant is engaged and where they can provide assistance to divorcing couples to ensure they have a clear understanding of their spouse’s financial situation.

Why a Forensic Accountant?

When the word “forensic” is mentioned, usually images of crime scenes, UV lights and blood splatter often come to people’s mind. While not as gory, the work of forensic accountants can be just as dramatic in the more contentious areas of divorce proceedings!

Forensic simply means relating to the law and, for a forensic accountant, much of our work will be to assist lawyers, with our reports often being submitted as expert evidence in court proceedings, requiring us to be cross examined by counsel representing the opposite party. We specialise in assignments involving business valuations, damages quantification and fraud investigation. During the course of a divorce proceeding, we often have to combine all three skill sets: in investigating whether there are any concealed assets or sources of income; valuing the business holdings of the parties; and ascertaining the maintenance requirements of the dependant spouse.

Below, we explore the typical situations where we are engaged and assist the spouses and their legal teams. To explore these assignments, we’ll use the example of a hypothetical divorce proceeding between John and Jane Smith. John and Jane were married in the UK just under 20 years ago and currently reside in Singapore. They have two teenage children. John is the majority shareholder in a Singapore headquartered entity SingCo, which he founded after he emigrated to Singapore over 15 years ago from the UK. SingCo has expanded to multiple jurisdictions and John often travels to various countries in Europe and Asia. Jane is currently a stay-at-home wife and moved with John to Singapore. Before moving to Singapore, she used to work, although she has not been in active full-time employment since she moved to Singapore. We have been engaged by Jane and her legal team to assist in the proceedings.

Financial Disclosure – Concealed Assets and Income Sources

Suspicions and concerns often arise after financial disclosure has been exchanged between the parties. In Singapore the Affidavit of Means (AOM) is sworn under oath, with each party affirming that they has made “full and frank disclosure” of their assets and means. In England, the Form E warns the parties that if they are subsequently found to have been deliberately untruthful, that they may face contempt of court proceedings or criminal proceedings under the Fraud Act 2006

Our first task will comprise of a review of the financial disclosure and investigate how open John has been with the disclosure of assets and income sources. We would begin our work by discussing with Jane the disclosure made by John. The purpose of this review is to ascertain whether there are any areas where John may not have fully disclosed his asset holdings. Often the spouse can be the most useful starting source of information, although they may not realise how their knowledge of their spouse can lead to the discovery of concealed assets. In particular, Jane’s knowledge of John’s travel plans, correspondence addresses and close associates and family, will allow a forensic accountant to conduct a focused investigation into specific jurisdictions and parties that may have assets held in John’s name.

Once we have more specific details of John’s lifestyle, we can begin to supplement this knowledge by reviewing publicly available information and the financial disclosure. These documents include:

  • Audited financial statements / Management accounts – In addition to providing the performance of a company, the notes to the audited financial statements may reveal the details of subsidiaries, spouse’s remuneration and related parties involved with the entity. Depending on the location of the Company, information may be available from various sources which include:
  • Government filings – Business / Companies registry filings – There will be publicly available information in government regulated bodies, such as ACRA in Singapore or Companies House in the UK. The amount of information available from the authorities depends on the jurisdiction.
  • Bank documents – Assuming that there are bank documents in the financial disclosure, bank statements and supporting documents to bank transfers may reveal other companies in the group or the acquisition of undisclosed assets. Bank documents could also reveal undisclosed sources of income.
  • Data aggregators and subscription-based online research tools – These can enable relationships between individuals and companies to be identified without having to manually cross-reference filings at different international registries.

After exhausting the documents disclosed and in public registries, we can assist Jane in assessing where there may be concealed assets, what further documents are required to ascertain John’s financial position and the extent to which John has been full and frank in his disclosure. Often, we assist legal practitioners and their clients when preparing the requests for discovery and interrogatories, which would compel John to provide further disclosure.

Valuing of Assets

Once we have uncovered all of John’s business holdings, and the corporate structure of SingCo, a formal valuation exercise can begin.

In relation to private business holdings, a valuation is often crucial, as a private company’s value is normally above its net asset value (which can be calculated from its balance sheet). One reason for this is internally generated goodwill, which will comprise of various intangible items including brand name, solid customer base etc., is rarely recognisable under generally accepted accounting principles, and therefore would not be recognised as an asset in the company’s balance sheet. Normally, for well established, profitable companies like SingCo, its goodwill would account for a significant portion of its value. Solely relying on its balance sheet values would likely undervalue SingCo.

When conducting a valuation, a valuer will typically consider the following approaches:

  • Market Approach – The value of the business is determined by comparing the subject to similar businesses, where the similar business was recently sold, or its selling price is known. An example would be by comparing the business to a listed entity.
  • Income Approach – The value of the business is determined by quantifying its future cashflows into a single lump-sum amount after considering all the risks associated with generating those cashflows. A common example of this is the discounted cash-flow (DCF) approach.
  • Asset Approach – The value of the business is determined based on the fair market values of its assets less its liabilities.

For profitable companies such as SingCo that are going concern, a Market or Income based approach would likely be the most appropriate valuation method, with the Asset Approach being used as the floor value.

Once the value of SingCo has been established, a valuer would need to consider when reviewing SingCo’s value, how much of its internally generated goodwill is related solely with John, as opposed to SingCo. As an owner-manager for the last 15 years, John is likely to have built up client and supplier relationships which would not exist if he were not the head of SingCo. In this regard the valuer would need to consider whether and how much of the value and profitability of SingCo is dependent on John and, if necessary, make adjustments such as a discount for key person risk.

Another issue that commonly arises in owner managed companies, is the mixing of personal and business interests. Often this arises as the owner-manager (i.e. John), mixes company resources with their personal resources. This can become apparent with the existence of:

  1. Surplus assets – Surplus assets are those which are either not utilised, or underutilised, when generating profits of the company. Examples would be if SingCo held any residential properties, which were unrelated to its main business lines. As these properties did not generate profits related to SingCo’s main business, they could be sold and would have little to no effect on SingCo’s profitability. When dealing with surplus assets, the valuer should ‘add back’ the value of these assets to the value of the company.
  2. Loans to directors and Shareholders – In owner managed companies, it’s common for the owner to lend funds to the company. The question that arises is are these truly loans, or simply cash injections by an equity holder? Dependent on the conclusion of the valuer, the treatment of these loans will have a tangible effect on the equity value of the company. Furthermore, in the case of divorce proceedings, the valuer should highlight the effect his or her treatment has on not just the company value but on the spouse’s AOM. For example, if John had lent SingCo funds, this would be a liability in SingCo’s balance sheet, but it would also be an asset in John’s AOM. If the valuer were to take the position that these are not real loans, it would have an effect on both John’s assets and SingCo’s value.
  3. Personal expenses – It’s common for owner managers to run some of their personal expenses through the company. The question that must be asked is are these legitimate business expense, which might be considered part of John’s remuneration, or are they excessive and being expensed through the company to drive down its profitability. If the latter conclusion is reached, the valuer would need to make adjustments.

Given the various issues above, it is prudent for spouses like Jane to ensure the valuation of SingCo is conducted competently to ensure she receives a fair settlement. While it has been the norm for each side to hire their own valuation experts, in common law jurisdictions such as Singapore, UK and Hong Kong, the Courts may appoint an expert for both sides known as a Single Joint Expert (SJE), in order to save on costs.

Maintenance and Lump-Sum Settlements

Ultimately, Jane will be looking for a suitable settlement to meet her financial needs. As forensic accountants, we are often asked to review and ascertain whether a person’s needs are reasonable. Often, the breadwinning spouse raises concerns over the dependent spouse during the divorce proceedings and whether expenses have been inflated. We are often asked to review pre and post-separation expenditures, to ascertain whether a spouse has purposefully increased their expenditure during the course of the divorce proceedings to gain a more favourable settlement.

In the case of Jane, we would want to review her credit card and bank statements, to quantify her level of expenditure. In addition to these documents, we would need information on other expenses that might be paid for by John and the educational expenses of John and Jane’s children.

Another issue Jane would need to consider is her future expenses and income. For instance, if there is an expectation that Jane would return to work, she may need funds for re-training to enter the workforce, and her subsequent income from that employment should be taken into consideration when determining her maintenance requirements. She may also need to purchase health insurance, as after the divorce she would no longer fall under John’s SingCo policy.

Once Jane’s expenditure level is determined, she may want to consider a lump-sum settlement as opposed to a monthly maintenance. Lump-sum settlements are often seen as advantageous to divorcing couples, as it removes the uncertainty that might arise from monthly maintenance settlements.

In the UK and Hong Kong, forensic accountants often assist parties with Duxbury Calculations. A Duxbury Calculation is based on the precedent English case of Duxbury v Duxbury [1987] 1 FLR 7 (CA), which has been adopted by the Hong Kong courts since C v C [1990] 2 HKLR 183. The calculation estimates the monetary amount (the lump sum) a person would need for the remainder of their life, after taking into account their inflation adjusted expenditure requirements and assuming they would invest the surplus proceeds in an investment portfolio that could off-set their expenditure requirements.

Whilst the precedent is not legally applicable in Singapore, the basis of the calculation may be of use to Jane to understand what she should be demanding from John if she wanted a lump sum settlement.

Another use of the Duxbury Calculation is a variant known as the Reverse Duxbury. This calculation works out the expenditure level a person could enjoy based on a known lump-sum. For Jane and her legal advisers, this could be useful for negotiations, to ascertain if the sums being offered by John would sustain her expenditure needs.

In our experience, often having the assistance of a forensic accountant providing Duxbury calculations can provide the reassurance a spouse like Jane would need to accept settlements, knowing that it will be sufficient to support her requirements.


The complexity of John’s financial situation and the contentious nature of most divorce proceedings can result in difficulties for Jane in uncovering John’s true financial situation. Having an experienced forensic accountant assist her and knowing where to look for information, how to value business holdings and how to assist her legal team can ensure that she receives a fair settlement and understand the short and long-term implications any settlement proposal may carry.


This article contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. MDD Forensic Accountants does not accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this article. On any specific matter, reference should be made to the appropriate advisor. The statements or comments contained within this article are based on the authors’ own knowledge and experience and do not necessarily represent those of MDD Forensic Accountants

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