The price of divorce
5 Oct 09
Forensic accountants have long played a key role as experts in divorce proceedings. As Richard Goslan reports, in a time of recession, their work is more important than ever
by Richard Goslan
Television drama has never been short of candidates for the super sleuth detective or maverick lawyer, but where’s the equivalent small-screen portrayal of the CA?
If commissioning editors are looking to find a hero with a head for figures, then forensic accounting could be the area they should concentrate on. And with the increasing concentration on delving into divorce proceedings, there should be no shortage of real-life drama.
Greig Rowand, a CA who works as forensic accountancy partner at Henderson Loggie, is busier than ever working in the field of divorce, which now makes up around 50 per cent of his workload.
The recession has not only increased the potential for marital break-up, he says; it has also made the task of putting a price on assets, which may have plunged in value over the past couple of years, much more complicated.
“We’re very busy doing work for divorce solicitors right now,” says Rowand. “But we’re now being asked to look at present date valuations as well as relevant date, so often it’s an extension of the work we’re doing on an assignment.”
Valuations in divorce cases have become just as contentious as the issue of fair value or mark-to-market accounting in the wider financial world. Until the Family Law (Scotland) Act of 2006, when a couple divorced they would have a separation date, and the value of their assets would be calculated according to that relevant date.
But now, solicitors can instruct a present date valuation and, because of the financial crisis, this can look decidedly different from what it would have been two or three years ago.
“Typically, in a divorce case, our task is to assess the value of interests held by the separating couple in business partnerships or privately owned companies,” says Rowand. “These will be included in the total ‘pot’ of matrimonial assets and liabilities and split between the two parties. But assets which, for example, might have been worth x thousand pounds at the relevant date of separation a year or two back, may now be worth much, much less.”
Ken Milliken, head of forensic at KPMG, has also seen at first hand the problems that the difference between relevant date and present date valuations can cause.
“We valued a business at the relevant date, because we were asked to, and it was sold nine months later at double the value,” he says.
“The court came back and asked us to explain why this valuation was so different. But it was an oil services company, and there was a significant change in oil prices during that period. Actually, if you look at the current value of that business now, it’s probably back towards what it was at the time of the first valuation.”
Just as the valuation process has become more challenging since the recession got under way, so has the job of the solicitor.
“We’re finding that not only have assets lost value, but that divorcing individuals are finding it much more difficult to get lending from their banks to help them through this difficult time,” says Rachael Kelsey, a founding director of Sheehan Kelsey Oswald, which specialises in family law.
“Historically, we found that banks would not only stick by customers and provide litigation lending during a divorce, they would often take a long-term view and help fund a settlement. We saw many clients who were able to work with bankers to come up with creative solutions that would allow them to extract value from the business in order to buy out their spouse while ensuring the long-term stability of the company.”
Judith Scott, a CA who is forensic director at BDO Stoy Hayward in Scotland, says it is possible that divorce proceedings are being delayed due to a lack of funds. She says: “It’s a slightly chicken-and-egg situation. Financial pressures can mean, unfortunately, that people decide that they’re going to split up; but because of the property market being stagnant,it’s been quite hard for divorces to proceed because you can’t actually realise the assets that you need to implement the division of the assets.
“I wonder whether what we might see as we come out of recession is more of an increase in divorce, because there will be a backlog of cases to go through.”
Figures from the Office for National Statistics show the divorce rate has fallen to its lowest level in England and Wales for 26 years. A survey of lawyers by the professional advice website unbiased.co.uk found that three out of four of them believe that the economic downturn has been influencing their clients’ attitudes towards their divorce, with the main trend being towards delaying reaching a settlement.
“The triple whammy of inertia in the housing market, highly leveraged accommodation and the prospect of a significantly reduced income are all likely to combine to force couples to remain in unhappy marriages,” says Sandra Davis, head of family law at Mishcon de Reya, who acted for Princess Diana, Jerry Hall and footballer Thierry Henry in their divorce cases.
“In the wake of the UK Government’s intervention in the banking sector, politicians have united in their calls for banks and their regulators to curb executive pay and City bonuses. This, combined with the effects of a global recession, will see former wives faced with the prospect of a significant reduction in their post-divorce standard of living, and husbands far less inclined to pay for a clean break from a depreciating asset portfolio.”
The high-profile troubles of other divorce cases may be enough to make even the most embittered couple re-think their plans.
In April, Brian Myerson, the activist investor, lost a highly-publicised court battle to reduce his wife’s £11m divorce settlement, on the grounds that the economic crisis had left him out of pocket.
Catherine Bokor-Ingram, the former wife of an investment banker, backed down over her demands to renegotiate for an increase in cash maintenance payments when her ex-husband revealed his salary and bonus had been affected by the credit crunch. The couple agreed to an out-of-court settlement to avoid legal charges.
Of course, whether it is the right time, financially, to proceed with a divorce depends which side you’re on, and how much you stand to gain or lose.
“There’s a definite argument that for some parties it’s not in their interest to have their financial affairs determined right now,” says Elaine Brailsford, a partner and head of the family law team with legal firm Tods Murray.
“But if you’re acting for the other party, maybe you see it differently. If you’re the husband whose property, business and shares are all devalued, then it’s quite a good time to separate – because values will be fixed at this point in time.”
But when cases do end up in court, forensic accountants can find themselves in the firing line. For those who are happier working with figures than fiery courtroom lawyers, it can be intimidating.
“If you’re going into court, it’s a hostile environment and you’ll have a smart counsel on the other side, who will try to find things to trip you up on,” says Rowand.
“In Scotland, you have to get in the witness box under oath, speak to the court and be experienced enough to think on your feet. You could write a very good report but present it very badly in court, and that would colour the judge’s opinion on it.”
“It’s a daunting thought, but the reality is that court process always moves much slower than you think it will,” says KPMG’s Milliken.
“You also know more about the issues that you’re talking about than anyone else in the room, apart from the expert on the other side. And most forensic accountants will be trained in courtroom skills, to make sure their evidence is as clear and easily understood as possible.”
Rowand admits his efforts to reveal the extent of a divorcing husband’s assets have led him into some uncomfortable situations.
“You sometimes have to deal with people who can be very unpleasant towards you,” he says. “You can get abuse, but you have to remain professional.”
The division of money in any divorce always brings the potential for conflict – even between the person seeking the divorce and their own accountant. “It’s common for both the pursuer and defender to disagree with our figures,” said Rowand. “But we tell them that our duty is to the court itself rather than the instructing parties. What’s being provided is independent scrutiny and maybe sometimes those who instruct us don’t like the answers.”
Milliken has even been involved in a dawn raid to try to recover information about hidden assets.
He recalls: “We raided this guy’s house because we knew he had records in relation to another business at this address. It was successful, and identified the other asset, which was great, and it also identified some unknown bank accounts.
“His wife had suspicions that when he pulled together his own statement of assets for the divorce proceedings, there were things missing, and that was proven.”
As for the prospect of that television drama, Rowand is not convinced the reality of his paper probing would translate into a must-watch series.
“When you tell other CAs about the type of work you do, they think it’s quite colourful,” he says. “But there’s nothing very glamorous about going out to an industrial estate in December in the central belt of Scotland to speak to a guy about his business. But then you’ll get into a good investigative case and it can be quite rewarding to play financial detective.”