Bridging a Breakup

EXECUTIVE SUMMARY

More family law attorneys are recommending their divorce clients hire a single, neutral CPA to help handle the transition from their shared financial life to their new independent lives. Using a neutral CPA often keeps the divorcing parties out of court. A neutral accountant gathers documents, makes inquiries of both the husband and wife, determines their income and expenses and prepares a schedule of assets and liabilities. Where necessary, the CPA values businesses and other assets. For the arrangement to work, there must be trust between the parties. The job is easier if the neutral CPA can speak to and meet with clients directly, without either lawyer present. Request that the husband and the wife and their counsel allow this. The CPA’s analysis, opinions and related correspondence should always be sent to both parties and their counsel, and both attorneys should have their client’s authority to request services. Dueling accountants usually present two different sets of numbers, creating a range within which the parties are likely to settle. Similarly, the neutral CPA should produce scenarios and ranges rather than a single number. Different sets of facts and assumptions will result in vastly different numbers. Many CPAs think that offering neutral CPA services to existing clients who decide to divorce poses a conflict of interest. However, it’s highly probable that the accountant already represents both parties in his work. It may be the case that the parties are far better served by hiring a practitioner who has worked with them, knows their finances and makes full disclosure to both parties. Philip J. Shechter, CPA, CVA, is a partner at Berenfeld, Spritzer, Shechter & Sheer in Miami. He specializes in matrimonial litigation and handles about 40 neutral forensic engagements a year. His e-mail is PhilS@bsss-cpa.com .

n a divorce, each side traditionally hires a CPA to determine how to separate the couple’s finances. If those accountants don’t agree, which is often the case, the likelihood of a trial increases. But with court dockets jammed and expenses sky high, more family law attorneys are suggesting that divorce clients agree to hire one accountant instead—a neutral CPA—to help the parties stay out of court. Judges are leading this action as well; if a case does go to court and the parties haven’t engaged their own CPAs and cannot agree on a neutral expert, a judge will appoint one. Here are details about my experience developing this growing litigation support niche.

WHAT A NEUTRAL CPA DOES
A neutral accountant performs the same duties in a divorce case that two separate CPAs would: gathering documents and making inquiries of the divorcing husband and wife to determine their income and expenses. After a lifestyle analysis, he or she prepares a schedule of assets and liabilities, calculates child support payments as regulated by state guidelines and values businesses and other assets.

Based on this forensic work, the neutral CPA recommends to the parties and their attorneys an equitable distribution of assets and liabilities, along with an amount for alimony. Most divorce cases involving an impartial accountant go to mediation, where the neutral CPA assists the mediator by presenting different financial options during the negotiations. If the case ultimately goes to court, he or she may be called as an expert witness.

HOW COUPLES BENEFIT
By analyzing a divorcing couple’s financial situation impartially, the neutral CPA helps

Save the parties money. Engaging two adversarial accountants can double fees and increase hardship, says Thomas F. Burrage, CPA/ABV, CVA, who handles litigation and valuation at Meyners + Co. LLC in Albuquerque, N.M., and chairs the AICPA’s Forensic and Litigation Services Committee. A family must pay those experts at a time when resources are stretched thin from the cost of establishing two households and paying attorneys’ fees. But when the parties use a neutral CPA, legal and accounting fees are lower because there is no need to file discovery motions and pleadings, attend hearings and depose the CPA. And the biggest savings by far stem from avoiding trial—a cost that is almost impossible to quantify.

Make going to court unnecessary. In the past five years, only one of the 200-plus cases I’ve worked on as a neutral CPA went to trial. That low percentage is fairly typical for my practice and, anecdotally, for practitioners in my area. In contrast, my experience shows that about 20% to 30% of divorce clients who use adversarial accountants go to court.

Get the full picture, faster. The neutral CPA requests financial documents (such as general ledgers, credit card statements and tax returns) directly from the divorcing parties and acts as the shared record keeper, releasing the documents to attorneys as requested. Besides being faster, this discovery method gives both parties a more complete financial picture. In the two-accountant scenario, documents are requested through the parties’ attorneys via motions and pleadings.

Ease the tension. Linda J. Schaeffer, CPA, CFE, CVA, makes a point of listening carefully when she first meets with divorcing parties. Schaeffer, a partner at WithumSmith+Brown in Princeton, N.J., specializes in family law and acts as a neutral CPA in about 35% of her divorce cases. “I give each client an opportunity to discuss what’s important,” she says. “A case usually is not about the numbers; it’s about the parties’ hot buttons.”

Schaeffer recalls an instance when an angry husband thought his wife had gone on a spending spree when she knew divorce was imminent. Schaeffer’s forensic work determined this was not the case. But until the husband saw the truth documented, and was able to believe it, the case was at an impasse.

One common emotional issue for the earning spouse is concern about having his or her cash flow drained by support payments. He or she may be less concerned about the assets, such as a residence. By contrast, the nonearning spouse generally wants the security of keeping the house. To address their respective needs, a neutral CPA might recommend giving the nonearning spouse the residence free and clear in return for reduced alimony. In court, on the other hand, judges often rule that the parties must sell the house and split the proceeds.

ARE THESE PEOPLE GOOD CANDIDATES?
Before you agree to act as a neutral accountant, size up the situation. For the arrangement to work, there must be some trust between the parties. Marriages with a history of domestic violence, for instance, typically are not good prospects.

Another essential component: The parties must agree up front to provide all requested documents. Schaeffer says, “A lot of times, the parties will say, ‘Let’s mediate the case,’ when what they really want is to eliminate discovery. Often, the discovery process is absolutely necessary.” If one party is determined to hide assets, a neutral forensic accountant’s job will be nearly impossible.

SET THE GROUND RULES
Once you determine a case is appropriate for neutral CPA services, meet separately with each party and his or her attorney. Discuss each client’s goals and expectations and the services the attorney wants you to render. Be aware of jurisdictional requirements such as whether interrogatories and financial affidavits are required.

Establish the ground rules at this point, giving yourself as much flexibility as possible. For instance, your job will be easiest if you can speak and meet with clients directly without counsel present. Ahead of time, ask the husband and wife and their respective counsel if they are willing to do this. Always direct results of your analysis—opinions and related correspondence—to both parties and their counsel.

To prevent the attorneys from battling about your role, you need to make sure each one has client authority to request your services, in whole or in part, and is fully satisfied with the terms of the client-attorney-CPA channels of communication for the engagement.

TERMS OF ENGAGEMENT
A very important aspect of your engagement letter is ensuring you will be paid for your work. It is a good idea to get a retainer (mine usually is about 25% of the expected total) up front.

Address the engagement letter to both the husband and wife and their respective attorneys and state that both parties are equally responsible, jointly and separately, for the entire fee. (Often, by agreement, one spouse pays the fees.)

The letter should specify that the court cannot waive your ability to pursue the parties for payment and that your fees can be included in attorneys’ charging liens—liens attorneys can file against an asset to ensure payment.

THE WORK PROCESS
After the engagement letter is signed, request and accumulate the parties’ financial records—bank statements, tax returns, credit card statements, retirement account and investment statements and other documents necessary to determine income, assets and liabilities. As work progresses, update the parties as appropriate and hold follow-up meetings. Sometimes, you may need to give clients “homework assignments,” such as preparing budgets.

At our firm, we don’t finalize any numbers until we review all the facts with each party and counsel to ensure we have a full understanding. After that we render a preliminary opinion as to an equitable distribution of the parties’ assets and liabilities and an alimony scenario. Then we communicate our finding to both parties and their attorneys, who use it as a foundation for negotiations. In the event the divorce goes to trial, this opinion provides the basis for our neutral expert testimony.

GETTING THE BUSINESS
Most divorce clients come from referrals—the vast majority from attorneys and some from other clients. Business also can come from existing clients who divorce. Some CPAs, concerned about a possible conflict of interest, assume they should reject such clients, but perhaps they should reconsider. The real issue is whether you can be impartial. If so, you have great value to offer. Chances are you already work for both the husband and wife, perhaps preparing their tax returns. You know the intricacies of their personal and business finances better than anyone. You have much of their financial documentation already, and they trust you. They may be far better served by hiring you than by retaining a CPA they don’t know.

If an existing client wants to hire you as a neutral accountant, ask yourself whether you truly can be impartial. If you decide you can be, make full disclosure to both parties and have them acknowledge and waive any potential conflict of interest concerns in writing.

THE SECRET OF SUCCESS
A successful neutral accountant really functions as a settlement advocate, not a trial advocate. Lawyers direct their clients to hire you because they want the case to settle out of court, saving their clients money, and because having one accountant narrows the range of possible financial settlements and limits unpleasant surprises in court.

But this does not mean presenting only one position about what alimony or child support should be. The key to success as a neutral accountant is to offer settlement ranges clients can use as guidelines for negotiation. For instance, in one case I valued a business based on three times earnings and five times earnings, resulting in a range of $300,000 to $500,000. The parties settled at $400,000. Dueling accountants would present two sets of numbers, so it is entirely appropriate to present alternative concepts.

Different sets of facts and assumptions will result in very different numbers. Deciding the facts is a judge’s job in the event the case goes to trial, while the attorneys’ job is to argue the facts. Providing financial alternatives based on several sets of circumstances allows the attorneys to do their jobs. Indeed, the biggest fear an attorney has about using a neutral CPA is that the accountant will supply only one number and close the door on any negotiation. By providing flexibility, you allay this fear and gain trust and respect.

Another case shows how different facts may call for different valuations: A financially independent spouse acted as an exclusive representative for various products, and his most valuable contract was with a celebrity. Annual revenues from the contract were more than $30 million, with net income of $5 million. The agreement held that if he sold the business he could not transfer the contract without the celebrity’s approval.

Under one valuation theory, the contract could not be sold, making the business worth its book value of $2 million. However, there was a possibility that the celebrity would permit the sale of the contract, resulting in a much higher business value. I performed two valuations based on these differing facts: The high valuation was $12 million, and the low was $2 million. The parties settled out of court, agreeing on a business value of $7 million, the midpoint of the range.

Practical Tips

View yourself as a settlement advocate, not a trial advocate. Allow room for negotiation by offering the parties ranges and options. Be prepared—bring a laptop and a printer to the final mediation so you can draft on-site changes to charts and documents. Get a retainer up front, and have your engagement letter state that both parties are equally responsible, jointly and separately, for paying your fee.

MEDIATOR’S RIGHT HAND
If the parties can afford it, I prefer to work with a mediator, who typically is a divorce lawyer. This person can provide a new and useful perspective, too. At the mediation, the mediator and I work closely as liaison between the parties and their attorneys.

The most valuable thing you can do is to be prepared. I bring my laptop loaded with the software I’ll need, reference documents on how situations have been addressed in previous cases and a checklist to ensure the final agreement covers all the relevant issues. I also bring a printer, as I may draft on-site changes to the equitable distribution chart and child support guidelines, among other things. My files include more than 100 marital settlement documents. If needed, the attorney can draw upon applicable language in those documents to express any changes resulting from negotiations.

The mediator and counsel appreciate this added protection, especially in the 11th hour of settlement. At every mediation there is always a point when the mediator turns to look at me and asks, “Did I miss anything?”

That’s a sign you’ve done your job right. As an essential player at the mediation, you helped your clients reach the best, fairest, most comprehensive settlement—and with minimal pain. Therein lies the biggest and most rewarding difference between neutral and adversarial accounting. As a neutral accountant, you make life easier for both parties.

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