| 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.
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.
| Less Stress to Settle Fewer than 2% of all divorce cases go to trial in the United States. Source: |
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.
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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.
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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.
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View yourself as a settlement advocate,
not a trial advocate. Allow room for negotiation by
offering the parties ranges and options.
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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