Procedures for investigating closely-held business income in a divorce proceeding

In any divorce proceeding, the presence of a business in the valuation of a marital estate adds a level of complexity to the investigation. It is a necessary component of the investigation, however, because a business may be an ideal venue for keeping assets from a spouse. This is a function of size, control and source. Specifically, transactions that can have a large effect on the marital estate may be camouflaged by the large transactions that normally occur in a business. Some business owners can exert total control over the operations of a business, defeating internal controls and normal bookkeeping procedures. A business may be a significant source of income for a couple; following the money may indicate where assets could have been hidden. Consequently, the presence of a closely-held business (i.e., one where the business owner exerts significant control over the business and its transactions) represents a high risk situation that every divorce lawyer or investigator should pursue. (If, on the other hand, the owner is a minority shareholder or has little control over the operations of the business, then an investigation treating the business owner as simply an employee of the company may be more appropriate.)

The documentation necessary to begin a business investigation is the same as that required for an investigation of an individual wage earner — the bank statements and the check registers. The difference is that the bank statements and the check registers are needed for both the couple’s personal account and the business account. The review procedure will be the same for both sets of accounts. With regard to the business account, the divorce lawyer or investigator will review how money comes into the business, interbank transfers, and unusual bank transactions. The review of the check registers will focus on payments made to, or on behalf of, the business owner, large or unusual transactions, and non-business expenditures. As with any investigation for hidden assets, the goal will be to determine whether a spouse had possession of assets (including income) that have not been disclosed.

If you own a business, expect to be questioned about unusual transactions in the bank statements and questionable items in the check register. If your spouse owns a business, expect that you will be asked to review the bank statements and check registers of the business, even if you were not involved in the business during the course of your marriage. This review may reveal payments to relatives, retailers, girlfriends (or boyfriends), questionable vendors, or unfamiliar credit cards. Even if this type of evidence is not found, you will learn about the income of the business and how it spends its money, and can make an educated decision about whether to continue any investigation into hidden assets.