Fall 2009 - Atlanta - Divorce Lawyer - Family Law - Atlanta Georgia

Fraud’s Effect on Settlementsin a Deteriorating Economyby Michael Levittmlevitt@mhlevitt.comwww.mhlevitt.comIt is well known that deterioratingeconomic conditions exacerbate stress andtensions in marriages and often result inseparations and divorces. While the oldadage advises that both spouses, for their ownprotection, should understand and be familiarwith family finances, it is problematic andgenerally not the case, when there is a familybusiness or a closely held company, run solelyby one spouse (the Owner/Operator).Historically when business is booming andasset values are high, a divorcing spouse mightcommit a fraud in order to reduce the businessvalue either for example, by accounting fraudor diversion of assets, thus having to share lesswith the other spouse, or using the funds fora “lifestyle” change. In the current economicenvironment where asset values are alreadyreduced, a spouse may still be inclined tofraudulently minimize values even further soas to retain more going forward particularlygiven the current recession.In periods like these, the engagement ofa Certified Fraud Examiner is a cost effectiveway to determine if any “monkey business”has occurred. Generally, the cost of a fraudexamination produces a significant return oninvestment, especially if one spouse has someinkling of wrong doing.I had been engaged in a case of corporatefraud at a privately held commoditydistributor (ComCo) 1 where it was suspectedthat funds had been fraudulently siphonedout of a subsidiary, which was a debtor toits bank (BankCo). Metaphorically, ComCowas married to BankCo, which had loanedmany millions to the company under aLoan Agreement. ComCo and BankCo eachassumed a significant level of trust, just asin a marriage. ComCo relied on BankCo toprovide funds when needed and BankCorelied on ComCo’s integrity to adhere to theterms of the Loan Agreement and repay theloans as prescribed therein. Unfortunately inthis case as in some marriages, ComCo wasup to no good.The initial evidence of a problem, aprerequisite to having access to the company’sbooks and records, was a violation ofbank covenants related to the level of anintercompany receivable from ComCo’sparent, which was not a debtor under the LoanAgreement. Often in a marital situation, thereis some feeling of doubt that the non-operatingspouse has about the legitimacy of the businessoperations, which supports the engagement ofa fraud examiner or forensic accountant.As a fraud investigator and forensicaccountant, the scope of my assignment was toidentify and quantify any fraud in the operationof the business. I began with interviews of keymanagement personnel as well as other keyemployees. This phase was undertaken to learnthe business flows and processes, as well as to“put the word out” about concerns of fraud. Asa result of discussing concerns of fraudulentactivity, several confidential tips of possiblefraudulent activitywere received andinvestigated. The nextphase was to conductan investigation ofpast transactionsinvolving cash,checks and letters ofcredit above a certaindollar level, lookingfor inconsistenciesor any suspiciousactivity. Transactionswere traced frominitial orders throughthe payment cycleand includedreconciliations toproduct receivedinto inventory.The purpose ofthis activity wasto confirm thelegitimacy of the cashmovements.48Fall 2009