“My husband and I own a company together. I look after the staff while he has always looked after the financial end of things. I’m not sure I can trust him to be honest in reporting the company’s earnings. What can I do?”
In this fact scenario, one spouse is expressing that she is not sure if she can trust her husband to be honest in reporting the company’s earnings. What rationale would a spouse have in understating or overstating a company’s earnings?
By understating or overstating a company’s earnings it might influence what equalization payment is received if one spouse assumes ownership of the family company. An equalization payment is the amount which one spouse will pay to the other on separation and represents the difference in the increase in net family property between spouses since marriage and date of separation. This varies by jurisdiction; however, if the earnings of this assumed company were understated then it would be likely that the resulting business value would be diminished and any resulting equalization payment would also be reduced when considering this item in isolation.
Another issue that arises is the earning power of each spouse. Is your husband going to continue to carry on the business? If so, by understating his earnings from the company his future support obligation might be diminished.
These reasons establish the rationale of why one spouse might have the motivation to understate or overstate the earnings of the family business.
How does one know if the records of the family business are fairly prepared and presented? One should first look to the accounting or auditing firm that works on the company’s books. Are they a reputable group of accountants, with a recognized designation in Canada, such as Chartered Accountants (or in the U.S., CPAs)? Does the income as reported seem to match the lifestyle you and your husband enjoyed during your marriage? Have there been any major fluctuations in reported income over the years, especially in the current years? Does your husband have a history of hiding income from the business? Is there a cash component to the business, where your husband has a history of not reporting all the company’s income?
Evaluating if the income reported fairly represents the company’s operations can be a daunting task. In that you have been a business partner over the years, it affords you a better appreciation of the status of your family business. It does not pay to be paranoid, but a healthy skepticism is appropriate. Are you capable of evaluating the reasonableness of the company earnings? Do you have the financial skills to do so? If not get help; consult an experienced forensic accountant with the qualifications necessary to understand the family business. It might be that simple and will allow you to have a greater assurance that you are being treated fairly.
Gordon Krofchick, CA, CBV is President of Krofchick Valuation Partners and is a forensic accountant with over 30 years’ experience in working with issues that impact a matrimonial separation, divorce, or other complex financial and litigation issues.