It is relatively unusual for a family law firm to have in-house forensic accountants, and our clients prize this service. In general, the demand for it appears to be increasing.

Financial Times journalist Jane Croft recently interviewed Nick White, the head of our forensic accountancy department, about high profile divorce cases and tracking down hidden assets. Extracts from the published feature appear below.

A model for breaking up

By Jane Croft

With so much at stake in big-money divorce cases, it is perhaps not surprising that there is often suspicion that some husbands are “hiding” their wealth so it cannot be included in any divorce settlement.

In these situations, divorce lawyers are turning to a small circle of specialist forensic accountants who can value a couple’s wealth and investigate allegations of non-disclosure. This can include tracing assets through a web of offshore locations to work out whether someone is underplaying their own net worth to win a cheaper settlement.

Nick White, a specialist in forensic accountancy and a partner at Stowe Family Law, dealt with the case of a woman considering a divorce who suspected her husband had one or two bank accounts that she did not know about.

The wife was friendly with her husband’s secretary, who tipped her off about various bank accounts he had in the Channel Islands and about a trust he had set up in Bermuda without her knowledge. The husband had declared his assets were worth £100,000, but the firm established he had assets worth millions.

Mr White says: “The situation we have, really, is the wife is kept in the dark and does not know about the husband’s day-to-day business and is happy to live the lifestyle and no questions are asked about where the money comes from. You can evaluate and appraise this disclosure. The husband is often very secretive and so you start to dig and find things are not what they seem and don’t stack up. It all builds from that point.”

You can read the full article on the FT’s website (registration required).

When it comes to divorce and taxes, timing is everything.

If you are thinking about separating from your spouse, you may prefer to wait until after 5 April.

A new client came to see me this week and described her family finances. In addition to the family home there are some jointly owned properties, one of which is a villa in Spain. Her husband’s company is worth a tidy sum – even in these recessionary times – and she is a director of that business. She holds 49 per cent of the shares. The couple also owns shares in various quoted companies. These jointly owned assets will have to be divided up between them.

At this point I asked Nick White, who heads our Forensic Accountancy Department at Stowe Family Law, to join our meeting. After he gave our client some very sound advice, I asked him to write up some of his points as a post for this blog.

Here they are:

The UK’s annual tax year runs from 6 April to 5 April in the following year. Unlike business accounting years, the tax year cannot be varied to suit one’s needs.

As with all areas of tax, capital gains tax (CGT) is far from straightforward. For divorcing couples, it is more complicated still. When capital assets such as shares in companies (quoted or private) or property are disposed of, by way of sale, transfer or gift, the disposal gives rise to a “chargeable event”. This can result in a CGT liability for the person who makes the disposal.  Specific provisions apply to married couples and to civil partners transferring assets between themselves. These provisions continue to apply during divorce or dissolution proceedings.

Transfers of capital assets between married couples and civil partners result in no immediate charge to CGT – as long as they take place in any tax year during which the parties are living together.  For divorcing couples, the key date is the date of separation.  Couples are considered to have lived together for the entirety of the tax year during which they separate. This means that as long as any transfer of a capital asset takes place before the end of that tax year, no CGT should be payable.  (Note that ultimately, when the asset is finally disposed of by its recipient, a charge to tax will still apply.)

Consider then two couples separating during the same tax year: one couple separates in May and the other couple separates in March of the following year. The first couple has 10 months in which to take advice and consider their options. The second couple has relatively little time during which to consider transferring the assets between themselves, so that the CGT liability can be avoided. Unfortunately their relationship is likely to be at its most stressed during this period; therefore any desire by one party to assume full ownership of jointly owned assets may be viewed with suspicion.

What is more, a March separation gives a small window of a month or less in which the parties must instruct advisors, and in which those advisors must get to grips with the nature and value of the assets in the case. The advisors must also decide if inter-spousal transfers of assets are appropriate, reach agreement with the other side and implement a transfer.

If all of these feats are not accomplished by 5 April, the financial consequences can be substantial for couples with many property assets, in cases in which a transfer of one or more properties from one part to another appears likely.

It isn’t all doom and gloom. In certain circumstances, various capital gains tax reliefs are available, particularly in respect of business assets, such as shares in a trading company.

In short, however, separating shortly before the end of a tax year provides little time in which to consider and implement the most tax efficient arrangements. If in doubt, wait – or seek professional advice at the earliest opportunity.

Nick White, a chartered accountant of 20 years standing, is head of our in-house Forensic Accountancy Department. He assists our clients with their financial disclosure and investigates the accuracy and thoroughness of the financial disclosure provided by other parties.  He is well versed when it comes to evaluating the veracity of the complex financial information disclosed by our clients’ partners

With a forensic accountant as an advisor, a client can be given a swift measured opinion.

Here at Stowe Family Law we have our own in-house forensic accountancy department. It happened more by accident than design.

About four years ago, I had lunch with a partner at a well-known accountancy firm. I had encountered him professionally on a number of occasions, when he had acted for our clients and against them. I was impressed, as I knew local barristers were, by his sensible, moderate and economic approach. He didn’t waste time and money asking questions that made no difference to the outcome. He was good at giving evidence and his concise opinions were respected by the court.

As we had lunch it dawned on both of us that we could work together, to offer a novel service to our family law clients that other firms did not. We shook hands there and then. This was how the accountant in question, Nick White, came to join us. It was as simple as that. I liked him, I trusted him and I trusted him to advise our clients. The arrangement has worked very well, and Nick White now heads our flourishing forensic accountancy team.

It means that when clients come to see us, there is no frustrating wait for financial information before we can advise on tactics. Instead, we can begin work immediately. This is particularly pertinent when we have to consider a freezing order (known as a Worldwide Mareva) against a client’s spouse. In such a case, time is of the essence.

With access to Companies House and global databases, Nick can download information, analyse it immediately and advise us where to concentrate our efforts. He can tell us if the client is likely to be chasing rainbows, or if there really is something worth looking at. He can provide immediate advice about the likely scale and nature of a case.

On occasions, a client’s understanding of a spouse’s financial situation does not match the reality. With a forensic accountant as an advisor, the client can be given a swift measured opinion at the first or second interview.

Similarly, our forensic accountants can provide advice about the likely value of a client’s business for the purpose of a divorce.  This is useful because business values may be artificially inflated or deflated by the client, for a variety of reasons. Because he is an independent, professional advisor, Nick’s eagle eye and “broad brush” approach can keep a client’s expectations in tune with reality. We can focus on taxation, liquidity, settlement and methods of payment – all of them art forms. Payment terms require skill to negotiate so that the client walks away satisfied with the outcome. This is particularly so if that client is seeking a clean break without the prospect of maintenance payments stretching out into the future, or the unwelcome possibility of a future additional capital payment (under section 31 of the Matrimonial Causes Act 1973, which I have examined in a previous post).

The capitalised value of a business is always a tough issue and often contentious. Because it is dependent on the outcome of separate valuations, one spouse may be advised to ask for too much – and the other spouse may be advised to offer too little. A substantial amount of costs can be wasted by concentration on a wholly artificial exercise because the business is not going to be sold. Rather, its capital value will taken into account when considering a capital award for a spouse. When a business is sold on the open market, the transaction takes place between a willing buyer and a willing seller, both of whom are acting for self-interest and gain. In the case of a divorce, however, different principles apply.

This thorny issue was recently considered by Mr Justice Moylan in the case of H v H (2008) EWHC 935.

Mr Justice Moylan is a “safe pair of hands” and his awards, never overly generous in my experience, are unlikely to be set aside on appeal. In this case, the Judge clearly felt that from the outset, the parties had adopted the most extreme of positions. The wife had asked for too much and the husband had offered too little. They were litigating over the capital value of a successful restaurant business, which had been owned by the husband long before this marriage (his second) had taken place, and in which he intended to continue to work.

Two forensic accountants gave differing opinions as to the value of the business. The husband’s accountant stated £1.7 million; the wife’s accountant stated £5.3 million. Quite a difference! The husband’s legal costs, including accountancy evidence, totalled £126,000; the wife’s, £280,000.

The Judge began by quoting from Lord Nicholls in the House of Lords case, Miller v Miller; McFarlane v McFarlane (2006), UKHL 24. “Valuations are often a matter of opinion on which experts differ. A thorough investigation into these differences can be extremely expensive and of doubtful utility…. This is to misinterpret the exercise in which the court is engaged…a broad analysis, not a detailed accounting exercise”.

Mr Justice Moylan stated that in his opinion, to seek to construct an award based on a broad valuation of a business could be unfair – particularly since valuations of private companies “are among the most fragile valuations that can be obtained”.

But how is such a substantial asset in a marriage to be valued? Evidently not by the detailed exercise in which these parties became involved!

Both accountants had managed to agree that an “Enterprise Value” was an appropriate methodology. This is an assessment of future maintainable earnings (FME) and application of a multiplier to those earnings, in order to calculate the capital value of the business. The wife’s accountant, however, contended for FME of £856,000; the husband’s, of £633,000. The wife’s accountant applied a multiplier of 9; the husband’s, a multiplier of 6. The parties then argued about the multiplier and about a number of other complex issues affecting the final figure. The judge patiently considered them all, in the interests of fairness to both parties, but made it clear that he was not validating the exercise.

The Judge decided upon an FME of £725,000 and a multiplier of 6.5, which gave a net business valuation of £2.5million. He found the husband’s involvement of more than 33 years in the business as a relevant pre-marital contribution, and rejected the wife’s application for equal division of capital.

Mr Justice Moylan expressly referred to fairness as the overriding principle.  He assessed the wife’s needs and, although both parties had argued for the wife to be given a clean break, (the husband on the basis of an excessively low capital award, the wife on a near wipe-out of the husband’s capital), found a clean break to be unachievable. He awarded the wife capital and continuing maintenance. Presumably, this satisfied neither party. After all, they had racked up joint legal costs of £400,000!

So what conclusions should be drawn?

Sometimes it is hard for advisors to stand back from their clients and take a birds’ eye view. But in cases such as this, advisors need to remain objective. Fairness requires less subjectivity and more of a meeting of minds.

I would recommend that in most cases, a single joint experts’ report should be obtained to value business assets. My preference is for less analysis, which I find many forensic accountants adopt when preparing their reports. Perhaps this is with an eye to professional liability – it is hard to say. However, I believe accountants could and should be comfortable with a “broad brush” approach.

In a case such as H v H, by agreeing to an even higher valuation than that adopted by the Judge, perhaps that £400,000 could have been better used to meet the parties’ needs. The focus could then have fallen upon how the payment would be made, and over what period. By agreeing the maintenance to be paid until the capital sum had been paid in full, fairness and certainty would have been achieved for both parties. Finally, the spectre of section 31 of the Matrimonial Causes Act 1973 would also have been avoided.

I have been profiled in the latest issue of Yorkshire Today magazine.

The full interview is after the jump.

A LAW UNTO HERSELF

Marilyn Stowe is one of the most renowned female lawyers in the country. Her pro-bono work on high profile cases such as Sally Clark – the woman falsely accused of murdering her two baby sons – has earned her a formidable reputation. Yorkshire Today met with the Yorkshire woman to see what makes her tick.

• I’d like to begin with how you got started in law. Was it something you always aspired to do from an early age? And how did your career develop.

At Leeds Girls High School I used to enjoy English and acting in school plays. We had to learn Shakespeare by heart every week which I liked. It tremendously developed my memory. And I particularly liked being Portia in the Merchant of Venice, so I decided I wanted to be a lawyer! I graduated in the top tier at Leeds University then went to teach English law at a French University in France thereafter qualifying as a solicitor. I initially handled a lot of commercial cases. When my son, Ben was born I had to ease up a bit. At the same time, commercial clients started asking me to handle divorce work. It was an excellent move – I found divorce was far more interesting than commercial law, because it centred on working with people.

• Your family law practice is 25 years old this winter, did you always believe it would be so successful? And why do you think it has been so successful?

I never expected that Stowe Family Law LLP (formerly Grahame Stowe Bateson (Private Client) Family Law Unit) would become as successful and high-profile as it has. When I started out in business in 1982, female company directors were a novelty in Yorkshire. Launching my practice meant taking out a second mortgage on our home and a bank loan – which resulted in “pre-emptive” action from a cynical and incredulous bank manager. He made weekly inspection visits to my East Leeds office, based in a converted cobbler’s shop, to scrutinise every detail of how I ran my firm.

I attribute the firm’s achievements to self-belief, determination and always going the extra mile. I am extremely discerning when it comes to recruitment – to ensure that Stowe Family Law LLP attracts the top talent. One of our lawyers, Julian Hawkhead, is among the UK’s leading specialists in “collaborative divorce”: a new method of resolving divorce matters that has already attracted a great deal of positive attention. Other lawyers such as Frank Arndt specialise in international cases and our specialist forensic accountancy unit headed by Nick White is expert at tracking down spouses’ concealed assets which range from secret bank accounts to entire property portfolios! Christine McVeigh and Judith Routledge are very experienced top women lawyers – we have a professional team of 20 and I’m very proud and confident in them all. Many of our clients are Yorkshire-based, but others come from all over the world; our expansive range of top-flight legal expertise is all-important.

• What prompted you to set up in Yorkshire and not London?

I am a Yorkshire lass through and through. It is a dynamic environment, which is currently enjoying a period of renewed prosperity. In my opinion, Yorkshire is also the most beautiful region in the UK. Why leave?

• Probably your most high profile case has been that of Sally Clark. Can you explain how you become to be involved in this case, what it meant to be involved and also how it felt when the case was finally quashed (also how you felt when Sally passed away in March this year).

I have always been committed to pro-bono work. In fact, I met my husband in 1981 when he and I were both doing voluntary work at Chapeltown CAB and I still take on pro bono cases where the client has hit a brick wall and I feel my legal expertise can extricate people out of a crisis.

With this particular case, I felt very strongly as a mother that something was horribly wrong. I have had friends who had experience of cot death, and what I had heard about Sally Clark’s case coupled with that implausible cot death statistic just didn’t add up. On an impulse, I wrote to Sally Clark’s website offering to help. I obtained from a hospital in Macclesfield, where Sally Clark’s sons were taken after they died, a large file of documents relating to their deaths. A pathology report from that file, which indicated that one of the boys had died of a viral infection, had not been produced at Sally Clark’s trial or appeal. Her own lawyers had not been able to obtain that information.

I was thrilled when Sally Clark was released, and very proud when she thanked me from the steps of the Court of Appeal. I was also deeply saddened to learn of her death. It came as a great shock.

• I imagine the world of law can be a very male dominated one, would you agree and have you ever come across any prejudice?

When I founded my law practice, we had already witnessed the introduction of equal pay, anti-discrimination legislation and the election of Margaret Thatcher as our first female prime minister. Even so, women still had to behave like macho men if they wanted to be taken seriously. There were 2 categories of professional men; – the paternal types who made it clear that they regarded females as players rather than competitors. The second category comprised the downright rude: I was called a “bitch” on more than one occasion. Thankfully, such behaviour is now (almost!) unthinkable.

When Ben was born, there was still a stigma attached to working mothers, and nursery facilities were few and far between. Notching up 100-hour weeks, I often had to bring my son into work in a carrycot and was derided by many who said I should have stayed at home with him. Juggling everything was a constant challenge: mentally and logistically. Whenever a client arrived for an appointment, a member of my staff would have to bundle the carrycot outside and take my baby for a walk. Fortunately, attitudes to businesswomen and working mothers have improved dramatically.

• And finally, what would you put your success down to?

I am a true Taurean so I think one of my strengths is tenacity. Once I have something I won’t let go if I think I’m right. I will go the extra mile and spend hours at work and at home thinking my way round a case, not just in a straight line. Once a client paid me a huge compliment and said “May I say you have a fabulous…… brain!” and I laughed. I am still able to remain detached and my style enables people to move forward, leave the trauma behind – and see divorce as a new beginning.

Clients do want straight-up advice and they want to win. That is why they are paying their fees. I am a Yorkshire person and a straight-talker who helps them through the process. The reputation of our practice speaks for itself: we constantly deliver and we are one of the biggest firms of our kind throughout the UK.

My level of commitment to the business does mean sometimes my brain acts like a computer, backing up in the middle of the night.

I have often woken up and had a thought which solves a case that has been puzzling me. In one case at 3am I realised there must be a dual company and non disclosed partnership being run together – and I was right. Once I started an injunction in the middle of the night, when I realised what was happening within a particular case that had not been disclosed to me. I had until nine o’clock the next morning to secure the injunction. In the end, I got a judge on the phone and sorted it by half past seven with an hour-and-a-half to spare! The solicitors on the other side paid all my costs.

When I really do want to leave it all behind I go distance running – it clears my head and relaxes and energises me and Yorkshire is the perfect place for running.