Podcast S6E1: Navigating Financial Complexities in Divorce with Forensic Accountants

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TRANSCRIPT

Hugill & Ip presents Series 6 of the HIP talks “Family matters”, a compelling podcast collection delving into the complexities of family law in Hong Kong. This season, our expert solicitors engage with preeminent professionals, psychologists, financial advisors and mediators to explore the real stories behind divorces, custody battles and financial disputes. Hugill & Ip brings you this series as part of our commitment to modern, client focused legal services, whether you’re navigating family law issues or simply interested about the system. Family Matters delivers sharp analysis without the jargon.

Kajal Aswani  00:39
Today we will explore the intricate world of family law and the financial complexities that often come with it. I’m your host, Kajal Aswani, and today we are diving into a crucial aspect of family law, the role of forensic accountants. In this episode, we’ll uncover how forensic accountants help untangle financial disputes, assess hidden assets and provide clarity in divorce proceedings, whether you’re a legal professional, someone navigating a family law issue, or simply curious about the intersection of finance and family law, this episode is for you join me as I chat with Tavish McLean, an experienced forensic accountant who will provide critical insights on forensic investigation in divorce proceedings and how that can make all the difference in a case. But first, a bit about me. I’m a Hong Kong born and raised Indian. I was trained as a general litigator with a focus on family law, with over 20 years of experience in this field, over the years, I’ve dealt with several high conflict and high net worth divorce cases, the longest one lasting at least nine years, involving several offshore companies and complex business structures. I also recently completed a 19 day divorce trial in the High Court involving dissipation of assets and dispute over ownership of assets with complex company structures. In those type of cases, it is almost certain that forensic accountants play a crucial role. Tavish, welcome to this show. Could you please introduce yourself and tell us a bit more about your background.

Tavish MacLean  02:21
Thank you for having me. As you mentioned, I’m a forensic accountant. I’m a director in Deloitte Strategy, risk and transactions team, and I deal specifically for with forensic accounting in disputes.

Tavish MacLean  02:34
Day to day my practice involves shareholder disputes, divorce, contentious probate matters, litigation support and expert witness assignments. I relocated to Hong Kong 15 years ago from Canada, following what was planned to be a 12-month backpacking trip with my now partner. It’s a fairly common story, as I’ve come to learn, since Hong Kong is such a welcoming and livable place, and certainly in my experience, a very easy early career springboard in professional services. My experience in the accounting profession would have unfolded much differently had I had been anywhere else. It was actually my father-in-law that suggested I explore forensic accounting when I was fishing for some early career advice, and before really knowing what I was doing, I was on my way to Hong Kong on an adventure to finish my accounting education and to find some work. I’m fortunate to have been able to have started my career in forensic accounting and insolvency, rather than to have to begin in tax or audit, which is also a very common route, although seeming to me a bit of a tedious one, this exposed me to the stress and excitement of this profession very early, and it’s been very rewarding all along the way.

Kajal Aswani  03:34
That’s interesting. Tavish, as you know, Hong Kong has been the Asia’s World City. So and stories that I hear from my friends often is that it’s a common one. You know, you come to Hong Kong thinking that it is going to be a short visit, and then you end up making this your permanent home. Just a little bit more about me. I don’t know if you know this, but as a junior lawyer, I do not want to practice family law because of all the emotions that’s involved and obviously the misconception that comes with it, that family lawyers direct marriages.

Kajal Aswani  04:05
But when I first came across a case as a trainee solicitor in my second year, it really piqued my interest. The case I was involved in actually was a couple who were married for 47 years, but the husband disputed the validity of the marriage. I mean, can you imagine the animosity and the heightened tensions that followed? I mean, it was really those Ally McBeal moments for me, when I used to go to court. And every time we were there, there was always a change in defence and new matters being thrown in. And was just incredible. Now you can imagine with, you know, someone disputing a marriage. The case that followed after that was just complex, and it involved a lot of companies in various jurisdictions, including offshore jurisdictions, requiring involvement of forensic accountants to trace assets. It became very clear early on in that process.

Kajal Aswani  04:59
Is that I was involved in that we really needed to rely on accountants for these type of exercises. I think the concept of divide and conquer is extremely true when it comes to dealing with big money, complex divorce cases.

Tavish MacLean  05:13
No, I completely agree. We tend to get involved in cases at a few different phases of the life cycle. As you could put it, of a divorce. My preference is usually, and I think this is the overwhelming preference in the profession, is that we get involved, really, as early as possible. So at the outset, to back up, to back up. It’s helpful to bear in mind that, and this sounds a bit cynical, but whenever there’s money or value at stake, there is a significant risk of deception, and especially that’s the case when one party or the other is not particularly financially savvy. So we talk a lot about the tools that forensic accountants use to identify concealed assets, but before we even start on any of those points, the technology points, the types of analysis, the first tool is really awareness and everyone should have family money matters as part of their interest. You may not know every single in and out of exactly where to begin looking, but the financial family life is a really important area to have a working knowledge of, not only as relevant to divorce, but you know later on, if you need to pick up the pieces following a death of the other spouse, the you can feel very much alone if you’ve not bothered, or if you’ve not taken the time to incorporate that into your body of interest, ask yourself whether you’re paying attention to how money is discussed in your family. What concerns arise as a starting point, how your spouse talks about money with friends. This will give an indication, I think, later on down the line, about what’s actually important in the in the financial standing of the family, bringing in a professional is where we want to bring in some necessary clarity, and this is often at the at the time of disarray or upset. So that’s death, divorce, bankruptcy, or when contracts get breached and so on. Forensic accounting involves the application of accounting, auditing, investigative skills to involve financial disputes, and in the context of matrimonial disputes, our role is really to untangle the complex financial matters, identify and appraise assets and ensure that both parties and the court have a very clear and fair understanding about the financial situation at stake. So bringing in a forensic accountant that really as early as possible can significantly benefit the entire process. Early involvement allows us to gather and analyse financial data more effectively, identify potential issues and provide some strategic advice. This can help prevent the loss of valuable information and ensure that the financial disentanglement is as smooth and fair as possible. So for example, if a spouse has been hiding assets or manipulating financial aid records, or if it’s suspected that they have done an early intervention can help uncover whether or not those issues require maybe more information or more investigation. If you can collect information or have some visibility into what may be going on before professionals get involved, it makes those assets much easier to uncover later on down in the piece.

Kajal Aswani  07:58
Yeah, so you’re absolutely right there. Tavish, I mean, one of the things that I always advise my client is pre separation, is, if you’re thinking about divorce, it’s extremely crucial to take some preliminary steps. So you start by, for instance, gathering financial documents. You look at bank statements, you look at tax returns, and you identify what are your debts and liabilities. This will do a couple of things. It’ll give you a comprehensive understanding of what your financial landscape is looking like. But also because in the divorce proceedings, there’s a very important process, which is to identify what are the marital assets. And because of this concept that we have, which is full and frank disclosure of assets in in the divorce proceedings, what that means is both parties must fully reveal their financial situation to facilitate fair settlement. Now we have this important tool called the form e, which you may have heard of. It’s basically the financial statement. It’s essentially a 20 page or 20 plus page questionnaire where parties will have to complete and set out everything in respect of their assets, liabilities, investments, etc. So, you know, it is quite crucial that when parties are thinking about divorces, they are then thinking about gathering this essential information prior to initiating any proceedings, and again, in situations where marriage is already on the cracks and you are contemplating divorce, you would see situations where a financially stronger party may have already taken steps to restructure their matrimonial assets. And this is again, because in Hong Kong, the starting position for financial division of assets in long marriages is equal division of assets. So essentially, there’s no distinction between a breadwinner and a homemaker. So what the court does? It really takes into account both roles and contributions by both party as equal so with that in mind, knowing that starting position is equal division, sometimes you will see, and actually, more often than not, that parties would have already taken steps to restructure their assets at the time when they’re contemplating separation. So my advice to clients Tavish is, well, keep your eyes and your ears open. Well, what does that mean? It’s that during the course of your marriage, if your spouse has had discussions with you, for instance, about, well, we are going to go to this country and think of assets, or they’re talking about bitcoins and digital assets, something of that, I would say, have a mental note of the discussions you’re having with your spouse, because once the form e is disclosed to you, you can then look back and see whether there were questions or there were those assets that were revealed. I would also say that if you’re having males come to your household from a bank, for instance. So let’s say it’s Bank of China, Bank of America. Keep a mental note of that, but beware, do not open those envelopes, right, because there can be serious consequences due to breach of privacy laws, and we regard this as self help. So do not self help by opening these documents. Do not even think about breaking into phones or computers, because there, as I mentioned, there could be serious consequences.

Tavish MacLean  11:26
That’s a fair point. I think, as I mentioned before, it’s really awareness. I think that that’s, that’s sort of where we’re the point we’re trying to emphasize here is really your first tool is awareness, making sure that you understand, okay, right? If there’s bank statements coming through. If there’s expensive hobbies that are being pursued that you have some idea where and about the money is coming from and where it’s going to, who’s it to? Whose benefit is the money being applied? Moving past awareness and into information gathering, as I mentioned, is is also important. And this really is where we come up with a sort of memory aid for when the when the professionals need to be brought on board. This is going to save a lot of time and a lot of resources when you have a very good idea of potentially, where you think there have been accounts that have been left out of of the of the of the for me, picture properties, real properties, if there might have been other interests, like, let’s say, the watch collection or the yacht collection, that should certainly be disclosed, but for some reason they appear to be missing. So what do we talk about when we’re talking about asset tracing and this? This is only a minor side bar, but typically, at this stage, we’d be looking at three different categories of assets, corporate assets, tangible assets and financial assets, corporate assets being shareholdings, interest in joint ventures and so on. Tangible assets, that’s our real estate, real properties, boats, watches, cars and like. And financial assets, that’s principally cash and bank accounts and cryptocurrencies, very topical these days, so the techniques for tracing those assets are limited at this early stage, usually due to incomplete information. Although it’s important that we maybe, if we’re if we’re a capable firm, or if we’ve got connections overseas, that we can mobilize investigators, we can involve a larger team geographically to be able to assist in that search. So in Hong Kong, that’s the company’s registry is one principal source of information, and we can go there first and find out where, okay, we have certain companies that have been identified, who are the members and directors of those companies.

Kajal Aswani  13:34
But if it’s an offshore company, it’s a bit more complicated, isn’t it?

Tavish MacLean  13:37
It’s much more complicated. And that’s where we might get the first indication of an offshore company if it’s say the if it’s one of the shareholders of your spouse’s company, then we know to go to BVI or Cayman or Mauritius, or wherever, the wherever the documentary trail is going to take us, right? So the practical steps, as you mentioned, are really going to be documenting, monitoring, communicating and getting that professional advice early. So what do I mean? Keeping a record, even however informal that it is, if it’s an Excel spreadsheet, it’s a it’s a box of observations, it’s something that you can go back on and just remind yourself. When it comes to actually divorce day, we’ll have something that we can remind ourselves with monitoring, making sure that we have those conversations open and often, and taking a look at identifying bank statements or bank statement numbers, as you said, without digging too deep, yeah, without reaching any privacy laws exactly communicating to the extent that it’s been possible to communicate financial matters openly and honestly with your spouse, and when all of that is in place, consider professional advice, as I said, early as possible to get a head start on gathering and analysing that financial data.

Kajal Aswani  14:50
Yes. So thank you for that, Tavish, so as I mentioned earlier during this podcast, the very important tool that courts in Hong Kong rely on with regard to financial disclosure is the form e documents. Now, as I said, very often than not, we will have information there that may not be complete, and that’s when we sometimes would have to ask further questions with regards to those assets or anything that has been revealed. And there is a process that’s built into the divorce proceedings, and I’m sure you’re familiar with this, because we would normally have to instruct forensic accountants at some stages to actually help us with the right type of questions that needs to be asked with regards to certain assets. So for instance, in a for me that I would often come across, if parties have private companies, for instance, there would be missing information, such as valuation of those companies. And again, you know, we will be provided with audited reports. But as you know, and maybe you can highlight some bits about that, with regards to how valuations in companies are then calculated, because clearly, just relying on the net net asset value of the company would not be sufficient. So that’s something that we can cover during this podcast, in terms of how companies are valued, and also from my experience having a forensic accountant during the process of investigation of disclosure can help. So I’ll give you an example. I had a case several years ago where my client was required to disclose his bank statements going back to five years, and one of the allegations that was made that over the course of his marriage, he had accumulated substantial income investments and the pot that was disclosed was essentially higher than what was actually the real fact. So ultimately, we had to instruct forensic accountants to essentially go through all of the bank statements, including the income, to set out essentially what was the actual part, and it was quite a tedious exercise. And if I had to do it myself or with even juniors in my team, the cost would have significantly escalated, and we made the right decision, rightly so at the time to instruct forensic accountants to help us out with this sort of process.

Kajal Aswani  17:21
I also had another situation, again. This was early on during our divorce proceedings. Is where we had to instruct forensic accountants during the disclosure process to ascertain the wife’s spending habits, because whilst the form e would clearly set out the expenses, the liabilities, the needs of the parties. Ultimately, when she took out an application for interim maintenance, the figures were much, much higher than what was historically being spent during the marriage. And, you know, instructing forensic accountants at that stage where they were then able to go through the bank statements we were there, they were able to identify what were the spending habits during the marriage and, you know, during the separation. And then, opposed to the application that was actually being made…

Tavish MacLean  18:13
You raise a really interesting point, and one of those is, you know, I kind of go back to early on. I was discussing, you know, what? At what point do we get engaged? And sometimes we do find that it’s very tempting for, you know, solicitors and their and their juniors to try to get their head around what are going to be the forensic accounting issues, yeah, forensic accounting issues, until things really get quite complicated, and then they tend to not hoard the work. It might come across my desk. And really, I think every, every forensic accounting team will have their own approaches to how to really get their head around that. But ultimately, the technological aspects of this are a bit rudimentary. I mean, it’s still done a lot with spreadsheets. We’ll build up a database of transactions. And, you know, you go through this, and there’s an orderly manner to be able to build up what the average expenditure and income from companies and what those, how those would actually benefit the family pot. So there is some discipline to the program. As you mentioned, the for me, really does. It’s supposed to have everything. It’s supposed to have all of your expenditure requirements stated by categories, potentially supplemented with bank statements, credit card statements to support those facts, considering that the marriage might have been having difficulties for some time, in the ideal scenario, lawyers would secure the disclosure of yeah, four or five years, I would say there’s no hard and fast rule, but I would say four or five years gives a very good window into, let’s say things have been deteriorating for two years, and and my spouse has had two years to start shifting things around to make it look like that. This. This matrimonial pot is quite small. My expenditure requirements are either inflated or deflated, depending on exactly what purpose we want to serve. And yeah, if you go back before that. So if you go back significantly further, four years, we’re able to look at the picture and see if it’s changed over time. And that’s that type of analysis is a bit more complicated. And so that’s when it’s helpful to have somebody who’s got a bit of a program and a bit of a track record to be able to put that analysis together, yeah, and then really communicate it in a way that is a layperson can understand. I mean, I do have a lot of sympathy for the judges who have to read valuation reports that exceed five, you know, three, four or 500 pages.

Kajal Aswani  20:35
Now, just, just on that Tavish, you’ve brought up an important point. So just starting point financial disclosure in form e, the standard period of disclosure is just one year with regards to bank statements. Now, of course, in scenarios that you’ve just described, where if there were cracks in the relationship early on, if parties were talking about separation, and as I mentioned earlier, and you did as well, that parties could have already started restructuring their assets. So there is an argument where often courts may sometimes agree to having disclosure going back to a certain period of time. So in a case that I dealt dealt with several years ago, we went back five years. In another unprecedented case that I dealt with went back eight years. The other thing I wanted to mention is the courts views on documents that are being produced in divorce proceedings. So very recently, I think was two years or three years ago, we’ve now introduced this system whereby the questionnaires are only limited to initially was limited to five pages for simple cases and 10 pages for complex matters. But now that’s been, again, limited to 10 pages. So what the courts are really trying to do is to have as little questions to be asked initially. Of course, if there’s a reason that the parties are not complying with their discovery requirement or disclosure requirements, then you would be taking out appropriate applications, like specific discovery applications. But even then, my recent experience in court has been the judges would turn around and say, Well, you know, the parties I experienced, lawyers go out and deal with it by way of correspondence, because they’re always inundated with so much paperwork and disclosure that, you know, you need to draw a line somewhere. Oh, certainly, yes. And there’s this concept of adverse inference, as you know, where the courts will say that if someone has deliberately not provided certain information, that adverse inference can be drawn against them.

Tavish MacLean  22:32
And I think the cost of doing this, this type of exercise, is often disproportionate in most cases, if we’ve got, I mean, we know that the advice, this type of advice, is not free, and clients may not wish to spend money on doing a scenario analysis that covers 5,6, 7 years, unless there’s very good grounds to do so. So I tend to sympathize with the court on this one.

Kajal Aswani  22:58
Yes. So, you know, just going back to the question about valuation of company. Now, as I said, often we will see parties with private companies, and the information on the form you will be limited to to be confirmed, to be advised. And this is always a matter that inevitably needs to be dealt with by forensic accountants. Perhaps you can explain to us your involvement in these type of situations, and what sort of help you can provide clients in these situations…

Tavish MacLean  23:27
Certainly, at least in my experience, valuation is, is the primary instance where we get involved in in these types of disputes. I shouldn’t say disputes necessarily, because often the value of the company is just TBC. It’s nil according to whichever party is controlling the business. They don’t see it as necessarily worth anything beyond what it’s giving them in terms of a salary, and they don’t really know business valuation, and so they just put nil, or they’ll put TBC, as you say. So business interests or valuing private business interests can be quite challenging. Obviously. Fact specific depends on exactly what we’re looking at, especially for closely held companies where there’s usually a paucity of documents. So we use one of or a combination of three different valuation methods, the income approach, market approach, asset-based approach. I might lose some of our listeners here, because this is where it gets a little bit dry. But valuation is, I prefer if we can afford to to use an income approach, but that involves estimating what the future earnings of the company will bring to the shareholders of that company. So what is the value today of all of the money that you’re going to earn from this in the future? That requires some projections. Those can be difficult to find. They may not exist. If the partner, if the, if the, if the spouses themselves, are operating that business together, they may have very different opinions about what that will bring. So that’s one forensic accounting battleground that is very common. Take the example of a joint venture you’ve got an operating partner and a silent partner. The silent partner has invested a lot of money into this venture, very much like a marriage. Then years go by, the silent partner suspects the operating partner of misappropriating funds or fudging the book somehow. But they have no access to information. They’ve not been kept alive to anything that’s going on. So where does this leave? The dispute is that the operating partner, in one case, that might be one of the spouses, has essentially all of the information with which to inform evaluation, and so they’re on the, really, the receiving end of a lot of the disclosure orders. It’s a proportionate amount of information that they keep, because if, really, they’ve been shut out, intentionally or unintentionally, this silent partner, that’s just the situation that you find yourself in. Alternatively, difficulty with private companies as well, is a market approach, and this involves a comparison of the subject company’s performance against some publicly available benchmark. So it could be a price to earnings ratio. It could be, with reference to a recent transaction of a similar company that’s taken place in a private equity market. As you can imagine, finding a decent comparable, or a mix of comparables, is a matter of heated debate can go on for a long time, and nobody can really get to a I mean, it attracts a lot of respectable criticism, I should say.

Kajal Aswani  26:22
Tavish, what about the nav, where it’s the net asset value? Is that something that parties, if they put that down on a form E, as the valuation for company, should any weight be placed on that? And how would one, as a forensic accountant, how would you view that?

Tavish MacLean  26:39
Skeptically, I suppose, is the best way to put it. I think an NAV is a perfectly acceptable and it’s one of the three valuation methods that that I would turn to. It’s determined simply by subtracting the business’s liabilities from its assets. The per share nav is then obtained by dividing the nav by the number of shares. It’s, it’s often, in the case like this, it’s, it’s a it’s a 50/50, and the issue is that it’s merely a snapshot at one moment in time, and so it really excludes any of the benefits of holding this into the future that are set out explicitly in a discounted cash flow or implicitly by the market approach. And so it’s usually the lower of the three. And so it’s important that when we’re doing a valuation, we have at least one cross check.

Kajal Aswani  27:22
The other aspect of NAV as well. I think we were having this discussion recently, was where you mentioned that the assets, if they’re listed on the audit reports, the value would be as of the date of purchase, and not necessarily as of the date the market value as of the date of the divorce, for instance. So those will have to be then updated and valued at price. So therefore, the takeaway that I see is that you do not rely on the NAV based on the audit reports. Is that, is that how that’s correct?

Tavish MacLean  27:54
Yeah. And I would, I would add to that to say, you know, depending on how, how those books are constructed. So financial statements in Hong Kong are all audited, unless you’ve got some exemption from providing the audit report. But the notes to those financial statements will set out what the basis of valuation for a lot of the larger assets. So obviously cash at bank is exactly what the bank balance should be. But if it’s real properties, those would likely deserve a closer look. If they haven’t been, you know, if the book value is as of 2015 if things have taken a nosedive, then at the very least the NAV is helpful as a sense check. But there are, as you mentioned, quite a few caveats. Where it’s it’s not going to give you what I think is, what I think is closer to fair value in these in these circumstances.

Kajal Aswani  28:46
Okay, and what about where? Again, often we see families having companies which are private, limited companies in which they are major shareholders, or sole proprietorships where they are the sole proprietor, and then using the company as their piggy bank to then maintain the family expenses and so forth and so on in those type of situations, firstly, do you come across that a lot during divorce proceedings? And if so, how would you be dealing with valuations of those type of companies, and what is the types of methods you’d be looking at for, what are the types of questions if you’re involved in that you would be asking from the party who is a major shareholder that company to provide for you, then to at least get a valuation of that company?

Tavish MacLean  29:40
I think that there are a few very standard places where we would look to get information. One of them is, first of all, the businesses, bank statements. Okay, the audited financial statements, to the extent that they’re available on audited financial statements as well. So the set of books that’s actually being used to make decisions on a day-to-day basis is probably not the audited financial statements, but they probably have. Have a set of books that then the auditor would use to prepare them. So they may have management accounts, they may have their own projections, and they have their own government filings. So the tax returns would hopefully show legitimately what’s being what’s being declared as income, by the parties being able to separate the business and its sustainable income by necessarily adding back certain items of expenditure that relate directly to the family. These adjustments take place before you can arrive at what looks like. This is the earning capacity of the company on its own with proper management. And this is what the sorry separating that from what the owners managers are taking away from it.

Kajal Aswani  30:43
Right. So it’s very interesting, Tavish that you mentioned about bank statements from businesses. Now, my experience has been there would be a huge pushback from companies in providing bank statements, often citing that this is commercial sensitive information that cannot be produced. And then in some proceedings, or in some cases I’ve dealt with we would only be provided with ledgers that are self generated by companies. But you know, then we would have to take a view on whether or not we need to take on the next step, which is a specific discovery application, essentially going to court identifying documents such as bank statements of a company to be provided. And in those type of situations, what we would need then is perhaps a report from a forensic accountant then to be able to substantiate or justify the type of applications that we are making to the court. Now, what has your experience been in those type of situations where we are looking at getting bank statements from a company, or where we see that, you know, we simply would not accept any ledgers that are being provided from companies as these are self-generated documents. Just wanted to hear from you on that aspect.

Tavish MacLean  32:04
Sure you raised two points in parallel that I think are both deserving quite a bit of attention. One of them is the questionnaire phase, and the other is separately if there’s a need to prepare a short affidavit to explain to the court the relevance of certain pieces of information insofar as they’re connected with valuation. So I’ll take the first one during the formation of the questionnaire. As you mentioned previously, it’s expensive real estate if you only have 10 pages and you actually want to interrogate several dozen, 100 transactions or so because they seem suspicious, or they seem they just deserve more attention. They’re all seemingly awkward, or we don’t understand the nature of the business well enough to be able to make an informed projection on our own. We’ll assist with the questionnaire phase. But it is, it can be. It’s a bit of an art, I should say, to be able to boil it down to merely 10 pages. So I would say that it’s not unusual at all during the disclosure phase and during the review of information that forensic accountants will need to go back make further inquiries, and particularly when looking at bank accounts, they often show, I want to say about 30% of the information that we want, and it’s not enough information to base a a projection on, or make a make a business valuation case on. It’s just the ins and outs of the company. So we’ll have our we have our debits and our credits, but they’re just in relation to the bank accounts. And often, if we’re looking for, let’s say, suspicious transactions, we want to say, who did this $10 million go to. We might only have information on the routing number of the bank account number, but not the name of the holder of that bank account, which means that we need to interrogate that a little bit further. So collecting banking supporting documents, as you mentioned, push back, of course, this is, this is documentation that takes time to get. It’s expensive as well to request from a bank at times, depending on which bank you go to, of course, but it does at least close down those avenues of investigation as need to be which is important. So bank statements unlikely to clearly show the recipient of the payments, and they’re only available from the issuing bank. You can’t go and get them yourself. Ledgers, same thing. They can provide a lot more actionable data than the audited financial statements, but they’re not source data, so they are prepared by the company itself. They might be prepared by the very spouse that you’re trying to get them from, and they have to be treated as such audited financial statements, they may not show the true market value of certain classes of assets. So they’re used as they’re very, very helpful documents, because they at least have some attest to them. You know, there have been auditors that have gone through and taken a look…

Kajal Aswani  34:50
…and they would have looked at the ledgers and not necessarily the bank statements of the company. Am I correct when preparing the audited reports?

Tavish MacLean  34:57
Well, they’ll, they’ll, they will go back and check with the bank. Bank to make sure that there’s to do a balance confirmation. And that’s and I say they would have, but the rule is that they must. I can’t speak to whether or not every auditor actually will do this. Certainly there are cases of auditor negligence all over the place. It does happen, but auditors are not charged with preventing fraud. They have to ensure that there that that material misstatement is reduced to an acceptable level. But if you are actually wanting to defraud your own company, it’s not impossible to hide that from an auditor, right? So we treat audited financial statements with some level of skepticism, and it’s not to say that we don’t trust them at all, but certainly, if we’re doing evaluation, we use those for a specific purpose, and we want to supplement that with better information. And now, on the other hand, you mentioned when we have specific information that might require a short form affidavit, right? And that’s usually just to explain why certain documents maybe they maybe the documents that are that we have that go back one year, are insufficient, and we say, Well, this was a COVID year, and it doesn’t it’s not representative of what was happening in the in the years prior. So we want to see what the trend line looked like. We can explain that to the court, if, to the extent that it’s helpful, right, in so far as it will inform evaluation, yeah, that generally made in the in the format of a short affidavit. So setting out the look back period, the detail of information sought, the specific documents believed to be relevant and in the possession of the disclosing party. But there’s no hard rule. I tend to request five years, because that is is very convenient. But as you say it, if you’ve got a group of companies that’s very complex, very interrelated, that can quickly turn into a very expensive request, and it will attract pushback.

Kajal Aswani  36:48
Yeah. So the limitations with banks is seven years, right? If you go back, it’s up to seven years that you can request for documents.

Tavish MacLean  36:55
You can request however much you want. They are only required to maintain in seven years, yes, but I’ve been, I’ve been able to get 10 years before, Oh, wow. Okay, hey, don’t ask, don’t get.

Kajal Aswani  37:07
Alright. So Tavish just wanted to ask your views on the appointment of experts in matters to assist courts, let’s say, for example, on valuations, so you would hear the courts, perhaps appointing parties experts and sometimes single joint experts, right? So I wanted to know your views about what would be your preference in those type of situations, and what sort of experts do you think that would assist the courts? I mean, would parties experts be more cost efficient, or would, you know, having a single joint expert in these matters help.

Tavish MacLean  37:44
Right. I think I understand the court’s thinking on this, which is, I hope I’m not completely missing the mark, but I, in order to save time cost you, to appoint one expert between both parties, both parties are able to inform that expert, and they prepare one single expert report. It streamlines the process, because in the alternative, and I gather that they can take a little bit of a different format, depending on exactly the circumstance, but you have each party appointing their own expert, taking instructions from their clients, potentially being fed differing information. So specific, going back to the example I was I was using earlier, about the parties that have differing views on the future prospects of the company. So expert A is provided with very aggressive projections expert be very conservative. And so what results is, let’s say, a discounted cash flow valuation, where the experts end up on different planets completely. And that’s not an ideal situation. So then we need to go into the joint expert meeting right where the issues are laid out exactly, what are the what are the points that are agreed and, more importantly, where are the battlegrounds that need to be determined at the next stage? So it’s a longer process. Yeah, in the single joint scenario, you can see how actually, this does streamline the process. It can make it more expensive if both parties decide to, behind the scenes, employ their own shadow experts.

Kajal Aswani  39:21
Which is often the case, isn’t it?

Tavish MacLean  39:23
I think so. I’ve been that shadow expert before, and it’s they’re really entertaining engagements. You know, the pressure is on the single joint expert, and your expertise is being applied to determine whether or not the questions that are being asked are relevant to valuation, whether or not there are legitimate grounds to, you know, resist providing information, whether or not they’re connected to valuation matters or not. But typically, the single joint expert is, is, you know, they they discharge their duty to provide an unbiased opinion to the court. That’s the that is the role of the expert in those situations, whether or not you’re singly appointed or jointly appointed.

Kajal Aswani  40:03
Great so what methods and challenges Tavish have you encountered when valuing assets?

Tavish MacLean  40:11
I mean business appraisal is it involves more moving parts than valuing a, you know, a portfolio of tradable assets. And so really, what the most difficult part of a discounted cash flow, or, or, I mean, principally, a discounted cash flow, because it has the most inputs, but it’s, it’s really collecting all of the relevant documents and information, uh, it sort of brings me back to the point of knowing your family’s financial life, well, getting involved early. If there are points of note, points of concern that you have them top of mind, because we’re not experts in your family’s business. We’re experts in valuation, and when it comes to explaining what is the operating reality of that business, we’re going to rely on the owner operators of that business to be able to round out our own understanding of it. And that is a it’s a challenge, whether or not you’re singly appointed or jointly appointed, getting that information, fishing that information out of people, can sometimes be difficult, because it’s a cagey time in in your in your in your marriage life, where you’re trying to separate?

Kajal Aswani  41:22
No, it’s absolutely quite a cagey time, as you’ve described it. Can you tell us some of your experiences on matters that you’ve dealt with and something that you found extremely interesting, that you’d like to share with our audience today?

Tavish MacLean  41:38
Sure, I was involved in a case about two years ago, and it was a very high net worth family, okay? And we would have been, we were working for the spouse that had principally all of the family, all of all of his family companies assets in his name. They were all corporate entities. They were traded in Hong Kong. They were traded in in they’re traded overseas. And he had written down on his on his form, either they were all worth nothing, right? So naturally, this raised the ire of of his wife, who said, Well, that’s, that’s nonsense. I’ll go and get my own forensic accountant to show to the court objectively that this is complete nonsense, right? And so she did, and she came back, and it looked like these businesses were worth billions and billions of dollars. It was, it was far more than, than, than what was actually being disclosed. So we, looked at the at the valuation reports that were provided, and that forensic accountant had gone through and merely tabulated up the assets, okay, without looking at the liabilities of any of these companies, right? If you have $100 in your pocket and $100 outstanding on a credit card, you’re net zero in that pair of trousers. And every one of these companies actually had on their audited financial statements and in their management accounts, they had loads of liabilities outstanding, but, you know, they might have a lot of real property as well. So they did end up looking nil or close to nil. And so it was a case where the forensic accountants in that case did end up on completely different planets. And so what do we do? Well, we requested, as disclosure, the instruction letter that that opposing accountant had been provided with, okay? And the instruction was, what are the what are the asset balances of these companies only? We’re not interested in the liabilities, so only interested in the asset side of the equation, which does skew things quite a bit, because if you’re only, if you’re only interested in, in in how much the real estate is worth, the judge is confronted with a very interesting question, which is, how is this possible, that you have all of these companies and you’re saying that they’re worth nothing? It puts it, put it, put my client very much on the back foot.

Tavish MacLean  44:03
Yeah. Interesting situation doesn’t happen all the time. There are a number of different ways also that we’ve seen where the way of depressing the value of your company. If one of the spouses has a lot of operating companies and wants to depress the value of those companies, what they might do is say, in terms of my income, let’s I’ll have my official employer just defer my bonus payment until this is done with, okay, that’s a common one. Yeah. If I’ve got two companies that essentially do the same thing, I’m going to have one in the name of my cousin, and I’ll put all of the profitable contracts over into that company, where I’ll keep all of the loss making contracts and we can swear up once this all, once this, this divorce is all through. That’s it comes in all flavours, right? The number of different ways that people can, what we would call it is sort of pre divorce, yeah, depression, where they just push down the value of all of their corporate assets is quite creative.

Kajal Aswani  45:01
Yeah, and then pay off everything in advance on contracts absolutely inflate the expenses of contracts with people that they are, as you said, a cousin in a company that’s been set up primarily to reduce the profits of the company.

Tavish MacLean  45:18
Yeah. And this is where you, you do venture a little bit into the areas of sort of occupational fraud where it’s, you know, this is this. These are perpetrated by insiders to the business, and it’s typically the higher value you go, the higher up, and the more control and the more influence you have over the financial accounts. And so those are the types of frauds that are carried out against a company by an employee or an owner, and they the Association of Certified Fraud Examiners publishes a study every two years. I think it’s survey data. It’s very it’s so it’s, you have to take it for what it is. It’s very interesting, but it’s remarkably similar year to year, and that specific area of fraud is always it’s the least common but the highest value. And it’s situations like this that bring it about.

Kajal Aswani  46:07
Yeah, talking about fraud. Now this is a very interesting thing. So I was attending a conference at the Law Asia last year, and the theme was all about AI technology, AI and family law. Have you ever come across a document that’s been presented to you that may have been generated by an AI and or where, I mean, have you looked at a bank statement, for instance, where you say that the statements may have been fudged and,

Tavish MacLean  46:43
okay, yes, I have, you have, right? It wasn’t in the context of a marital breakdown, though, we have seen documents that have been, you know, bank statements that were presented to to the Finance Committee or to the accounting committee that looked like, well, a bunch of trends, a bunch a handful of withdrawal transactions were removed, and so then, then the running total balances were all amended, and the ending balance was amended. And that was done year after year after year, right?

Kajal Aswani  47:11
Okay, well, the reason why I brought it up is because, again, you know, I was, when I was attending the conference, it was quite shocking to see that there are tools out there available where bank statements can be fudged or, you know, amended or changed by using these apps. And it’s quite shocking, because in divorce proceedings, all we are asked to do is produce bank statements. And you would never think, well, at least before these apps were created, that this was possible if you’re interested.

Tavish MacLean  47:39
And I recommend for anybody that this is their interest, to go on Google and just look up fake receipts, right? You can get a fake Hugill & Ip invoice made up by AI for any amount. It’s shocking, and the amount of AI based deception that is coming up nowadays, where you know previously, if there was something fishy going on with the accounts, and you know, you’ve probably gotten these types, these types of phishing calls, where it’s an email from the boss saying, I just need you to do me a quick transaction. Yeah, can you I’m too busy to pick up the phone, to just pick up the phone. That would normally be the quick fix. Now, the sort of executive video based AI deceptions are quite scary. Wow. And so we’re getting into that neighbourhood now, yeah.

Kajal Aswani  48:28
So just again on that point, the importance of financial disclosure and true and accurate financial disclosure is very essential for the courts to be able to then reach the appropriate decisions on assets division. But one of the cases that was brought up to my attention two years ago, or even maybe a year ago, was where this husband had fabricated all of the documents to the court in the divorce proceedings for the purposes of applying for variation of maintenance and that matter, actually went to the criminal courts where he was then sentenced to at least three years in jail. That sounds about right. So that’s quite serious stuff, repeating documents. That’s, that’s, it’s a twist, Hmm. Well, thank you, Tavish, I think that’s it for now. I hope you found this podcast quite useful, and if you are contemplating divorce proceedings, I would say that you should empower yourself with knowledge and seek professional guidance to navigate this challenging transition effectively. Divorces are not easy, but when you have the right people in your team, you can get through the process easily. Thank you, Tavish, and thank you all for listening in.

49:43
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