CPA Expert Witness

Greg Raffaele provides expert witness services in divorce matters concerning Income and Property issues. The income issues include gross income, cash flow, spousal support, child support and marital lifestyle. The property issues include business valuation (Pereira Van Camp), separate property home (Moore-Marsden), transmuted separate property home (Marriage of Branco), combined separate and marital balance sheet, asset tracing and property characterization, apportionment, allocation reimbursement (CA Family Code 2640), division and equalization. Greg used to provide expert witness services in torts and contract law matters concerning economic or compensatory damages from negligent and intentional acts. But beginning September 2017, he has limited his practice to divorce litigation and divorce mediation. Though his business valuation and forensic accounting expert services may never be used in court, he nevertheless makes certain that it is suitable for court.

The capitalized excess earnings method is used to value a business in divorce matters. Unreported income and personal expenses deducted as business expenses lower the reported earnings of a business, which lower the value of a business value if not adjusted. Business that accept cash may have unreported income. If the business tax returns are unreliable, the marital lifestyle and net worth of the community may need to be analyzed using the net worth method, which is an indirect balance sheet approach to estimating an “true” income. To use the net worth method, it is necessary to calculate the individual’s net worth at the beginning and ending of the period in question.

If a business was acquired or formed before the date of marriage and the business appreciated in value during marriage, then the community property is apportioned using Pereira Van Camp, which are really two distinguishable cases. If the marital home was acquired before the date of marriage and it appreciated in value during marriage, then the community property is “generally” allocated using Moore-Marsden, which are also two distinguishable cases. Refinancing separate property and re-titling it to community property may change the character of the appreciation during marriage (Marriage of Branco).

Public companies like Enron, WorldCom and AIG overstated their earnings because it enhanced the market price of their shares, which was a form of compensation for their executives. Unlike public companies, the motivation of privately-held businesses is to understate their earnings so that they pay less income taxes. The schemes by a business to understate its earnings are not that complex if there is only “one shell” in the game. If there are “two or more shells” in the game, the scheme to understate earnings can become more complex especially when you do not have equal access to all the shells. The most obvious scheme is deducting personal expenses like vehicles, meals and vacations as business expenses. Another obvious scheme is overpaying family for proportionally less work or paying them for no work at all. Accrual accounting can be used to create phantom expenses much like it was used by WorldCom and AIG to create phantom income. Cash flow statements are used to reconcile accrual accounting to cash accounting. Cash is inherently honest because banks faithfully represent your cash, which they either have or not. Cash is king and, unlike phantom income, it is what pays for the spousal support and child support.

“To be persuasive we must be believable. To be believable we must be credible. To be credible we must be truthful.” (A quote from Edward R. Murrow posted in the vestibule of Judge James Waltz, Orange County Superior Court)