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Dangers of Utilizing the Business Accountant as a Valuation Expert in Divorce

by Charles F. Vuotto, Jr., Esq.

Scott Maier, CPA



            To a divorce litigant, it often appears to be more cost efficient to have the business accountant prepare a valuation of his or her business for the purpose of equitable distribution.  However, there are inherent dangers in utilizing the business accountant as the business owner’s expert in a divorce proceeding.  This article highlights these dangers and outlines the areas of attack that should be covered in cross-examination.  For ease of reference, we shall refer to the business accountant as the “company accountant” and the forensic valuation expert as the “expert.”  Many forensic valuation experts may indeed be accountants and some company accountants may also be forensic valuation experts.  However, as this article highlights, an inherent conflict arises when the business accountant and expert are one and the same.  As set forth below, the divorce litigant may find that the cost of not utilizing a separate expert is actually greater.

In order to understand the dangers of using a company accountant as an expert in a divorce case, we must realize the difference between their respective roles.  The services which an expert performs during litigation are generally as follows:

·        Forensic investigation;

·        valuation reports;

·        cash flow analysis;

·        marital lifestyle analysis;

·        immunity analysis of business or non-business assets;

·        net worth charts/calculations; and

·        any other analysis required by the litigation.

Services a company accountant generally performs are as follows:

·        Compliance work – audit, review and/or compile financial statements;

·        tax return preparation;

·        management consulting (implementation of hardware/software systems, internal control reviews, documenting financial systems under SOX, other consulting);

·        bookkeeping services;

·        forecast/projections of future result of operations;

·        valuations for other purposes (e.g., estate planning, financing);

·        personal/business tax projections;

·        determination of collectability of advances/loans to/from company, related parties or third parties;

·        review of overhead costs/true economic profitability;

·        financial management consulting;

·        investment advice; and

·        other services.

The conflicts between the role of a business accountant and litigation expert are acutely evident in the following services:   Forecast/projections of future result of operations, valuations for other purposes (e.g., estate planning, financing), personal/business tax projections, determination of collectability of advances/loans to/from company, related parties or third parties, review of overhead costs/true economic profitability, and actual financial management/investment advice. 

For example, if the company accountant made projections or forecasts of revenues of profits, or valued the company for estate planning or gifting purposes, and those valuations are different from each other or for the divorce related valuation report, he will be subject to significant attack on cross-examination. 

Most problematic, however, are adjustments to the reported income of the company that are done in almost every valuation report.  These adjustments will almost always put the company accountant in a difficult position of having to either: (1) decline to make appropriate adjustments in his valuation report in order to be inconsistent with his work as the company accountant; or (2) make adjustments that conflict with adjustments that he did not make when preparing the company’s financial reports and tax returns.  These pitfalls are explained in greater detail below.

Once the differences in the roles between the expert and the company accountant are clear, the pitfalls of being both the testifying expert and the company accountant becomes self-evident.

·        Loyalty to business owner – the company accountant has a business relationship with one of the divorcing parties outside the scope of the divorce litigation. Therefore, he has more on the line if the litigation does not go well for the client, namely his job. This creates a potential loss of objectivity and independence.

·        Familiarity with client – the company accountant often has some relationship with the non-titled spouse. This offers a lot of fodder for cross-examination. For example, the company accountant may have had informal discussions with the non-titled spouse before the divorce about topics addressed in his report that are inconsistent with said discussions.

·        Ability to verify accounting records – As mentioned above, an expert often must verify or test the company accountant’s work. It is difficult to honestly test or verify the veracity of your own work (tax returns, financial statements…), especially if there are any errors.

·        Ethics Violations – The “appearance of impropriety” extends to the expert witness. Even though there may not be any actual conflict of interest, an appearance of impropriety may prejudice the credibility of the expert.

·        Qualifications and knowledge as an expert – Does the company accountant have the experience or credentials to testify as an expert?  Most business valuation experts possess one or more of the following credentials:

o       Certified Public Accountant (“CPA”) – CPA’s act as advisors to individuals, businesses, financial institutions, nonprofit organizations and government agencies on a wide range of financial matters.  They are licensed by the state, and must follow a strict ethical code.  For more information about CPA’s in the State of New Jersey go to http://www.njscpa.org/.


o       Accredited in Business Valuation (“ABV”) – The ABV designation was created in 1997 by the AICPA. The ABV designation is awarded to CPA’s who have demonstrated educational and practical experience in valuing businesses.  Currently, ABV’s do not have a set standard for valuation, but a draft of the standards has been circulated for approval by the membership.  The ABV credential handbook is available at http://bvfls.aicpa.org/


o       American Society of Appraisers – Accredited Senior Appraiser (“ASA”) –  The American Society of Appraisers awards an ASA designation in business valuation that is based on a curriculum that includes classroom instruction, examinations and a review of appraisal experience.  ASA accredited professionals value interests in closely held businesses as well as other intangible assets such as patents, copyrights, employment agreements and goodwill.  For more information about the ASA business valuation accreditation, including the standards an ASA must follow, go to http://www.bvappraisers.org/.


o       Certified Business Appraiser (“CBA”) – The Institute of Business Appraisers awards the CBA designation to valuation professionals who meet established criteria including formal education requirements, minimum levels of active experience as a business appraiser and successful completion of a written examination on business valuation theory and practice.  Much like the ASA, CBA’s value interests in closely held businesses.  CBA designation criteria and standards are available athttp://www.go-iba.org/certify.asp#1.


o       Certified Divorce Financial Analyst (CDFA) – The CDFA designation is awarded to financial professionals that meet education, examination, experience and ethics standards in financial issues related to divorce proceedings.  Specifically, CDFA professionals assist their clients in understanding and preparing for post-divorce lifestyles.  General information about the CDFA designation can be found at www.institutedfa.com.


o       Chartered Financial Analyst (CFA) – The CFA Institute has awarded the CFA charter since 1963 to professionals employed within the global investment community.  Of the more than 75,000 CFA charterholders worldwide, forty-nine percent are employed as financial analysts and portfolio managers for mutual fund companies, banks and insurance companies, while almost thirty percent of charterholders are sell-analysts, investment bankers, broker/dealers and investment advisors.  The remaining charterholders include academics, regulators, accountants, and consultants.  For more information about the CFA charter, please go to www.cfainstitute.org.

·        Adherence to Professional Guidelines which have been promulgated by the Uniform Standards of Professional Appraisal Practice (more information can be found at (www.appraisalfoundation.org) that were adopted on or about 1989 by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 that provide rules to be applied in valuing a business.

·        Fiduciary Conflicts – a company accountant may have other fiduciary responsibilities to the client or the client’s business beyond the scope of the litigation.  For example, the expert may calculate the economic profit of a business, which may differ significantly from the income reported on the tax return.

·        Understanding of the process – company accountants often do not understand the legal process including discovery, depositions and testimony. This lack of understanding may impede the proceeding.

The following is a non-exhaustive list of questions that highlight the key points to raise when cross-examining the company accountant utilized as an expert by the business owner:

Fees and Independence:

·        How much of your annual revenues come from the Defendant?

·        Would it be fair to say that it is in your best interest to do a good job for the Defendant?

Familiarity with client:

·        Have you discussed your opinions with the Defendant?

·        Did you make any edits to your report at the request of the Defendant?

·        Is it true that you play golf regularly with the Defendant?

·        Has the Defendant ever mentioned to you what he thinks the business is worth?


Ability to verify accounting:

·        What analysis have you done on the accounting records, which you prepared, to determine the economic income of the business?

·        Did you make any adjustments to the reported information?

·        Plaintiff has estimated that there is $200,000 in unreported cash income from the business each year, which is evidenced in the lifestyle analysis, but not included in your analysis of the business.  What is your exposure since you prepared the business income tax return?


·        Have you ever prepared the requested analysis for the purpose of a matrimonial proceeding prior to this case?

·        Do you have appropriate credentials to value a business (CPA, ABV, ASA, CBA, CDFA, CFA)?

·        Have you followed the ABV Guidelines in preparing your report?

Cross purposes (e.g., matrimonial accounting v. tax return preparation):

·        Is it true that the income tax return reports no income from business operations of the Defendant’s business?

·        Given the information on the tax return (which you prepared), how can you conclude the business income for the Defendant’s business to approximate $500,000?

·        Further, how can you conclude that the marital lifestyle is $500,000 per year on average given that the only source of marital income is the Defendant’s business?

General Acceptance Within the Scientific Community.

Will the company accountant’s expert testimony be admissible?  In the case of Frye v. United States[i], the Court established what is commonly referred to as the “general acceptance standard,” which requires that scientific testimony is only admissible if it is based on a scientific technique that is generally accepted in the relevant scientific community.[ii] 

New Jersey courts have interpreted the Frye test as requiring that the general acceptance of scientific evidence may be demonstrated in three specific ways: “(1) by expert testimony as to the general acceptance, among those in the profession, of the premises on which the proffered expert witness based his or her analysis; (2) by authoritative scientific and legal writings indicating that the scientific community accepts the premises underlying the proffered testimony; and (3) by judicial opinions that indicate the expert’s premises have gained general acceptance.”[iii] 

With limited exceptions,[iv] the more relaxed Federal evidentiary principles established in Daubert v. Merrell Dow Pharmaceuticals, Inc.,[v]which allow for the admissibility of expert testimony even in situations where general acceptance can not be proven, have not been adopted by the courts of New Jersey, who continue to apply the ‘general acceptance’ Frye test when determining the admissibility of scientific evidence.[vi]  For more information about specific Daubert challenges visit http://www.dauberttracker.com/.

Considering the foregoing, one must determine whether the company accountant’s opinions will be admissible under the Frye test.


The conclusion is fairly apparent: avoid at all costs utilization of the company’s accountant as your forensic business valuation expert in a divorce case unless you can proceed jointly an


[i]Frye v. United States, 293 F. 1013 (D.C. Cir. 1923)
[ii] Frye, 293 F. at 1014.
[iii] State v. Harvey, 151 N.J. 117, 170 (1997) (quoting State v. Kelly, 97 N.J. 178, 210 (1984)).
[iv] Two exceptions to the Court’s application of the Frye rule include tort cases involving injuries caused by a drug or toxic substance (seeKemp ex rel. v.Wright v. State, 174 N.J. 412 (2002)), and death penalty hearings wherein the defense offers scientific evidence (see State v. Davis, 96 N.J. 611 (1984)). 
[v] Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).
[vi]Richard J. Biunno, New Jersey Rules of Evidence, 2006 Ed., Comment to Rule 702[3], page 853 (“The Frye test remains the standard in New Jersey in most types of cases in which scientific testimony is to be introduced.”);  In Re Commitment of R.S., 339 N.J. Super. 507, 536  (App. Div. 2001), affirmed 173 N.J. 134 (noting that “New Jersey has long recognized that in order to be admitted into evidence, a novel scientific test must meet the standard articulated in Frye v. United States…,” and further recognizing, “Although Frye has been replaced in the federal court system by the more lenient standards of Federal Rule of Evidence 702 as set forth in Daubert v. Merrell Dow Pharmaceuticals, Inc., in New Jersey, with the exception of toxic tort litigation, Frye remains the standard.”) (citations omitted).

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