Fraud and the Thieving Wife

A divorce that involves business ownership is complicated enough. What do you do when both spouses run the business … and one spouse is stealing from the other?

Andrew D. Pappas, CPA

Not all forensic investigations are exciting enough to merit public discussion, but this one – conducted in the context of a pending divorce – had just about every ingredient of a good story: infidelity, theft and at least four of the Seven Deadly Sins.

The case involved a husband and wife – let’s call them “Eliot” and “Amanda” – who owned a large automotive business that operated at multiple locations. Aside from their marriage, Eliot and Amanda had a few other important things in common:

• they both worked in the business (he as the president, she as the controller and office manager);

• neither liked the other very much; and

• both had romantic relationships outside of their marriage.

If this combination of factors weren’t sufficiently incendiary, Amanda added an accelerant to the flame: her outside love interest wasn’t quite far enough outside – he was a salesman for Eliot and Amanda’s company. Worse yet, Amanda and her salesman-boyfriend were not only indiscrete about their tryst; they flaunted it, taking exotic trips together, eating in expensive restaurants, etc.

Lacking the will and the moral authority to put his foot down regarding Amanda’s conduct, Eliot looked the other way – until two or three consecutive monthly income statements showed a drop in the company’s financial health. Eliot put two-and-two together (Amanda’s extravagant affair, plus her control of the company’s finances, plus declining profits), called his attorney and filed a petition for marital dissolution. When Eliot mentioned to his attorney that he suspected Amanda of siphoning money from the company, the attorney called Pappas & Company.

Our meeting at Eliot’s attorney’s office was a rambunctious event that at times bordered on the surreal. In the conference room with my associate, Denise Fritz, and me were Eliot, Eliot’s attorney, and – drumroll, please – Eliot’s girlfriend. The attorney pushed hard for a forensic accounting investigation, because he believed that was in Eliot’s best interests. Girlfriend pushed hard for a forensic accounting investigation, because she believed that was in her best interests (expediting the divorce and becoming the new co-owner of Eliot’s company was not without its rewards). But, for reasons that would become clear to us only as events unfolded, Eliot was fairly squeamish about investigating his soon-to-be ex. After a lengthy discussion that featured reasoned, logical arguments by the attorney and lots of frowns, pouts and other persuasive body language by Girlfriend, Eliot ultimately saw the light and engaged our services.

Investigating a person of Amanda’s position and temperament required a little subterfuge on our part, so I visited Eliot and Amanda’s offices under the premise of providing business consulting, tax planning and tax preparation services, which both spouses agreed was needed.

It didn’t take long for us to conclude that, notwithstanding her motives and conduct, Amanda was not up to performing all of the extensive responsibilities that went with her job as controller and office manager of a large company. She was overworked and was forced to perform tasks that required knowledge and experience she didn’t have. She clearly needed some good help.

We recommended that the company hire a qualified assistant for Amanda. To be effective in our financial sleuthing on behalf of Eliot, we needed someone in that position who was more knowledgeable than Amanda and who could help us determine why the company’s profits were declining and what Amanda was up to.

Amanda’s new “assistant” was quickly hired after a perfunctory interview, and we worked with her to get her up to speed on the company’s operations and to help facilitate trust and a good working relationship with Amanda. In the process, I worked closely with her to unearth Amanda’s scheme and shady financial practices.

It didn’t take long for us to determine that Amanda had her own company invoices prepared and had given them to her salesman-boyfriend. When her boyfriend made sales with the fraudulent invoices, Amanda would not record them in the company’s books. Also, Amanda had established at another bank a secret account (not on the company’s books) in which she deposited the funds received from these sales. That is why the company’s income statements showed declining sales, even though the business activity was normal. We also learned that Amanda was paying personal expenses – including the costs of her lavish tryst with salesman-boyfriend – with company funds and recording them as business expenses.

We were able to determine an approximate amount of Amanda’s ill-gotten gains and prepared a net worth statement to assist in dividing the marital assets and determining the tax ramifications.

Speaking of “tax,” our investigation also told us why Eliot had resisted hiring us to investigate Amanda: He had been using a combination of payroll checks and cash to pay the wages of certain employees, in order to reduce his payroll tax obligation. We learned that Amanda was wise to Eliot’s practice and had threatened to report him to the taxing authorities.

While our involvement in this shady case didn’t entirely please our client, it did force Eliot and Amanda to address and more or less equitably resolve some difficult financial and other issues. All parties agreed that their divorce settlement would have been delayed significantly had we not served as a catalyst.

Aftermath. Like most forensic investigations, this one serves as a reminder of some fundamental truths:

• You should not mix business and pleasure (especially the type of pleasure that Eliot and, to a greater extent, Amanda were enjoying outside of their marriage).

• You can’t pick your blood relatives, but you can pick your spouse. Choose wisely.

• Don’t hire anyone you can’t fire.

As for the players in this real-life drama, three out of four walked away with something: Eliot kept the business; Amanda kept her salesman-boyfriend and half of the value of the community property that she and Eliot had accumulated; and salesman-boyfriend got to keep Amanda (time will tell how much of a bargain he received). The big loser: Eliot’s girlfriend, whom Eliot unceremoniously dumped long before the decree was issued, thus failing in her quest to achieve the dubious goal of becoming Amanda II.

While the preceding account is based on an actual case, the facts have been simplified and the names of all parties have been changed.

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