Cash Me if You Can

"If he be Mr. Hyde," he had thought, "then I shall be Mr. Seek." - Robert Louis Stevenson, The Strange Case of Dr. Jekyll and Mr. Hyde 

Lawsuits and divorces have a strange effect on people. When faced with a big financial loss, otherwise honest and trustworthy people will begin to hide assets and lie about their cash. 

In a fictionalized recent case, our client won a legal settlement and we were asked to help determine if the defendant had the ability to pay it. The defendant claimed they had no resources, no cash to pay the claim. Our client told us they were prepared to take a "haircut" but wanted us to find as many assets as we could.  We knew that cash would be the quickest and easiest asset to satisfy the settlement. Working with our client's attorney, we were able request a long list of documents and we concentrated on locating the cash. 

Bank Statements  

In your search for your target's cash, start with his or her monthly bank statements. Ideally, the bank statements will include all the receipts and disbursements from the account as well as images of the checks paid out of the account.   

Start by looking at the disbursements and withdrawals. Ask and answer the following questions: Are there any electronic transfers to previously undisclosed accounts?  Do any payments indicate previously undisclosed relationships?  Did your target transfer cash or loan money to family members or friends?  

In our case we could see recurring payments for various debts, obligations and ordinary expenses. We had to consider if this account and account activity covered all of our target's financial life.  Some common items seemed to be missing.  Our target had payments for groceries and restaurants, but the amounts spent were not enough to keep a household furnished or feed one person for a week.  We also noted that there were no payments for certain common expected expenses for cable TV and insurance.  We suspected there were other cash accounts.  We asked how our target paid for his cable TV and we ultimately located another account. 

If you suspect your target has an undisclosed bank account, you should review for transfers to other bank accounts. If you have access to check copies from a known account, look for transfers to other bank accounts. Keep in mind, bank routing information will be printed on the back of the paid check when it clears the payer’s account and this might indicate that your target has a second account. 

If your target has multiple bank accounts, you will need to perform some testing on the completeness of each account. It's possible your target could understate cash by writing a check from account "A" payable to account "B". If your target deducts the check from account "A" on June 30 but physically deposits the check into account "B" on July 1, he can hide a significant amount of cash from you on June 30. 

Finally, if your target is hiding both receipts and disbursements in their account activity, the best way to detect this is to perform a "proof of cash." For example, suppose your target received a bonus from her employer but never told her spouse and never recorded it in the checkbook. If she received the $5,000 bonus in early April and immediately took the same amount of cash out of the bank by mid-April, she would never have to show an entry in the checkbook or on a bank reconciliation. A proof of cash will allow you to detect this sort of activity. 

Outstanding Checks 

Review your target’s check register for old, outstanding checks. For example, maybe your target tells you they wrote a check to the IRS to pay a quarterly estimate in June. If that check remains outstanding in July, who's to say the payment was really sent?  Look for the subsequent clearing of that check on the August bank statement. If the check to the IRS was never really written or sent, the checkbook balance would be lower and your target has more cash than they are reporting in their check book. 

Credit Card Statements 

There are a couple of reasons to look at credit card statements. The amounts owed to the credit card company can be temporarily overpaid and hold cash balances that can be spent later. It’s also worthwhile to review the source of payments to the credit card company. Are payments to the credit card company coming from a known account? 

Tax Returns 

Tax returns can be useful in a search for cash accounts. While your target might be inclined to lie to you, they may hesitate to misrepresent their financial picture to the IRS. Tax returns can be used to identify sources of income (from assets) or identify other assets. 

Individual income tax returns should be reviewed to determine if your target has an overpayment or refund due. Overpayments and refunds can be carried forward and used to offset future tax liabilities or refunded in the future as cash.   

Individual income tax returns can also be used to help identify sources of interest income. When you have information on interest income reported on a tax return, you have some measure of assurance of completeness as to your target's savings and banking relationships. 

Other Sources  

Today, smartphones, tablets, laptops and email servers contain vast quantities of information. Be sure to review bookmarks and browser histories for possible clues. 

Cash can be stored as credits in cyber accounts. Be sure to consider eBay, PayPal, Amazon accounts, prepaid credit cards and other platforms.   

Ask for and look through any un-shredded receipts or statements for clues.    

Employer Information 

Don't forget other sources of cash coming from employers.  Consider asking the following questions: 

1. Does the target's employer have a bonus program? If so, does the bonus get deposited in the same account as the regular paycheck?  Ask the same question for expense checks paid to your target. 

2. Does the target have a deferred bonus? Does the target have the ability to delay or defer the bonus payment to some future period?  

3. Does the target have reasonable withholdings on their salary? Are they over-withholding on taxes to generate a big future refund?   

4. Are there any unknown or unrecognized deductions coming from the payroll check? 

5. Are there any retirement accounts or savings accounts where the employee is stashing cash? 

Old-School Hoarding 

Cash can be hoarded, held in carved out books, buried in the back yard in a coffee can and stuffed under the mattress. Don’t overlook bank safe deposit boxes and storage lockers, particularly if you’ve uncovered large, recent and un-located withdrawals. 

Conclusion 

By the end of our case, we found that our target had accelerated $400,000 of mortgage payments to their lender. At the time these payments were made back to the bank, our target had a home equity line of credit. The cash was converted to home equity, but the funds were generally available to pay our client’s claim.   

If you are asked to search for cash, think of all the ways you would hide your cash. Think of all the ways you could spend, invest, loan or transfer cash. Then, by trial and error, go fish and catch them if you can. 

Ken Stalcup, CPA, CFE, serves as manager at Somerset CPAs, P.C., where he provides expertise in forensic services, fraud audits, litigation support and financial statement audits for privately held companies and non-profit organizations. Email Ken.