Lessons learned from the shadows

So far this year we have seen a rise in the number of shadow expert appointments. A shadow expert is usually engaged by one party to matrimonial proceedings to advise on the expert’s report.

In this article we take a look at the various stages at which a shadow expert can become involved and the benefits that they can offer.

Is it worth engaging an expert?

A shadow expert can be appointed in advance of engaging an SJE to advise on whether it is worth appointing an SJE.

Sometimes a small owner managed business may have little capital value, especially where a company is essentially an income generating vehicle for the parties, who may strip out any profits as soon as they are generated.

In such cases, there will be little capital value beyond the value of the net assets reported in the latest financial information and usually suggested as the value of the company within the Form E. Where this is the case, there may be little value in appointing an SJE who will conclude that the answer was effectively there all along.

The value usually ascribed to business interests on a Form E is the net asset value. Where a company is trading profitably this may well significantly understate the value. The difficulty lies in determining which situation applies – some profitable businesses do have limited  value because they are effectively a vehicle by which an employee is paid.

A ‘one man band’ providing services to one or two large customers is unlikely to have a capital value – in this situation capitalising future earnings in valuing the company is effectively crystallising future income which is to no-one’s benefit.

A formal SJE valuation can be costly and a shadow expert can advise on whether it is necessary to engage an SJE, potentially saving costs where not necessary or providing assurance that the appointment is required.

Where the shadow expert concludes that it is necessary to appoint an SJE, the shadow expert can advise on the SJE to be selected and the merits of some of the instructions.

Spoilers!

A business valuation can be daunting, especially to parties who are not involved in the business, who may not know what to expect from the outcome or have unrealistic expectations of the value. A shadow expert can be engaged while the SJE is preparing their report to help with forming expectations.

Note that the shadow expert may not have access to the same information as the SJE and that valuation is to some extent “an art disguised as a science”. Thus, the shadow expert may come to a different conclusion and both the shadow expert and the SJE may be right (within the range of reasonable valuations). It has been known for the SJE to come to the right answer by adopting quite the wrong methodology!

It may be best to just wait and see.

Reaching for the magnifying glass

We are most frequently engaged as a shadow expert following the receipt of the SJE’s report.

This can be for one of two reasons; as a sense check and friendly face to explain the valuation or to assist with preparing questions and challenging the expert.

Business valuations are complicated and the shadow expert can perform a sense check to confirm whether the valuation is reasonable.

lessons learned forensic accounting

The value of a business can be a significant aspect of divorce proceedings, particularly in respect of the parties’ ability to fund a clean break settlement, making it crucial that there are no significant errors. Business valuation is complicated and we frequently see valuations that, to the untrained eye, appear to be adopting a reasonable approach but in practice adopt unfounded assumptions or are just wrong.

The shadow expert can perform a sense check of the report to conclude whether the valuation is within the range that may be considered reasonable. Where the valuation does lie within this range, the parties can continue with peace of mind.

Where the valuation doesn’t stack up the shadow expert can assist with drafting questions that will hopefully lead to the SJE clarifying or changing their opinion.

It is important to highlight that SJEs are often loathe to change their opinion unless new information is provided. This is because their conclusions will (hopefully) be the outcome of careful consideration of the information previously provided, albeit this careful consideration may not be set out in the report – hence the need for clarification.

For example, we commonly see conclusions supported by the statement “in my experience…”. Sometimes this phrase simply provides impressive wording to hide behind, sometimes it does in fact mean the expert has relevant experience.

It will be interesting to see whether the new practice direction restricting the length of SJE reports leaves more or less scope to challenge valuations.

Start all over again

Very occasionally it may be the case that a valuation report isn’t worth the paper it’s written on and no amount of clarifying questions can lead the SJE to amending their conclusions sufficiently to bring the valuation to within a reasonable range. In such instances, a shadow expert can be engaged to prepare a second expert report, to be introduced into proceedings through a Daniels and Walker application.

This is a last resort approach and runs the risk that the application may be rejected after the report has been prepared.

Just ask

Ultimately the best time to engage a shadow expert depends on the circumstances particular to the parties and the case in question. If you are unsure about whether or not or when to engage a shadow expert, feel free to give us a call and we can run through the options with you.

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Article taken from our Autumn edition. You can download our latest Forensis matrimonial newsletter from our latest publications page

For more information

For more information on our forensic accounting service, please contact us on:

01483 416232