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Assessing Financial Motive

It is alleged that your client had financial motive to commit a very serious crime.  Forensic accountants are often utilized to analyze the defendant’s financial records, and provide an opinion on the existence of financial circumstances that assist in assessing financial motive.  This article discusses the circumstances under which financial motive may arise, the approaches utilized in its determination, and the types of documents that should be reviewed.  The article focuses on how an analysis would be performed for an individual; however, the approaches discussed can be modified in cases that involve a business.

When Financial Motive Arises

Claims of financial motive exist most frequently in fraud, arson, and sometimes in murder cases.  In these cases, you will often see the following characteristics which may be used as a basis for alleging financial motive:

  • The defendant may have incurred significant debts prior to the alleged crime, and did not have sufficient financial resources to cover the debts (e.g. income, individuals from whom the defendant could borrow funds, other assets owned by the defendant that could be sold, etc.).
  • In murder cases, the defendant may have been the beneficiary of a large life insurance policy.
  • In cases involving arson, the defendant may have operated a business that was unprofitable, and was relying on the proceeds of business insurance policy to cover outstanding debts.  Financial motive can also result in cases where the owner of a rival business commits arson in order to disrupt a competitor’s operations, thereby increasing the profitability of their business.
  • The defendant had an addiction (e.g. drugs, gambling, etc.) and required funds to finance it.

It is important to understand the basis for alleging the existence of financial motive, as this will guide the approach taken to the resulting analysis.

Procedures Performed in the Assessment of Financial Motive

There are several issues that must be considered when assessing whether financial motive exists.  Although the specific facts of any case must be fully considered, below is a list of approaches that are often applicable.

Cash Flow Analysis

The purpose of a cash flow analysis is to determine whether cash spending exceeds the defendant’s income or cash inflows.  This can indicate whether the defendant is able to meet their current financial obligations given the existing level of income.  If the cash inflows equal or exceed cash outflows, this would suggest that the defendant was living within his / her means, which can refute the presence of a financial motive.  Other factors to consider include:

  • Does the defendant have a steady source of income?
  • How frequent are cash withdrawals made from the account?  How large are the cash withdrawals relative to the amount of income earned?
  • Are cheques returned to the account due to insufficient funds?
  • How stable is the bank balance during the course of a month or year?  Is the account frequently in overdraft?
  • Does the defendant pay his / her full credit card balance every month?  Or are only minimum payments being made?
  • When cash outflows are categorized (e.g. rent, mortgage, meals, etc.), what percentage is each expense category of the defendant’s total income?  For example, if the defendant’s housing costs are 50% of his / her total income, this means the amount of income available to cover other expenses is significantly reduced.

If the defendant is married, living common-law, or cohabiting with another individual, this analysis should be performed on both an individual and joint basis in certain situations.  This can be important in some cases involving murder, if it can be established that the defendant would have been better off financially if the murder victim was alive.

Net Worth Analysis

A net worth analysis involves comparing an individual’s total assets to his / her total liabilities.  This is a measure of a person’s financial wealth and indicates whether he / she has sufficient resources to cover their outstanding debts.  If the defendant’s assets equal or exceed his / her debts, this would suggest that the defendant is able pay off any outstanding liabilities.

Examples of items that would be included in the net worth analysis are:

ASSETSLIABILITIES
Bank AccountsCredit Cards
Stocks, Bonds, Other InvestmentsLines of Credit
VehiclesMortgages
Registered Retirement Savings PlansBank Loans
Tax-Free Savings AccountsPayday Loans
Houses, Cottages, Vacation HomesStudent Loans
Furniture and Household ContentsVehicle Financing Loans
Cash Surrender Value of Life Insurance PoliciesHome Equity Loans

It is important to note that net worth analysis must be performed as of a specific date versus over a period of time.  This is because the value of assets and liabilities can change on a daily basis, and their value must be captured at a point in time.  It is recommended that key dates be selected both before and after the alleged crime, and the net worth analysis be performed as of each date, to determine if there are any significant changes, or if there is evidence of sudden or gradual financial stress.

Net worth typically depends on a person’s age and stage of life.  According to the report “Life-Cycle Asset Accumulation and Allocation in Canada” written by Kevin Milligan of the University of British Columbia Department of Economics, assets accumulate as a person ages and peak between the ages of 55 and 57.  Individuals between the ages of 25 and 33 tend to have higher levels of debt, with the intention of paying it off at a later age as they amass more assets and income levels increase.

Since net worth varies by age, it is important to compare the results of the net worth analysis to demographic statistics that report average net worth based on various characteristics.  For example, Statistics Canada publishes average net worth amounts by age, gender, marital status, and ages of dependent children.  This comparison is useful because in cases where the defendant has a negative net worth, this may simply indicate that the defendant’s finances are in line with averages for someone in that demographic category, as opposed to indicating that a financial motive for the crime existed.

Similar to the cash flow analysis, the analysis should be performed on an individual and joint basis if any assets and / or liabilities are held by multiple people.

Financial Ratios

Various financial ratios can also provide a picture of an individual’s financial health.  The ratios should not be considered in isolation but should instead be assessed in conjunction with other information.

Examples of ratios that can be performed are:

RATIOPURPOSE
Debt to Pre-Tax RatioMeasures the amount of debt owed for every $1 of income
Debt to Asset RatioMeasures the amount of debt owed for every $1 in assets owned
Debt Service RatioCalculates the amount of cash available to cover the principal and interest portions of any outstanding debt

Similar to the net worth analysis, the ratios calculated should be compared to statistics reporting average ratios by age, gender, and other relevant factors.

Life Insurance Policies

A common basis for asserting that financial motive exists in murder cases is that the defendant was the beneficiary of a life insurance policy.  There are many factors to consider other than the mere existence of a life insurance policy such as:

  • The length of time that the life insurance policies have been in place – were the policies purchased shortly before the murder?  Or have they been held for a number of years?
  • Any increases to the amount of coverage, especially in the period of time shortly before the murder.
  • Other financial purposes to owning a life insurance policy (e.g. if the murder victim and defendant held a mortgage, had dependent children, etc.).
  • The number of life insurance policies held, and the reason for the purchase of multiple policies.  For example, if coverage is provided through an employer, an additional policy may be purchased in the event that policy holder loses or leaves his / her job and the resulting coverage.
  • The amount of life insurance coverage in place, and whether the amount of coverage is reasonable.

Employment Prospects

In cases where the defendant earns a steady income, it is helpful to assess his / her employment prospects and identify whether there is any risk of unemployment which may lead to financial hardship.  This analysis can include:

  • Developing an understanding of the defendant’s employment history, looking for periods of unemployment or a sporadic work history.
  • Reviewing the defendant’s personnel file from his / her current employer, and identifying the length of time the position has been held, whether there were any performance issues / concerns, and whether the defendant received performance bonuses / promotions, etc.
  • Obtaining industry data to determine the employment outlook for the defendant’s profession, the level of demand for individuals working in the occupation, and the average wage / salary for the occupation as compared to the defendant’s current pay.

Positive employment prospects can tend to negate other evidence that there is financial motive, since it can indicate that the defendant will likely experience a steady income in the future.

Time Period

It is recommended that the analyses described above be performed for a sufficient period of time such that a clear and complete picture of the defendant’s financial situation can be developed.  The period of analysis should also cover both before and after the alleged crime, to determine if there were any significant changes subsequent to the event (e.g. significant changes in spending habits, types of expenses incurred, etc.).

Documents to Review

Below is a list of common documents that should be reviewed in cases where financial motive may be an issue:

  • Copies of the defendant’s bank statements, including the bank statements for any accounts that are held jointly with another individual.
  • Copies of investment account statements, showing the market value of any investments held individually or jointly (both registered and non-registered).
  • Copies of credit card statements for all credit cards where the defendant is the primary and supplemental cardholder.
  • Copies of all loan account statements and agreements.
  • Credit reports (which can be obtained from Equifax and TransUnion), listing the defendant’s credit rating and frequency of debt payments.
  • Copies of life insurance applications and policies, including copies of any requests for coverage increases.
  • Mortgage account statements, showing the balance owing and frequency of payments.
  • Real estate market information and property tax assessments to estimate the value of any properties owned by the defendant.
  • Market value of any vehicles owned by the defendant.  This can be obtained in the Canadian Black Book, which lists the market value of a variety of makes and models based on the number of kilometres driven.
  • Defendant’s personnel file from their current employer.
  • Copies of the defendant’s personal income tax returns, for comparison to the cash inflows into the defendant’s bank accounts.  This can indicate whether the defendant has other sources of income that are not reported on his / her tax returns.

Conclusion

There are several factors to consider when evaluating an allegation of financial motive, which can form the basis of a case involving fraud, arson, or murder.  It is important to review the defendant’s entire financial picture both before and after the alleged crime in evaluating financial motive, and to examine the information obtained as a whole versus in isolation.  Accounting experts can be of assistance in reviewing personal and business financial records, accumulating statistical data to support or refute the existence of financial motive, and identifying other factors specific to the defendant’s circumstances that should be included in the analysis.

By Rehana Moosa. Published in For the Defence Magazine – July 2014 edition.

 

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