Possible Bias in Asset Valuations: An Application of the Fraud Risk Triangle to Divorce Cases

• In Event: Bias in Asset Valuations, Stolen Identity and Domestic Asset Tracing

Abstract

Applications of the fraud risk triangle have traditionally focused on asset/income overstatement by publicly-traded companies or misappropriation of assets from companies by employee. We apply the fraud risk triangle to the divorce context. In a divorce, there are incentives to hide or to undervalue assets because the assets will be shared with the ex-spouse. Opportunities arise because the assets being split in divorces are often subjectively-valued (such as a house) and because one spouse (the “in-spouse”) often has more financial information than his or her partner (the “out-spouse”), creating information asymmetry. Individuals in divorce situation may also be more likely to rationalize their fraud based on personal grievances they
may have against their former spouse.
We conducted an experiment in which participants assumed the role of a financial advisor to a client that was facing a divorce or planning to apply for a bank loan, which was included in our study as a basis point for comparison, and in which the incentive may be to overstate assets. Our results indicate that financial advisors are significantly more likely to report lower asset values for subjectively-valued assets when their client is facing a divorce than when the client if applying for a loan. We also find that the downward bias in a divorce situation may be stronger than the upward bias in the loan situation, possibly due to the incremental emotional content in a divorce.

Authors

• Jennifer Tonasetti, Bryant University

• Charles P Cullinan, Bryant University