7. The pain of divorce

A well-established toys trading company in Hong Kong was owned and run by a couple for more than 10 years. The company had encountered satisfactory turnover growth in recent years. Feeling at ease with the business, the wife had reduced her daily work in the office and stayed much more time at home to take care of the family affairs.

Sadly to say, the couple had sentimental problems which had ruined their relationship. Until about two years ago, they felt impossible to cling together and decided for a divorce. There were many disputes in the negotiation of splitting of wealth and the level of future maintenance. The trading company had been mainly operated by the husband during the past few years who also took care of the financial and taxation matters. When certain audited financial statements were presented to the wife’s lawyers, the wife was astonished to note the poor results of the company, having no profit at all for the past three years. That’s impossible! She knew quite well how this business could earn money and considered it was impossible to generate no profit out of millions of turnover a year.

Lawyers of both sides had combated severely over the division of wealth. The husband strongly advocated that the net assets of the company and his personal wealth had been truly stated and were free of errors. The wife wished to appoint an accounting firm to review the company’s books and records again but the move was strongly opposed by her husband who cited the second audit was wasting time and effort.

According to the wife’s experience, the company should have earned a decent profit due to the continuous rises in turnover with operating expenditure staying at relatively similar level. She found out that the gross profit margins in the profit and loss accounts were unreasonably low which then resulted in the thin profits.

There were enquiries conducted by the wife to some suppliers whom she knew quite well. These suppliers gave feedback that the gross profit margins should have no dropping. To project the results by this external finding, the margins in the financial statements must have been deliberately lowered by somebody. Without much saying, she went for explanations from her counterpart who then repeatedly denied her concerns. The wife, feeling hopeless after various means, reported her doubt to the Inland Revenue Department, informing the authority that she suspected the company and her husband had evaded taxes. She had also provided suitable information to assist the Department to institute the investigation.

Soon after the informant had reported the case, the Investigation Unit began the process to ask the husband to supply relevant information. This gentleman used a delay tactic in responding. However, a paper lantern could not cover a fire for long. The fact was that the husband had sought consents from his major USA importers to accept invoices issued by his trading company at 5% lower than the agreed transaction prices. But this 5% difference was then billed by another unlimited firm which borne a very similar name to the trading company. This 5% income was treated as commissions received by the unlimited firm. The husband had manipulated the accounts in the past annual tax reporting. The under-reported net profit had been millions for a year!

The final outcome was very obvious. The husband was heavily fined with additional taxes by the Inland Revenue Department. His ‘extra’ wealth was of course needed to be divided among himself and his wife. This stupid move of the man was well penalized. Regret was useless!