1. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-1 Today’s Topics n Fraud, bankruptcy and divorce n Tax fraud n Bankruptcy overview n Bankruptcy participants n Bankruptcy schemes and concealment n Divorce schemes and concealment n Money Laundering

2. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-2 Why Fraud? n Hiding assets to prevent redistribution n The Devil’s Triangle n Bankruptcy n Divorce n Fraud

3. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-3 CPAs Role n Examiner or trustee role n Creditor committee representation n Investigation assistance n Recovery assistance n Private investigation role

4. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-4 Tax Fraud n Criminal offense n IRS staff trained to “look for fraud” n Supported by tax law (p. 569) n See cases on pps. 568-571 n Careers in IRS Criminal Investigation

5. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-5 Types of B & D Frauds n Fraud causes B & D n Partner wants out due to the fraud n B & D is used to perpetrate the fraud n Fraudulent transfer of assets during the “stay” or cooling off period n B & D is used to conceal the fraud n Records destroyed as part of B & D which helps to conceal the fraud

6. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-6 Bankruptcy Overview n Chapter 7: complete liquidation n Chapter 11: reorganization n Chapter 13: individual reorganization n Criminal cases prosecuted by U.S. Attorney’s office n Concealment: “knowingly and fraudulently” n See summary in text

7. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-7 Bankruptcy Overview, cont. n Embezzlement against the debtor’s estate n Adverse interest or conduct n Bankruptcy fraud: false filings or reps. n Civil proceedings in U.S. Bankruptcy Ct. n Intentional deceit n Fraudulent transfers

8. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-8 Bankruptcy Participants n Bankruptcy court n U.S. Trustee: administrative role n Court appointed Trustee: working trustees n Examiners: investigators n Debtors: one who owes n Creditors: one who is due funds n Adjusters: field agents

9. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-9 Bankruptcy Frauds-the Bustout n Planned bankruptcy or the “bustout” (Soprano’s video) n Obtaining loans or merchandise and then failing to pay n Either with new or established companies n Red flags n P.O. box operation n Vague data on owners n Sudden change in management n Bad credit references n Order size increases n Inventory disappears n Unreasonably large discounts

10. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-10 Bankruptcy Fraud-Illegal Concealment of Assets n Common to divorce as well n Methods n Cash receipts are diverted to another entity n Inventory goes off-site or into gray market n Asset ownership shifted n Sales not recorded or understated n Fraudulent vendor payments n Records disappear n Inadequate disclosure

11. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-11 Bankruptcy Fraud-Illegal Concealment of Assets, cont. n Red flags n Transfers of property to insiders n Frequent bank transfers n Cash transactions n Large vendor payments n Rapid reduction in assets n Increase in losses n Financial and tax inconsistencies n Travel to tax havens n Missing records

12. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-12 Fraudulent Transfers n Intent to hinder, delay or defraud n Exchanged for less than fair value

13. FORENSIC ACCOUNTING - BA124 - 2011Slide 15-13 Money Laundering n See diagram on p. 585 n Consider the case of “Crazy Eddie” Antar