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Today’s Topics

Today’s Topics. Fraud, bankruptcy and divorce Tax fraud Bankruptcy overview Bankruptcy participants Bankruptcy schemes and concealment Divorce schemes and concealment Money Laundering. Why Fraud?. Hiding assets to prevent redistribution The Devil’s Triangle Bankruptcy Divorce Fraud.

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Today’s Topics

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

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

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

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

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

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

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

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

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

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

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

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

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

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