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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

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 - 2011Slide 15-1


Why fraud

Why Fraud?

  • Hiding assets to prevent redistribution

  • The Devil’s Triangle

    • Bankruptcy

    • Divorce

    • Fraud

FORENSIC ACCOUNTING - BA124 - 2011Slide 15-2


Cpas role

CPAs Role

  • Examiner or trustee role

  • Creditor committee representation

  • Investigation assistance

  • Recovery assistance

  • Private investigation role

FORENSIC ACCOUNTING - BA124 - 2011Slide 15-3


Tax fraud

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 - 2011Slide 15-4


Types of b d frauds

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 - 2011Slide 15-5


Bankruptcy overview

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 - 2011Slide 15-6


Bankruptcy overview cont

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 - 2011Slide 15-7


Bankruptcy participants

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 - 2011Slide 15-8


Bankruptcy frauds the bustout

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 - 2011Slide 15-9


Bankruptcy fraud illegal concealment of assets

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 - 2011Slide 15-10


Bankruptcy fraud illegal concealment of assets cont

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 - 2011Slide 15-11


Fraudulent transfers

Fraudulent Transfers

  • Intent to hinder, delay or defraud

  • Exchanged for less than fair value

FORENSIC ACCOUNTING - BA124 - 2011Slide 15-12


Money laundering

Money Laundering

  • See diagram on p. 585

  • Consider the case of “Crazy Eddie” Antar

FORENSIC ACCOUNTING - BA124 - 2011Slide 15-13


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