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Today’s Topics

Today’s Topics. Shenanigan #5 Fraud, bankruptcy and divorce Bankruptcy overview Bankruptcy participants Bankruptcy schemes and concealment Divorce schemes and concealment Shenanigan #6. Shenanigan #5- Liability Games… Failure to record or understatement. Technique #1:

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Today’s Topics

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  1. Today’s Topics • Shenanigan #5 • Fraud, bankruptcy and divorce • Bankruptcy overview • Bankruptcy participants • Bankruptcy schemes and concealment • Divorce schemes and concealment • Shenanigan #6 FORENSIC ACCOUNTING - BA124 - 2009 Slide 15-1

  2. Shenanigan #5-Liability Games…Failure to record or understatement • Technique #1: • Failure to record-intentional or unintentional • Technique #2: • Reducing liabilities by changing assumptions-tax provisions and reserves • Technique #3: • Questionable cookie jar reserves-Chainsaw Al Dunlap and Sunbeam Corporation • Technique #4: • Sham rebates-rebate used to reduce COGS • Technique #5: • Early revenue recognition versus revenue received in advance FORENSIC ACCOUNTING - BA124 - 2009 Slide 15-2

  3. Shenanigan #6 • Shifting revenue to a future period • Why would we want to do this? • What is the benefit? • Fraud vulnerability charting of this fraud FORENSIC ACCOUNTING - BA124 - 2009 Slide 15-3

  4. Why Do It? • Reserves for a “rainy day” • Investor benefit post merger FORENSIC ACCOUNTING - BA124 - 2009 Slide 15-4

  5. Techniques • Creation of “cookie jar” reserves • Revenue hold back before an acquisition FORENSIC ACCOUNTING - BA124 - 2009 Slide 15-5

  6. “Cookie Jar” Reserves • W.R. Grace, Heinz & MSFT examples • Warning signs • Excessive use of reserves • Post-dating of shipping documents • Smoothing income…flat-line even (Stryker) FORENSIC ACCOUNTING - BA124 - 2009 Slide 15-6

  7. Revenue Holdback • Tyco and Medaphis • Hold back revenue today • Reverse it into income after the acquisition FORENSIC ACCOUNTING - BA124 - 2009 Slide 15-7

  8. Why Fraud? • Hiding assets to prevent redistribution FORENSIC ACCOUNTING - BA124 - 2009 Slide 15-8

  9. CPAs Role • Examiner or trustee role • Creditor committee representation • Investigation assistance • Recovery assistance • Private investigation role FORENSIC ACCOUNTING - BA124 - 2009 Slide 15-9

  10. 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 - 2009 Slide 15-10

  11. 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 - 2009 Slide 15-11

  12. 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 - 2009 Slide 15-12

  13. 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 - 2009 Slide 15-13

  14. Bankruptcy Frauds-the Bustout • Planned bankruptcy or the “bustout” • 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 - 2009 Slide 15-14

  15. 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 - 2009 Slide 15-15

  16. 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 - 2009 Slide 15-16

  17. Fraudulent Transfers • Intent to hinder, delay or defraud • Exchanged for less than fair value FORENSIC ACCOUNTING - BA124 - 2009 Slide 15-17

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