Fraud Common in a Bankruptcy

Bankruptcy fraud ranges from the simple failure to list assets on bankruptcy schedules to the complex schemes such as bust outs, bleed outs and rent/equity skimming.  

Most bankruptcy fraud involves an effort to conceal assets from creditors.  In the simplest form of this type of fraud, the debtor does not list all assets on the bankruptcy schedule or they are understated in value. In a somewhat elaborate scheme to defraud creditors, a debtor transfers assets to related third parties so that the assets cannot be confiscated. 

Red flags that a forensic auditor watches out for in order to trace concealed assets are:  

• Business records do not exist, and/or books and records are incomplete.  Usually, there are unrecorded cash transactions evident on the bank statements but not on the books of records.  
• Debtor’s bankruptcy schedules are incomplete or multiple changes are made to these schedules.
• Assets listed on financial statements immediately prior to bankruptcy are not listed on the bankruptcy schedules.
• There has been an increase in financial activity involving the related third parties or insiders for assets transfers, real estate transfers, payments, or loans.
• There is a complex corporate structure and relationships involving the debtor and other entities controlled by insiders. 

These red flags need to be investigated by the forensic accountant and they will identify and confirm the red flags by tracing the movement of funds and/or assets, as well as presenting their findings and opinions related to their analyses when called upon as an expert witness.