According to the US Court system, there were over 900 thousand bankruptcy filings during the fiscal year ending March 31, 2015. Although this number has been decreasing over the last 4 years (there were 1.5 million filings in 2011), bankruptcy is still with us given the 2008 economic downturn and the slow pace of recovery. Economic despair, a single unfavorable event, illness, negative cash flows or deteriorating creditworthiness are main drivers for bankruptcy filings. Additionally, greed, which can lead to fraud, continues to trigger and generate bankruptcy filings.
Historically, CPAs are team bankruptcy members during complex bankruptcies and are critical throughout the entire process. They prepare financial statements and reports, deal with valuation challenges, tax planning considerations, restructuring and the treatment of debt. As a result of an increase in fraudulent bankruptcy filings, CPA forensic accountants are increasingly being called to join these teams. This type of fraud involves difficult to understand business structures and complex transactions that are designed to camouflage assets in order to hide them from creditors.
Bankruptcy fraud can be difficult to detect. Although at times, signs of fraud are evident, there are times when they are not. The evidence of fraud that a skilled CPA forensic accountant can detect might be buried in thousands of pages of documents. These business records and complex webs of business structures are where fraud indices are hidden. For example, a detailed analysis of financial information may reveal if evidence of transactions between insiders and vendors has been disguised. Also, a lack of information can be considered a sign that something has been buried or concealed. Detection of fraud in a bankruptcy proceeding demands the attention of a specialist. It is a complex endeavor.
CPA forensic accountants trace cash flows to look for patterns of fraud and the concealment of assets. Their skill set, allows for detection and identification of red flags earlier in the bankruptcy process. Some of the detectable red flags of bankruptcy fraud are:
- Complex corporate structures
- Increases in insider financial activity
- Information that is not recorded, missing or incomplete.
- Significant cash transactions
- Lack of adequate books and records
- Inaccurate financial statements
- Missing Assets
- Sales of assets
- Excessive salaries to executives and loans to corporate officers
- Failure to make payments to vendors
Tracing the movement of funds and assets is critical to a successful bankruptcy resolution. A CPA forensic accountant works with attorneys and privileged information, providing expert testimony if necessary. The experienced CPA forensic accountant is trained to “look beyond the numbers”, “follow the money” and simplify the information. For these reasons, a forensic accountant is a valuable asset, and the best financial “private detective” that a Team can have.