1. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-1 Today’s Topics n Shenanigan #5 n Fraud, bankruptcy and divorce n Bankruptcy overview n Bankruptcy participants n Bankruptcy schemes and concealment n Divorce schemes and concealment n Shenanigan #6

2. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-2 Shenanigan #5- Liability Games… Failure to record or understatement n Technique #1: n Failure to record-intentional or unintentional n Technique #2: n Reducing liabilities by changing assumptions-tax provisions and reserves n Technique #3: n Questionable cookie jar reserves-Chainsaw Al Dunlap and Sunbeam Corporation n Technique #4: n Sham rebates-rebate used to reduce COGS n Technique #5: n Early revenue recognition versus revenue received in advance

3. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-3 Shenanigan #6 n Shifting revenue to a future period n Why would we want to do this? n What is the benefit? n Fraud vulnerability charting of this fraud

4. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-4 Why Do It? n Reserves for a “rainy day” n Investor benefit post merger

5. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-5 Techniques n Creation of “cookie jar” reserves n Revenue hold back before an acquisition

6. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-6 “Cookie Jar” Reserves n W.R. Grace, Heinz & MSFT examples n Warning signs n Excessive use of reserves n Post-dating of shipping documents n Smoothing income…flat-line even (Stryker)

7. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-7 Revenue Holdback n Tyco and Medaphis n Hold back revenue today n Reverse it into income after the acquisition

8. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-8 Why Fraud? n Hiding assets to prevent redistribution

9. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-9 CPAs Role n Examiner or trustee role n Creditor committee representation n Investigation assistance n Recovery assistance n Private investigation role

10. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-10 Types of B & D Frauds n Fraud causes B & D n Partner wants out due to the fraud n B & D is used to perpetrate the fraud n Fraudulent transfer of assets during the “stay” or cooling off period n B & D is used to conceal the fraud n Records destroyed as part of B & D which helps to conceal the fraud

11. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-11 Bankruptcy Overview n Chapter 7: complete liquidation n Chapter 11: reorganization n Chapter 13: individual reorganization n Criminal cases prosecuted by U.S. Attorney’s office n Concealment: “knowingly and fraudulently” n See summary in text

12. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-12 Bankruptcy Overview, cont. n Embezzlement against the debtor’s estate n Adverse interest or conduct n Bankruptcy fraud: false filings or reps. n Civil proceedings in U.S. Bankruptcy Ct. n Intentional deceit n Fraudulent transfers

13. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-13 Bankruptcy Participants n Bankruptcy court n U.S. Trustee: administrative role n Court appointed Trustee: working trustees n Examiners: investigators n Debtors: one who owes n Creditors: one who is due funds n Adjusters: field agents

14. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-14 Bankruptcy Frauds-the Bustout n Planned bankruptcy or the “bustout” n Obtaining loans or merchandise and then failing to pay n Either with new or established companies n Red flags n P.O. box operation n Vague data on owners n Sudden change in management n Bad credit references n Order size increases n Inventory disappears n Unreasonably large discounts

15. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-15 Bankruptcy Fraud-Illegal Concealment of Assets n Common to divorce as well n Methods n Cash receipts are diverted to another entity n Inventory goes off-site or into gray market n Asset ownership shifted n Sales not recorded or understated n Fraudulent vendor payments n Records disappear n Inadequate disclosure

16. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-16 Bankruptcy Fraud-Illegal Concealment of Assets, cont. n Red flags n Transfers of property to insiders n Frequent bank transfers n Cash transactions n Large vendor payments n Rapid reduction in assets n Increase in losses n Financial and tax inconsistencies n Travel to tax havens n Missing records

17. FORENSIC ACCOUNTING - BA124 - Fall 2008Slide 15-17 Fraudulent Transfers n Intent to hinder, delay or defraud n Exchanged for less than fair value