Bankruptcy fraud: reporting, responding to fraudulent activity in bankruptcy cases.

• Author: Cohen, Marc S.
• Position: Professionalissues

With the recent rise in bankruptcy filings, stronger enforcement of bankruptcy fraud laws is likely to elevate the CPA's role in investigating civil and criminal bankruptcy fraud. GPAs may find themselves asked to serve as examiners or trustees in bankruptcy cases, or to serve on creditors' committees, a situation in which they will be called upon to investigate a corporate debtor's financial affairs. Clients may also seek assistance in recovering assets from a debtor suspected of fraud. Thus, it behooves CPAs to familiarize themselves with some of the common aspects of bankruptcy fraud.

Bankruptcy filings have risen dramatically in the United Stales in the wake1 of the economic downturn. Indeed, individual bankruptcy filings for the 12-month period ending March 31 were up 33.3 percent over the previous 12-month period, according to the Administrative Office of the U.S. Courts. The National Bankruptcy Research Center reported that in July alone, more than 125,000 new things were recorded the highest monthly total since Congress enacted new bankruptcy laws in 2005.

This increase in bankruptcy petitions has been accompanied by an increase in bankruptcy fraud. The most common types include concealing assets, filing serial bankruptcy cases and making fraudulent transfers. The U.S. Department of Justice estimates that 10 percent of all bankruptcy petitions contain some elements of fraud. Thus, CPAs and financial professionals must educate themselves on the remedies and courses of action civil and criminal--available to them once they have identified indications of fraud.

Civil Responses

If yon suspect fraud in a Chapter 11 bankruptcy case, consider seeking die immediate appointment of a Chapter 11 trustee. The trustee displaces die management that got the debtor in its financial predicament and is vested with broad rights and powers to overset-the debtors financial affairs. It is appropriate to seek appointment of a Chapter 11 trustee if you suspect that any party in control of the debtor was dishonest in managing the debtor or in preparing the debtor's financial reporting.

The appointment of a Chapter 11 trustee is considered an extraordinary remedy; requiring a showing of fraud, dishonesty, incompetence or gross mismanagement either before or after the bankruptcy filing.

If the situation is dire, and you suspect a debtor is attempting to quickly conceal or transfer assets, it can be appropriate to seek the immediate appointment of an interim...