Forensic accountants and insolvency lawyers will play a key role in detecting bankruptcy fraud


A slight increase in bankruptcy filings is expected in early 2023

Detecting bankruptcy fraud can be a challenge for trustees and creditors. »

— Deborah Temkin, Executive Member of Trace Forensic Experts LLC

CHICAGO, ILLINOIS, USA, October 18, 2022 / — TRACE LEGAL EXPERTS LLC AND HUSCH BLACKWELL LLP – Forensic accounting experts and attorneys knowledgeable bankruptcy will play a key role in financial crime investigations and detection fraud as many industries face financial hardship and the likelihood of bankruptcy due to the economic disruption caused by the global pandemic and its aftermath.

Despite a decline in the number of bankruptcy filings during the lockdown period, many expect to see an increase in bankruptcy filings in Q1/Q2 2023, particularly in sectors such as aviation, tourism, manufacturing and retail. That’s according to forensic accounting and economic damages firm Trace Forensic Experts LLC and nationally recognized law firm Husch Blackwell LLP.

Deborah Temkin, Executive Officer of Trace Forensic Experts LLC, based in Chicago, Illinois, says:

“While the downfall of some of these companies may have been accelerated by the pandemic as well as the current economic climate, several underlying factors may have triggered these financial difficulties.

“Detecting bankruptcy fraud can be a challenge for trustees and creditors. Sometimes the signs are obvious. But usually the red flags are hidden in thousands of financial and accounting records and documents. A lack of information or insufficient information can also indicate that something has been covered up.

An increase in bankruptcy filings has historically led to more suspected cases of fraud being investigated. In the United States, about 10% of bankruptcy filings involve fraudulent claims, according to the Federal Bureau of Investigation (FBI). When a party declares bankruptcy, it is required to disclose all of its income, assets and debts.

Paul Rodrigues, Managing Member of Trace Forensic Experts LLC, based in Miwaukee, WI, comments:

“Committing fraudulent bankruptcy is a federal crime. Bankruptcy fraud occurs when debtors deliberately lie or falsify information when filing for bankruptcy. Usually, bankruptcy fraud occurs alongside other crimes, such as mortgage fraud, money laundering, identity theft, Ponzi schemes, fraudulent transfers, and misappropriated sales.

Although most companies become financially insolvent without any wrongdoing within the organization, there are instances in which company insiders have committed fraudulent and abusive transactions that have rendered a company unviable.

Daniel McGarry, senior attorney at Husch Blackwell LLP, based in Madison, WI, says:

“An economic downturn tends to expose fraud that has been (or is being) perpetrated by individuals within a company – often without the knowledge of management. Bankruptcy filings can inadvertently reveal this fraudulent activity. Having a lawyer versed in bankruptcy and insolvency law is therefore essential to uncovering the nature and extent of the deception and to holding the perpetrators accountable.

Role of forensic accountants and insolvency lawyers

Ms. Temkin comments:

“Forensic accountants and experts have a key role in conducting forensic investigations. A forensic investigation will help identify assets that have been concealed, inaccuracies and fraudulent financial reports, misappropriation of assets, misappropriation of funds and other irregularities. A bankruptcy process tends to involve more extensive forensic investigations than most debtors are accustomed to.

Typically, forensic accountants work hand-in-hand with an attorney familiar with insolvency cases to identify and confirm red flags, as well as track the movement of funds and/or assets.

Mr. McGarry adds:

“This is where a seasoned bankruptcy attorney, working closely with a forensic expert, can help creditors, businesses and other victims document fraud. They can also be instrumental in recovering assets or help successfully pursue insurance claims, which in some cases can help defray the cost of professionals hired to help uncover the fraud.

The consequences of fraudulent bankruptcy

Congress expanded the anti-fraud measures contained in the Bankruptcy Code. Bankruptcy fraud is punishable by up to five years in federal prison, a fine of up to $250,000, for each count, or both. 18 USC § 157.

Deborah Temkine
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