By Jessica Salerno-Shumaker, OSCPA senior content manager
While CPAs should always be on the lookout for fraud, poor decisions are usually made when clients begin to undergo financial strain.
“When somebody is on the verge of bankruptcy or financial problems, accountants need to think about everything they usually do in terms of fraud detection,” said Jim Lanik, JD, partner at Waldrep Wall Babcock & Bailey PLLC. “And realize that when things get tough, people get desperate.”
Lanik specializes in business bankruptcy and municipal law and will present on bankruptcy fraud at the upcoming Aug. 29 Fraud & Forensic Conference. He’ll give an overview of the process, what it means to be in bankruptcy, the responsibilities of debtors and more.
“My experience is that people who don't know a lot about bankruptcy don't know what they don't know,” he said. “Generally, there's a misconception that you don't have to put everything you own through bankruptcy. When they file, someone might think they can keep their house or car out of bankruptcy. That’s not how it works.”
Lanik said bankruptcy operates on the policy of being completely open and honest, and that those going through bankruptcy don’t get to choose only certain debts and assets to surrender.
“In the context of bankruptcy, fraud is a big problem because it undermines the entire foundation of the system,” he said.
The most common type of bankruptcy fraud Lanik said he sees is misstatements in the petition. This is when the person declaring bankruptcy is undervaluing the value of an asset or hiding an asset, and usually occurs when the individual is trying to protect something.
Sometimes business owners filing for bankruptcy will attempt to undervalue the scope or value of their business, and in doing so will provide false statements to their accountant.
“Bankruptcy isn't something people should be scared of,” Lanik said. “It's complicated and it's a very serious matter. But it's a tool. And it can be a tool that in the right situation can achieve your clients’ goals.”