To Find More Bankruptcy Fraud, Trustees and Creditors Need to Be More Vigilant; A Forensic Accounting Capability Helps Detect Fraud in the Earliest Stages -- Even Before It Is Suspected

In Economic Downturn, Bankruptcies Surge, and So Does Bankruptcy Fraud; Forensic Accounting Specialist at Marks Paneth & Shron Available to Discuss the "Red Flags" of Bankruptcy Fraud

NEW YORK, NY--(Marketwire - November 1, 2010) -  Bankruptcies are surging as the economic downturn continues. Business and personal bankruptcy filings rose 32 percent in fiscal 2009, and July 2010 saw a 24.2 percent increase in bankruptcy filings over the previous month, according to U.S. Bankruptcy Court and AACER (Automated Access to Court Electronic Records) data.

The economic desperation that produced the bankruptcies is also creating a surge in bankruptcy fraud, as many debtors scramble to hide assets from creditors and courts. In response, trustees and creditors should consider adding a forensic accounting capability to most bankruptcy teams, not just in cases where fraud has been identified, but rather, at the slightest suspicion of fraudulent activity. 

That's the advice of Sareena M. Sawhney, MBA, CFE, CFFA, a Director in the Litigation and Corporate Financial Advisory Services Group of New York accounting firm Marks Paneth & Shron LLP. Ms. Sawhney, a specialist in complex fraud investigation and litigation, explains that there are ways to conduct a 'fraud audit' that quickly identify the red flags that point to fraud, including situations where trustees and creditors do not yet have concrete evidence or clues that fraud has occurred.

"Trustees and creditors have multiple responsibilities. One that that they often neglect is being on the lookout for fraud," Ms. Sawhney says. "Having a system or capability in place for focusing on the reams of financial data and dozens of interviews that might contain indications of fraud is a wise move, especially in an environment in which bankruptcy is on the rise."

"Trustees and creditors should consider adding a forensic accounting dimension to most bankruptcy teams -- certainly to those where there is even the smallest suspicion that a fraud has taken place," Ms. Sawhney says.

Ms. Sawhney is available for interviews and can author a bylined article that explains:

  • Why bankruptcy fraud is rampant. "Business and personal bankruptcy typically extend well into a downturn, as tight credit forces business contraction and high unemployment decimates household finances," Ms. Sawhney says. "Fraud as a whole typically goes up when the economy is challenging, and bankruptcy fraud is part of that pattern -- a subset of individuals and businesses will try everything, including illegal means, to hide assets from creditors and courts."

  • The many different types of bankruptcy fraud. "Fraud schemes range from the very simple -- concealing assets by not declaring them on bankruptcy schedules -- to the extremely complex. Those committing bankruptcy fraud have been known to shift assets to insiders, give preferential payments to vendors who may be in on the fraud, acquire inventories to sell them without paying for them, or acquire real estate for the income, then declare bankruptcy to stall foreclosure. If you are experienced in fraud, you will recognize these schemes, but trustees and creditors do not always see them early in the bankruptcy process."

  • The "red flags" of bankruptcy fraud, and why they can be hard for non-specialists to detect: "Bankruptcy fraud is often revealed by small discrepancies in ordinary business records," Ms. Sawhney says. She explains that concealed assets might be revealed by the following:

    • missing assets (assets listed on financial statements prior to bankruptcy are not accounted for in the bankruptcy schedules);
    • poor record-keeping (the debtor has failed to keep business records, and/or books and records are incomplete); 
    • missing or heavily revised information (insufficient information is provided on debtor's bankruptcy schedules, and/or there have been frequent changes to such schedules);
    • too much cash activity (there have been an unusual number of unrecorded transactions, especially cash transactions);
    • a spike in insider transactions (there has been an increase in financial activity involving the debtor's officers, shareholders or relatives and other insiders -- payments, loans, or real estate or asset transfers);
    • or webs of complexity (there are intricate corporate structures and relationships involving the debtor and other entities controlled by insiders or close contacts).

A more intricate preferential payment scheme might be indicated by a sudden, non-standard payment, for example to an attorney or accountant. And signs of complex inventory and real-estate schemes include low inventories, a lack of local vendors, false credit references, excessive payments to officers and insiders, and transfers of real estate interest just before foreclosure.

"This information doesn't always jump out at you -- it is embedded in routine documents," Ms. Sawhney says. "You need to know where to look and recognize patterns of fraud quickly."

  • What a forensic accountant brings to the table: Forensic accountants are usually Certified Fraud Examiners -- trained to understand and trace complex cash flows and patterns of concealment. "What they bring to the table is specialized knowledge and focused experience that help greatly accelerate the detection process," Ms. Sawhney says. "Trustees and creditors have multiple responsibilities and tasks. A forensic accountant can focus exclusively on fraud -- he or she can even conduct a 'fraud audit' during a seemingly routine bankruptcy and find fraud that wasn't yet suspected. Of course, when fraud has been detected, the forensic accountant develops the evidence and plays a key role in preparing the case for court."

"Fraud is, unfortunately, a part of many bankruptcies. Being prepared to detect it early, even before it actually happens, should be an imperative," Ms. Sawhney says.

For more information, to schedule an interview or request a bylined article, contact Itay Engelman of Sommerfield communications at (212) 255-8386 or

About Sareena M. Sawhney

Sareena M. Sawhney, MBA, CFE, CFFA, is a Director in the Litigation and Corporate Financial Advisory Services Group at Marks Paneth & Shron LLP. She has approximately 10 years of litigation experience. Ms. Sawhney focuses on providing services in the areas of complex fraud investigations and forensic accounting examinations as well as services related to commercial litigation and comprehensive damage analyses.

Ms. Sawhney's experience includes conducting fraud investigations, forensic examinations, calculating commercial damages, purchase price dispute analyses, lost profit analyses and bankruptcy fraud analyses for midsize to Fortune 500 companies.
Ms. Sawhney has served as a testifying expert witness. She has worked with counsel to develop case strategies, assisted counsel with depositions and with preparing reports and exhibits for trial.

About Marks Paneth & Shron

Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of whom 64 are partners and principals. The firm provides businesses with a full range of auditing, accounting, tax, bankruptcy and restructuring services as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high-net-worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional and financial services and energy clients.

The firm's subsidiary, Tailored Technologies, LLC, provides information technology consulting services. In addition, its membership in JHI, the leading international association for independent business advisers, financial consulting and accounting firms, facilitates service delivery to clients throughout the United States and around the world.

Marks Paneth & Shron LLP, whose origins date back to 1907, ranks among the 35th largest firms in the nation, and is the 13th largest firm in the New York area. In addition, readers of the New York Law Journal rank MP&S as one of the area's top forensic accounting firms.
Its headquarters are in Manhattan. Additional offices are in Westchester, Long Island and the Cayman Islands. For more information, please visit

Contact Information:

Itay Engelman
Sommerfield Communications, Inc.