NCJ Number
115835
Date Published
1987
Length
12 pages
Annotation
This paper traces elements of an insolvency fraud in New Zealand and suggests ways such frauds can be detected.
Abstract
Insolvency fraud is exposed when a solvent business collapses into receivership or liquidation. It involves an unauthorized redistribution of wealth using an incorporated limited liability company as a shield for those carrying out the unauthorized activity. Using the case of a brown goods retailer, this paper demonstrates how an unaudited company is able to 'puff' its balance sheet and obtain loan finance through over-inflated and nonexistent assets. Low deposits and over-inflated trade-in price discounting on a small share capital are warning signs that even a short-term decline in sales could produce heavy loss. Insolvency occurs when bankers and creditors fail to evaluate properly the calibre of the business with which they are dealing. Investigating accountants are commonly used in the United Kingdom and to a lesser extent in New Zealand. The investigating accountant will, at the request of the banker, conduct a quick, discreet, and limited inquiry as to the state of the company's apparent solvency. If events make the lender of supplier uneasy, an independent investigation can expose deception. In the case study, the losses could have been avoided had such an investigation been performed.