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December 23, 2013

Breaking Bad: A Case Study in Accounting Fraud

If you are familiar with AMC’s hit series Breaking Bad, you may think the show could be a case study in a number of societal issues, but accounting fraud is probably not one of them. It’s true though. Through all five seasons of this show, accounting fraud has been prevalent in one form or another: financial statement misrepresentation, tax fraud, and money laundering. We will examine each throughout this article.

For a bit of background, the show centers on the life of Walter White, Sr. (portrayed by Bryan Cranston), a brilliant high school chemistry teacher with terminal lung cancer, who begins manufacturing very potent, illicit drugs to provide for his family’s financial well-being after his death. His wife, Skyler White (portrayed by Anna Gunn), is pregnant with and later gives birth to their second child; their first child is a teenager with a mild case of cerebral palsy. Five seasons depict how Walt’s decisions affect his life, and the lives of those he loves and loathes.

Skyler takes a job as a bookkeeper with an old employer, Beneke Fabricators, to help make ends meet when Walt begins cancer treatments that are not covered by his health insurance. The company’s owner, Ted Beneke (portrayed by Christopher Cousins), has been committing financial statement fraud since before Skyler’s arrival, by not recording certain customer invoices, or recording less revenue than what was actually received, in order to make revenues appear worse than they actually were. Skyler quickly catches on to his scheme and when confronted, Ted insists that he must continue doing this for the time being and enlists Skyler’s help. She objects at first, but later agrees to be a willing participant in the scheme.

The scheme continues on for almost another year, when Ted receives a letter from the IRS’s Criminal Investigation Division notifying him that Beneke Fabricators is being investigated for tax fraud for claiming less revenue on tax returns than was actually earned, as a way to lessen the company’s tax liability. Skyler helps him deflect the CI agent by playing the part of an incompetent, under-qualified bookkeeper who assumed all of her entries of customer revenue were correct because, “the Quicken didn’t flash red.” As a result, the agent believes the whole situation came about because of negligence, rather than fraud and backs off pursuing any criminal action.

There was ample opportunity for Ted and Skyler to commit this fraud because both had unlimited access to the company’s books. In Ted’s case, he felt pressure to keep his family’s business running by keeping the IRS off his back and not paying his huge tax bill. In Skyler’s case, she needed her job’s income because she believes it is helping her family’s financial situation while Walt undergoes expensive cancer treatments. It is also hinted that Skyler and Ted may have had a past romantic relationship, which may also contribute to the pressure she feels to help Ted commit the fraud. They both rationalize the wrongdoing by believing that this will all stop and unwind itself at some point in the future.

However noble their intentions, what they did could have landed them in prison. While the storyline is fictional, the IRS’s Criminal Investigation unit is very real. According to the IRS’s website, CI is responsible for, “investigating potential criminal violations of the Internal Revenue Code and related financial crimes…” At many points in the show, Skyler warned Ted that he could go to prison for this scheme, and she was right. In Fiscal Year 2013, CI initiated 4,119 investigations, recommended prosecution for 3,250 cases, and obtained convictions on 2,336 cases. The average criminal served 44 months in prison for crimes investigated by this division.

This fraud played a major role is Ted’s downfall and eventual paralysis, but Skyler also willingly participated in her husband’s money laundering scheme to protect her family and the huge, illegal fortune her husband has amassed. It is revealed in season 5 that over the course of about a year, Walter White has accumulated about $80 million in cash from manufacturing illegal drugs. If that amount seems outrageous to you, as it certainly did to me, read an article analyzing its plausibility.
If Walt were to attempt to deposit all of that cash into a bank account, it would likely raise a number of red flags. First, the bank would be required to file a currency transaction report (“CTR”), which is a report filed by a financial institution when a customer makes any transactions at or above $10,000 in cash either all at once, or that total to $10,000 in one business day. These reports are filed with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury. If the bank feels the cash came from or is used in suspicious activities, a suspicious activity report (“SAR”) can be filed. These are just the reports Walter White doesn’t want filed, considering the sources of his cash.

In season 2, Walt’s lawyer, Saul Goodman (portrayed by Bob Odenkirk) suggests to Walt that he buy a business with his cash so that he has a means to launder his illegally obtained drug money. Eventually Skyler and Walt buy a local car wash business, using said illegally obtained drug money, because it is a business that has a high number of customers paying in cash. It would be an easy way to deposit, or launder, the illegally obtained cash into the financial system and use it for operational expenses, Walt and Skyler’s salaries, distributions, and, most importantly, to pay taxes. Thus, the dirty money going into the system would come out seemingly clean in the end. Skyler willingly created fake car wash tickets and added the cash from the fake sales to the cash register and deposited the money at the end of the day. Sounds simple right? Well, money laundering is an incredibly complex scheme to pull off, and unfortunately, other events in the show do not allow the viewers to see any conclusion to the laundering of Walt’s drug money other than the seizure of all of his and his family’s assets once it is discovered that he is the elusive drug manufacturer, “Heisenberg.”

Who would have known a show that focuses on the morality of manufacturing and distributing drugs could have so much focus on accounting fraud? The truth is accounting fraud could also be considered a study in morality. Whether witnessing it through a fictional TV show or reading a real article in the newspaper or online, accounting fraud boils down to the methods and rationale used when seemingly good people decide to “break bad” and commit financial malfeasance.

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