Corporate Governance

Deloitte Study Links Bankruptcy and Fraud

By Tamar Weinrib

As the financial crisis continues, the advent of fraud at struggling companies becomes a distinct danger that management needs to address.  According to a recent study published by the Deloitte Forensic Center, ?Ten Things About Bankruptcy and Fraud,? companies that are facing bankruptcy are three times more likely to be subject to an SEC action due to financial statement fraud as compared to non-bankrupt companies.  In addition, companies subject to SEC enforcement actions were twice as likely to face bankruptcy.  The most common types of fraud for both bankrupt and non-bankrupt companies were revenue recognition, manipulation of expense, and improper disclosures.  Though the results of this study seem rather obvious in the connections they make, it is a warning to companies that is very pertinent to today's corporate climate.  Management of companies facing bankruptcy need to include internal investigations of potential fraud in their bankruptcy preparations.  In addition, management needs to make sure that there are adequate controls in place to prevent any occurrences of fraud.  This should include communicating realistic goals and target numbers to employees so that there is reduced motivation to engage in fraudulent conduct to avoid bankruptcy or to keep stock prices at current or increased levels. Companies also need to provide for detailed fraud risk assessments, greater involvement by senior management, and more active participation in fraud detection and prevention by middle management and low-level employees.

Full post as published by PomTalk on December 01, 2008 (boomark / email).