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Bankrupt Firms Three Times As Likely for SEC Probes: Deloitte

As "bankruptcy" becomes the moniker for late 2008, here's a revealing report by Deloitte Forensic Center. Their conlcusion: firms that file for bankruptcy are up to three times more likely to be probed for wrongdoing by the U.S. Securities & Exchange Commission.
Such alleged ill-doing included asset misappropriation, bribery and kickbacks, and manipulating accounts receivable, assets, expenses, liabilities and reserves, among others. Deloitte began its study by picking 1,009 publicly-traded firms that had filed for Chapter 11 from 2000 to 2005. After extracting firms that failed to make $100 million in revenue for at least one of those five years, Deloitte came up with a sample of 519 companies.

The control group included 2,919 like-sized firms that did not go bankrupt during the period.

After massaging its data further, Deloitte found that 139 of the bankrupt companies were issued enforcmeent notices. After some alterations of the control group, none was found to have been issued similar notices.

Why the SEC attention? The agency tends to look at bankrupt firms. The study showed that bankrupt companies were twice as likely to have more than 10 fraud schemes in their history and most of those were in the consumer business sector. Among the top violations were revenue recognition irregularities, manipulating expenses and improper disclosures.

My Takeaway: More cause for worry among executives whose firms are in trouble.

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