According to a study published by the Deloitte Forensic Center, “Ten Things About Bankruptcy and Fraud,” companies filing for bankruptcy protection are three times more likely than non-bankrupt companies to face enforcement action by the Securities and Exchange Commission relating to alleged financial statement fraud. The study analyzed SEC Accounting and Auditing Enforcement Releases and bankruptcy filings.

The study also found that companies that were issued financial statement fraud–related Enforcement Releases by the SEC were more than twice as likely to file for bankruptcy protection as those not issued one. Of publicly traded companies with revenues greater than $100 million that were issued financial statement fraud–related SEC Enforcement Releases, 35 percent filed for bankruptcy compared to 14 percent of similar companies that were not issued the Releases.

Approximately one in seven financial statement fraud–related Enforcement Releases issued to companies that filed for bankruptcy were issued prior to their bankruptcy filings. These situations may provide a warning signal of potential bankruptcy filing.

“With economic conditions likely to increase corporate bankruptcy filings, companies should be aware of their potential exposure to allegations of fraud that may be sustained by the SEC,” said Toby Bishop, director of the Deloitte Forensic Center. “Consideration of potential fraud issues may be a wise part of bankruptcy preparations.”

Bankrupt companies receiving SEC Enforcement Releases were twice as likely as non-bankrupt companies to have more than ten alleged financial statement fraud schemes — and at least 1.5 times as likely to have six to 10 alleged fraud schemes as non-bankrupt companies. Bankrupt companies with revenues greater than $10 billion that received SEC Enforcement Releases had 10.8 alleged financial statement fraud schemes on average, compared to 4.3 schemes at such companies with revenue between $100 million and $10 billion.

“In the past few years, many companies have created highly leveraged balance sheets with many layers of debt. When such a highly leveraged company files for bankruptcy protection, its creditors may have little other recourse than to seek recovery from non-traditional sources such as challenging potentially fraudulent conveyances, seeking recovery under D&O policies and filing other (non-bankruptcy) litigation,” said Sheila Smith, national service line leader of Deloitte’s Reorganization Services.  “This strategic shift has raised risks for directors, officers and senior management, increasing the importance of fraud detection.”

Companies issued the most Enforcement Releases were in the consumer business (30 percent); technology, media and telecommunications (27 percent); and manufacturing (16 percent) industries.