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Companies Filing for Bankruptcy, and SEC Fraud Enforcement Actions

By Toby Bishop

Companies that are entering or in danger of entering bankruptcy can potentially suffer in a variety of ways. Financial losses for investors and employees. Declines in worker performance and morale. Customer defections. And in extreme situations, liquidation. Some companies entering bankruptcy may well find themselves facing yet another disturbing reality: They may have to address acts of financial statement fraud allegedly committed along the way to Chapter 11.

A recent Deloitte study found that companies filing for bankruptcy protection were three times more likely than non-bankrupt companies to face enforcement action by the Securities and Exchange Commission (SEC) relating to alleged financial statement fraud. In addition, companies so cited by the SEC were more than twice as likely to file for bankruptcy protection as those not cited.

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