Private Equity Investors Are Concerned About Fraud; Many Would Pay a Premium for Companies with Anti-Fraud Programs

According to BDO Consulting 84% of PE firms consider fraud risk when making an investment

NEW YORK--(AllPayNews)--According to a new study by BDO Consulting, LLP, thirty-seven percent of top executives at leading U.S. private equity firms have been exposed to corporate fraud through their investments and 40% of these investors say the impact on their investment return was significant. Fifty-nine percent of those exposed have faced instances of fraud worth $1 million or more. Nearly one third (29%) would be willing to pay a higher price (a median of five percent more) for a company that had a comprehensive anti-fraud program in place.

The BDO Consulting Corporate Anti-Fraud Study examined the opinions of partners and other senior executives at 100 private equity firms throughout the United States regarding their perceptions of the seriousness of corporate fraud among U.S. companies, the risk of fraud to their investments, how important anti-fraud measures are to them, and which measures they consider the most effective in preventing fraud. BDO Consulting is a division of BDO Seidman, LLP, a leading national accounting and consulting organization.

According to Carl W. Pergola, Executive Director of BDO Consulting, and an experienced fraud investigator, “Fraud prevention is not a fad. To be effective it requires a genuine commitment to a comprehensive and continuously vigilant program.” Pergola continued, “Forward-thinking organizations, willing to commit the time and resources to truly understand how to prevent fraud, would undoubtedly drive value to their organizations, and I think these survey results support that.”

The Study also noted that private equity investors tend to focus on common and traditional anti-fraud techniques. They place the highest value on:

Conducting criminal and other background checks on potential employees (72%)
Maintaining a Board and Audit Committee with oversight responsibilities for preventing and detecting fraud (62%)
Monitoring and updating anti-fraud controls (60%)
Timely and well-communicated policies regarding appropriate behavior (56%)
Other interesting findings:

Private equity investors’ focus on fraud prevention is evident. A large majority (84%) say they consider the risk of fraud when they make an investment.
Is SOX enough? Interestingly, only twenty-two percent of partners and senior executives at private equity firms believe that a company in compliance with Sarbanes-Oxley, including Section 404 of the Act, is adequately protected from fraud. But sixty-six percent think a comprehensive anti-fraud program would be at least somewhat effective in fighting fraud.
Confident in own investments. Interestingly, respondents rate their own investments much more positively than they rate U.S. companies overall on the development and implementation of internal controls. Twenty-three percent rate U.S. companies highly (8-10 on a 10-point scale) on developing and implementing controls for preventing and detecting corporate fraud; however, half (53%) rate their own investments at this level.
Fraud monitoring and implementation varies. Forty percent of those surveyed offer that if the company they were investing in decided to implement an anti-fraud program, they would rather have it carried out and monitored by an outside company, but under the direction of the audit committee. Over half, (58%) prefer the program to be implemented and monitored internally either by the company’s management or internal audit committee.
“Often organizations are missing one or more components of an effective fraud prevention program,” explains Glenn Pomerantz, the National Director of BDO Consulting’s Risk Advisory practice and an experienced fraud investigator. “For example, background checks are often performed at the start of employment, but are often not repeated as these same employees advance to positions of trust within an organization.”

The BDO Consulting Corporate Anti-Fraud Study was conducted by The OSR Group, a leading national public opinion and marketing research firm. The survey is based on a total of 100 interviews among partners and other senior executives within private equity firms based in the United States. Twenty-three interviews were conducted online and 77 by telephone in February 2008.

BDO Consulting, a division of BDO Seidman, LLP, provides litigation, investigation, restructuring and risk advisory services to major corporations, law firms, insurance companies, financial services entities and government organizations. Our highly experienced and well-credentialed professionals draw upon a range of industry knowledge and completed consulting engagements throughout the United States and internationally to provide clients with unparalleled service. BDO Consulting leverages the global industry and accounting knowledge of the BDO International network, providing rapid, strategic advice to assist our clients with dispute resolution, risk management, mergers and acquisitions, financial solvency and regulatory compliance issues.

About BDO Seidman, LLP

BDO Seidman, LLP is a national professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. Guided by core values including, competence, honesty and integrity, professionalism, dedication, responsibility and accountability for almost 100 years, we have provided quality service and leadership through the active involvement of our most experienced and committed professionals.

BDO Seidman serves clients through 37 offices and more than 300 independent alliance firm locations nationwide. As a Member Firm of BDO International, BDO Seidman, LLP serves multi-national clients by leveraging a global network of resources comprised of 621 Member Firm offices in 110 countries. BDO International is a worldwide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country.

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