WorldCom watchers take heed: History shows that firms that cook the books are statistically less likely to survive bankruptcy.
A study of 162 companies that declared Chapter 11 bankruptcy between 1981 and 1994, finds that companies with "aggressive accounting" practices are 21 percent less likely to survive bankruptcy.
"In the case of WorldCom, the company's accounting practices seem to have exceeded the boundaries of aggressive accounting and into the arena of fraud, so one could speculate that WorldCom would be even less likely to emerge from bankruptcy," says researcher Samuel Tiras, assistant professor of accounting and law at the University at Buffalo School of Management.
Tiras's analysis also reveals that that fewer companies have survived bankruptcy over the past 20 years -- a trend he expects to continue given the prevalence of aggressive accounting practices in corporate America.
Other findings from Tiras's study:
* Companies that switched auditors prior to filing for bankruptcy survived bankruptcy 24 percent less frequently than did firms that did not switch.
* Companies that postponed filing for bankruptcy protection survived bankruptcy 18 percent less frequently than firms that filed for bankruptcy protection before they committed debt violations.
"Firms that strategize to avoid bankruptcy are less likely to survive bankruptcy," Tiras says. "Bankruptcy forces a company to face its demons and make changes."
"Switching auditors is usually a sign that the auditor dumped the client because the company is too risky and is heading toward bankruptcy, or that the client dumped the auditor because it wanted the auditor to report more aggressively," Tiras adds. "Either way, it's a bad sign for the future of the company."
Tiras's study is part of a research project with co-researchers Daniel Bryan, UB assistant professor of accounting and law, and Clark Wheatley, assistant professor of accounting at Florida International University.
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