Many private equity investors are willing to pay a premium to acquire companies with comprehensive anti-fraud programs, according to a study by BDO Consulting. Twenty-nine percent of the 100 partners and senior private equity executives reckon its worth the extra money–a median of 5% more–upfront to avoid catastrophes down the road, explains Glenn Pomerantz, national director of BDO's risk advisory practice.
Almost 40% indicated they have been exposed to risk through their investments, and 40% of those exposed 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.
"Private equity investors are a very good gauge as to what the business community is thinking," says Pomerantz. "It's their job to know what CFOs are worried about," because their own livelihoods are at stake.
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Almost 60% believe that corporate fraud in the U.S. remains a significant problem and a large majority (84%) consider fraud risk when they make their investments, according to the survey, conducted in the first quarter of 2008.
"We view this as a very positive survey result," says Pomerantz. "We're glad to see private equity investors recognize there's a fraud problem."
The study also shows 66% of private equity investors expect a comprehensive anti-fraud program would reduce at least some fraud risk exposure. The most effective anti-fraud measures include background checks for potential employees (72%), board and audit committees (62%), up-to-date anti-fraud controls (60%) and appropriate and well-communicated anti-fraud policies and procedures (59%).
Only 22% of investors believe that compliance with the 2002 Sarbanes-Oxley Act, including the internal controls testing required by Section 404, adequately protects a company from fraud. "There's a disconnect between what investors are saying today and the intent of Sarbanes-Oxley when it came out," observes Pomerantz.
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