Reputation Impact From Fraud

Stakeholders beware.  A declining reputation can have a significant impact on an organization.  Just two and a half years after the initial public offering (IPO) of Basin Water, Inc., they were forced to issue a press release that would prove to be the beginning of the end.  The company was defunct within one year of the initial press release which indicated a potential problem involving the operational risk of financial statement fraud pertaining to revenue recognition.  This is merely one example where 72% of Securities and Exchange Commission (SEC) investigations in fiscal year 2010 identified deficiencies with 42% resulting in “significant findings”.   When those issues are highlighted with restatements of earnings, companies loose market capitalization and shareholders’ investment equity declines.  Researchers have found that when financial statement fraud was involved, for the three-day period surrounding the restatement date, firms lost an average of 13% of their market capitalization with an average loss in US dollars of $210 million.

Download the entire article: Operational Risk & Reputation Impact, A Case Study on Basin Water, Inc. (PDF, 8 pages)