Private equity firms’ chief financial officers are zeroing in on prevention and detection of fraud, according to a recent survey conducted by Corporate Resolutions.
The study, Corporate Resolutions’ first on fraud prevention, found that 39 percent of those surveyed said they had encountered fraud at some point during their tenure as a private equity CFO, either in their firm or in a portfolio company. Furthermore, 81 percent had not invested in a company because of suspected fraud or integrity issues.
“Private equity firms have had a high focus on [fraud]. Because when they’re investing in companies, they’re investing their own money,” Corporate Resolutions founder Ken Springer told Private Equity International. “[Private equity firms] do, by and large, the most due diligence when investing. We weren’t surprised to see the results when they came out.”
Fraud prevention measures range from background checks and management reviews to surveillance, and can be used to combat corruption, asset misappropriation and falsified financial statements.
Of the 36 respondents, the survey found that 91 percent conduct background checks on firm and portfolio company employees and 67 percent have controls in place in cases of fraud.
Fraud prevention, as well as internal controls to combat fraud-related activities, has become increasingly important for firms in recent months as the US Security and Exchange Commission has heightened its scrutiny of private equity. In February, the SEC launched a probe of an Oppenheimer Funds vehicle when it was discovered that one of its holdings may have been deliberately overvalued.
The growing focus on fraud within the private equity universe is even more important given the recent level of attention on transparency by organisations like the Institutional Limited Partners Association, Springer said.
“The [LPs] are looking at the private equity firms, looking at what they’re doing and what they could do better,” he said.
Corporate Resolutions is a business investigations and consulting firm with offices in Boston, London, Miami and Hong Kong.