Troubled Firms that Delay Bankruptcy Filing Less Likely to Survive, Study by UB Accounting Professor Shows

BUFFALO, N.Y. -- WorldCom and other financially troubled companies considering bankruptcy are better off filing for bankruptcy protection sooner than later, according to a University at Buffalo School of Management researcher who studies how accounting practices affect a firm's chances of bankruptcy survival.

"In general, firms that 'strategize' to avoid bankruptcy are less likely to emerge from bankruptcy," says Samuel L. Tiras, UB assistant professor of accounting and law, who analyzed the fates of 162 companies that filed for Chapter 11 bankruptcy protection between 1981 and 1994. The study is part of an ongoing research effort with co-researchers Daniel Bryan, UB assistant professor of accounting and law, and Clark Wheatley, assistant professor of accounting at Florida International University.

"Bankruptcy forces a company to face its demons and make changes," Tiras explains. "Delaying bankruptcy hurts the firm because the firm typically continues to operate in the same fashion it has in the past, without making changes."

According to Tiras's research, firms that postponed filing for bankruptcy protection until after they had violated a debt-covenant restriction emerged from bankruptcy 18 percent less frequently than did firms that filed for bankruptcy protection before facing such violations.

Tiras also found that companies with aggressive accounting practices emerged from bankruptcy 21 percent less often than did firms with conservative accounting practices. Moreover, the research showed that fewer companies have survived bankruptcy over the past 20 years -- a trend that Tiras expects to continue given the prevalence of aggressive accounting practices in corporate America.

"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," Tiras says.

Tiras also found that companies that switched auditors prior to filing for bankruptcy emerged from bankruptcy 24 percent less often than firms that did not switch.

"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 financial statements more aggressively," Tiras says. "Either way, it's a bad sign for the future of the company."