Highlights from SCCE’s 2023 Compliance & Ethics Institute – The Compliance and Legal Issues Related to Financially Distressed Organizations

November 3, 2023

This is the third blog article in our series detailing the highlights of SCCE’s 2023 Compliance & Ethics Institute. Today’s featured fabulous session with Dan Harper and Kasey Ingram explored the dynamic role of the compliance function in a financially distressed organization. Harper and Kasey pointed out that even well before bankruptcy proceedings begin, financial distress can lead to poor decision-making and unlawful or unethical business practices designed to cover up or mitigate the severity and extent of the financial distress. During times of existential financial stress, unique and heightened workplace cultural risks arise that shift the normal playing field of corporate compliance and increase the risk of not only misconduct and fraud occurring, but that they may be underreported.


First, Harper and Ingram highlighted there may be drastic changes to corporate culture resulting from bankruptcy proceedings. A company may experience increased employee turnover as employees resign en masse after seeing the “writing on the wall.” Confidentiality and protection of corporate proprietary information may become a heightened concern if employees are negotiating for new jobs. This may require more attention on non-disclosure agreements or negotiations of severance packages.


In addition, remaining employees may be more anxious about pending layoffs to further cut costs. They may be angry or resentful of “piling on” as they are expected or asked to take on the duties of employees who resigned or were laid off. Conflicts of interest may increase and go undisclosed as employees lean towards doing business at less than an arm’s length just to demonstrate their value to avoid being laid off. These factors can combine to create a culture of fear that prevents reporting of fraud or misconduct. The opposite can also occur – a flurry of reports, a bit like a corporate “Wild West” where it’s “every employee for themselves.”


A second major culture impact may arise from the auction or sale process of business assets. On-going due diligence both pre-acquisition and post-closing creates fatigue and pressure on employees who may feel “under a microscope” or under investigation as due diligence proceeds, particularly when it involves a lot of document production and report preparation. If the business is acquired, there may be integration challenges for business risk areas, culture, and the compliance program itself. Employees may be distracted and disorganized by the major changes upon acquisition, and as a result, control gaps can be easily missed.


The session was ripe with helpful teaching points for compliance professionals. When working with a financially distressed company, they recommended heightened awareness and questioning of transactions that seem unusual or “off.” To promote trust, they also recommended frequent employee communications that emphasize integrity. They added it is important to keep the hotline up and running and encourage anonymous reporting to counter increased fear of retaliation amidst down-sizing and large lay-offs. Also critical is accurate record-keeping and thorough financial reporting and disclosures.


While managing a compliance and ethics program is challenging even when a business is thriving, this session was a superb overview of the unique and dynamic atmosphere created by corporate financial distress.

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