Why Businesses Fail

Source: AICPA CPA Insider

In this article from CGMA Magazine, Paul Hopkin summarizes findings of a Cass Business School study that revealed common factors among businesses that faced significant failures and financial losses. The report examines 18 case studies involving 23 businesses, including AIG, Arthur Andersen, BP, Maclaren, and EADS. The researchers found seven common factors among companies that experienced major crises:

1. Ineffective boards, in terms of competence or ability to oversee senior management.
2. “Risk blindness” – that is, failure to “engage” with significant risks, such as reputational risk.
3. Poor leadership on ethics and culture.
4. Ineffective communication. For example, some companies communicated poorly with subcontractors; others experienced excessive delays in reporting problems to senior management.
5. Excessive complexity, in terms of project or management structure.
6. Inappropriate incentives, such as bonus programs that fail to reward employees for achieving health or safety standards.
7. “Information glass ceiling” – that is, risk management or internal audit teams could not effectively report on risks originating from high levels within the company.

For the complete article, read “Seven Reasons Businesses Fail.”

From AICPA CPA Insider, January 31, 2012, http://www.CPA2biz.com.