Re: Accountants as Enablers
yalanand
5/7/2012 5:14:11 AM
Unfortunately, one of the big problems investors face are "audited" financials that turn out to be totally bogus.
@Street Smart, I totally agree with you. Many times auditing firms collude with the companies to prepare this bogus report. For exmaple in case of Satyam (Indian IT stock which was listed on Nasdaq) PwC was also involved in generating bogus financial reports.
Re: You can never cut a good deal with a bad guy
Value Hiker
5/7/2012 12:15:56 AM
Good question, Phil. In most case, investor can detect the Skeleton early by:
- Reading serveral years of 10K, and compare them to find if the management team can keep their promise, frankly admit their errors, or be honest about their business prediction.
- Double check the past history of top executives. When you check earning, you want 5-10 year tracking record. Do the same check on CEO/CFO's past employment history
- The rest is common sense. If the management team did some thing against common sense ( Remember Madoff gave investors straight 10% return year after year, disregard the economic environment, you know it is impossible, even Mr. Buffett has several down years)
Like any investing decision, the above checks are not bullet-proof . There are cases someone spent a life time to build a good reputation, but five minutes to ruin it (remember David Sokol?) - Fortunately, it is rare case.
Even the due-diligence check on corporate misbehavior improves your winning chance by only couple of points, it is worth doing.
Re: You can never cut a good deal with a bad guy
PredictableChaos
5/6/2012 11:46:01 PM
@Scott,
Another clue to shenanigans is cashflow. It's not easy to play games with cashflow, so it should raise a red flag if a company who's accounting shows that it's printing money, is somehow, going into the markets for cash.
I was an investor in WorldCom and this is exactly what happened. They were going into the bond markets to raise cash, when it really seemed like they should be generating enough cash on their own. Supposed to be connected with acquisions, etc. but still smelled funny.
Good question @Noreen.
The causes are many, but it does seem we've lost something that our parents or grandparents had. For most Americans today, the definition of right and wrong will have some connection to what you can get away with. (So, as one example, if you can get away with certain entries on your tax forms, that makes it okay.)
Even a touch of thiis attitude in senoir managment becomes a very dangerous thing, as they will have a lot of control, and usually an above average amount of charm, too.
Re: You can never cut a good deal with a bad guy
Scott Raynovich
5/6/2012 11:23:17 PM
Phil,
I believe there are actually a lot of red flags at companies run by disengenous executives. Here are some common ones
1) Overly promotional statements and cheerleading.
2) Defensiveness and threatening behavior in response to criticism.
3) Suspicious revenue/profit activities. in quarterly earnings.
Here's a good summary of common accounting red flags. By the way most of these were present with both Worldcome/Enron:
http://www.forbes.com/2002/02/27/0227wayman.html
Re: You can never cut a good deal with a bad guy
philtheinvestor
5/6/2012 4:26:43 PM
Value Hiker,
If there's no public demonstration of corporate misbehavior, how is an investor to know about the potential skeletons in the closet, BEFORE investing?
Re: Reflection of society?
AskAsa
5/5/2012 3:14:52 PM
Ethics and rules are largely situational.
What's needed is a stronger moral compass that guides a person to do the right thing regardless of whether or not they'll be caught.
Integrity is the ability to stand for something.
Re: Reflection of society?
tokyogai
5/5/2012 11:47:21 AM
I think maybe our lifestyle is to blame. Jobs are out of the home and quite often both parents work. Everything is a riush as there isn't time to get it all done. Life is nowhere near as simple as it used to be. We commuinicate in distant ways ( phone, e-mail, social networking , etc) instead of face to face. In some ways we are more efficient and in other ways we seem to be losing values.
So how did we get here? Who is failing to rear kids with values? Is it the parents? Schools? Relaxed rules in churches and the like?
Reflection of society?
tokyogai
5/5/2012 9:55:20 AM
Maybe this lack of ethics is just a reflection of the loss of these values in our society in general. The executives all live in our world and maybe they got the message somewhere along the line that this type of behavior was OK. Maybe we need a little more oversight and harsher penalties to reverse the trend.
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