JANUARY 29, 2015 3:07 PM January 29, 2015 3:07 pm 2 Comments
Carson C. Block is the director of research forMuddy Waters, a research and investment firm. He is on Twitter at @muddywatersre
I’m often left scratching my head when seemingly smart investors get blindsided by a fraud. But I’ve learned that it isn’t reasonable to expect them to entirely avoid mistakenly getting taken in by what on the surface seems like a sound investment but turns out to be a fraud. A buying mentality is simply incompatible with the skeptical mentality needed to avoid scams. Continue reading →
Based on data collected from 616 experienced financial officers who use U.S. GAAP or IFRS and are domiciled in the U.S., Europe, or Asia, we examine how reporting standards (U.S. GAAP vs. IFRS) and domicile (U.S. vs. non-U.S.) affect earnings management (real vs. accrual). U.S. firms using U.S. GAAP rely more heavily on real methods than non-U.S. firms that use either IFRS or U.S. GAAP, and U.S. firms using IFRS. U.S. firms using U.S. GAAP operate in an environment that encourages real over accruals methods; specifically, U.S. GAAP facilitates detection of earnings management and enforcement is more effective in the U.S. Further, the likelihood and amount of earnings management does not differ across conditions, suggesting that firms using less accruals earnings management tend to fully compensate by increasing real methods. So, stronger reporting environments do not necessarily reduce total earnings management, but instead encourage substitution of real for accruals methods.
Posted by TEH Jun Wen, Year 3 undergrad at the School of Accountancy, Singapore Management University
(Financial shenanigans cost shareholders billions of dollars. This is part of an ongoing series about how to spot Wall Street wrongdoing before it puts your portfolio in jeopardy. See last week’s “Is There an Enron Sitting In Your Portfolio?” for more.)
For many companies, meeting or beating quarterly earnings estimates matters more than anything else. Add stock options to the mix, or big cash bonuses tied to short-term earnings or stock price targets, and executives’ temptation to focus exclusively on quarterly results becomes irresistible. In the worst cases, this tunnel vision can drive companies to creative accounting, or even fraud. Continue reading →
Role of the Chief Executive Officer in preventing lapses in ethical standard
Posted by Terence Chua, Year 4 undergrad at the School of Business, Singapore Management University
I remember an article I read from Bloomberg, “AIG of Drugmakers Pfizer Is Too Big to Be Guilty” -http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahodmf54hyPA
Brief summary: Pfizer sales personnels blatantly ignore negative health consequences to push drug with detrimental health consequences. Despite being fined repeatedly for such lapses in the past, regulatory authorities have found it difficult to come up with a strong enough punishment to prevent Pfizer from committing such a lapse because the bankruptcy of Pfizer will lead to greater detriments to society; if Pfizer is convicted of crime, they would face debarment from federal programs. And that would mean that Medicaid and Medicare patients would have to either somehow pay pocket for vital medicines the company produces or go without. With such a consideration, Pfizer’s senior executives continue to flout laws without much consideration of the consequences of their actions.
Democratising finance: China’s P2P industry attracts scammers
Gabriel Wildau in Shanghai
When Chinese peer-to-peer lending platform Hengjin Dai launched last June, it used a three-day promotion to lure investors. Just 12 hours later its website went dark. In a similar case the 22-year-old founder of Boliya, another P2P platform, whom state TV had featured as a model young entrepreneur, suddenly vanished. Police in Chengdu, the capital city of western Sichuan province, told the Financial Times they were investigating the case but declined to provide further details. Local media quoted a company employee saying they owed investors substantial sums.
Even as P2P lending has grown dramatically in China over the past year, and venture investors have flocked in, analysts say that the industry has become a breeding ground for fly-by-night operators who once inhabited the world of informal lending. Continue reading →
Posted by CHEN Liting, Year 3 undergrad at the School of Accountancy, Singapore Management University
Accounting Abroad-How to Keep Managers and Auditors In Line
Reforming Financial Reporting in Developing Nations
Research by Ray Ball How do you improve the quality of financial reporting in countries switching from a planned to a market economy? Conventional wisdom suggests these countries should simply adopt high-quality accounting standards and high-quality reporting and disclosure will follow. The European Parliament recently took this approach, but it has not worked in other countries. The top priority for reform should be restoring the rights of affected shareholders and lenders to sue managers and auditors for false or misleading reporting. The Enron scandal has brought unprecedented attention to the U.S. accounting system and the topic of financial reporting and disclosure. While Enron may be news here, in many countries Enron-style accounting is the norm. A reflex response has been for governments and Securities and Exchange Commission-type organizations to tighten their regulation of accounting standards, despite the evidence that regulation decreases financial reporting quality. Continue reading →
A relationship of trust can paper over fraud, for example, warn due-diligence experts
DOING business in China, it is said, boils down to guanxi, or relationships. But buying a company linked to someone powerful can just as well work against you, warned participants at a symposium, who were discussing issues related to conducting due diligence in China. If the powerful backer of one’s business is caught up in an anti-corruption crackdown, the business would, at best, not grow as quickly as expected; in the worst-case scenario, the company could fold. Alternatively, one’s relationship of trust could lead one to overlook fraud or other undeclared issues. Continue reading →