Financial crimes and misdemeanors

October 4 2005

Hello,

Is there no shame? From the UN to the halls of congress to boardrooms from sea to shining sea corruption seems to be the order of the day. What’s an investor to do? Yes some actions are out and out criminality, some are solely the province of an isolated single individual, some are debates of accounting tactics and tax payments and some are simply wild eyes accusations. Is corruption at epidemic proportions or is it simply ingrained in many institutions in our society? Many institutions acting more like criminal enterprises thinly veiled in a cloak of legitimacy.

Stocks that play by the rules ,follow proper accounting procedures and keep shareholders and employees informed ,in the long run they have their stocks rewarded .Companies that over pay their executives, and don’t act in the best interest of shareholders and employees are in the long run looked at with suspicion and their stock prices are penalized. We all know the stories of World com ,lucent, AT&T ,Enron and so on many of these stocks are no longer with us or trading at very low valuations. It is important to stay calm and separate acts of fraud, bad management or poor business judgment. Remember General Motors not selling enough SUV’s with $3 a gallon gasoline is not corruption it is just very bad management.

How do you know what they say is true? First there are accounting standards that are practiced uniformly in most parts of the world. Standards have some differences country to country but are generally uniform in most of the industrialized world. Most exchanges are self regulatory bodies and have standards of there own that companies have to meet to remain listed on their exchange. There are state administrators and Federal regulators that demand certain level of compliance with regulation and companies must demonstrate compliance to the regulators as well as the exchanges. Companies hire auditors, who are liable for the company meeting the regulatory requirements. It is also important to note that bulletin board or penny stocks have almost NO requirements and some countries have historically weak compliance and enforcement, Japan, Italy, Brazil for instance and some countries like China have no standards and are currently trying to develop standards, policies and procedures. However an Italian or Japanese or Brazilian stock that is listed on the New York Stock Exchange has to meet NYSE standards, US standards and there own country standards. This is not to cast dispersions on certain countries or companies .The USA was a model for transparency until the Clinton Era scandals of the 1990’s ie.. Enron, World Com and well you know the story…

So again what’s an investor to do? I have some simple rules, they don’t inoculate you against everything but it is a good place to start.
1) Don’t buy stocks that don’t have audited financials,2) Over hyped CEO’s often lead to underperforming stocks,3) It is what they do not what they say,4) longer term consistency of earning and revenue growth,5) the companies articulated strategy has to make sense. 6) The stock is listed on a major exchange like the NYSE which has even higher standards. 7) A company’s openness to share information with shareholders. It is important to remember that there are over 8000 mutual funds and about 8000 stocks so the amount of financial crimes is rather small, but often spectacular.


James

www.jamesfoytlin.com

http://onesmallvoice.blogspot.com/