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Guess What? Numbers DO lie

If history has taught us nothing else during the recent decade of corporate scandals and downfalls, it’s taught us this:  numbers DO lie.  Or rather, those that produce the numbers sometimes stretch facts and obfuscate the truth with misleading impressions about a company’s financial health. 

We’re referring to audited financial statements.  How much have you learned from reading a financial statement?  Could you tell if it was a fair and accurate representation?  Would you know if there was any outright fraudulent information embedded in the many paragraphs of fine print? Did it portray an accurate picture of the company’s near-term future viability? Or did it hint that maybe the company might be at risk for failing?

Today, there is a growing concern over the concept of a “going concern.”  Generally, it’s been the responsibility of third-party auditing firms to report anything amiss in a company’s operational and financial dealings, and to make note of any red flags that might indicate that the company is heading for a cliff. In other words, when the accounting firm prepares the audited financial reports, they are expected to indicate that the company is either a bona fide “going concern,” or that there is substantial doubt that the company can even survive.

But one of the potential problems with that arrangement is that auditors and accounting firms earn hefty fees from the corporations they audit. This calls into question the supposed arm’s length relationship between the two. This problem erupted under glaring spotlights during the 2001 case of former Big-Eight accounting firm Arthur Andersen and their cozy relationship with Enron—the shared office space, the joint employee parties, the fudged numbers, etc. 

In spite of the fact that many of those players are now either behind bars, or are forever discredited, and even though the salacious news headlines should have been adequate warning to all who would consider participation in this level of malfeasance, there still exists the possibility that an auditing firm will be tempted to simply overlook a glaring problem rather than risk killing the goose that lays the golden eggs.

The Financial Accounting Standards Board (FASB) aims to make some changes in this arrangement so that detailed disclosure and appropriate alarms go off before a company fails. In addition to tightening auditor standards, they are proposing that the company’s own management assume responsibility for issuing warnings if it appears that the company may not be able to continue as a going concern.  That proposal, initially set forth back in 2008, but which got waylaid by other priorities, is now back on the table.

If the new procedures are enacted, it’s sure to complicate the process, and probably create some friction between all concerned. After all, what manager wants to go on record by saying, “Well, we’re not really sure yet, but maybe we’re not going to make it,” and run the risk of the warning becoming a self-fulfilling prophecy.  We understand why they’d be reluctant, but what’s the bottom-line here?  More accuracy in financial statements, that’s what! 

So it would seem that these kinds of changes could work in favor of the average Joe/Joan who has some money to spend/gamble/bet/risk/invest in their corporation of choice. 

We’re all for that; in fact, we’ve taken it one step further. Because even with more stringent watchdog regulations, how do you know what those financial statements are really saying?  If you have any doubts or questions in that regard, and you definitely should, the answers will be found in our latest book, The Truth Behind the Numbers In Financial Statements.  And as promised on the cover, it’s “A step-by-step guide to investigating before you invest.”

That pretty much says it all.  We encourage you to check it out.

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