Blogs & Comment

Fraud, accounting tricks and ETFs

Outspoken forensic accountant Al Rosen and son Mark will be releasing a new book, Swindlers, in mid-October. It looks at howinvestors, analysts and shareholders are increasingly victimized by accounting manipulations, kick-back schemes, invoice and loan frauds, and rogue actions of trusted directors and employees. Im looking forward to reading it.
His book reminds me of another reason for owning exchange-traded funds (ETFs). Not only do ETFs save investors the time and effort of researching individual companies, but they also substantiallyspread the risk of investing in a stock that collapses on news of accounting irregularities and/or executive malfeasance. For investors with small portfolios, this risk spreading can be significant.
To get an idea of some of the pitfalls, consider the recent scandal in Europe over the auditing practices of the Big Four accounting firms. With non-audit consultancy fees comprising 75% of revenues earned from audit clients, a British regulatory agency has found numerous cases where Big Four audits appeared to succumb to conflicts of interest. Here are some actual instances where ethical and professional standards may not have been met:
auditor takes job with firm at which he did auditing work (e.g.IPO prospectus of firm)
auditors seconded to work terms at client firms
auditing firm is both auditor and actuary to a group pension plan
assessments of auditors for partnership reference selling of non-audit services toclients
inadequate confirmation of the existence and accuracy of clients assets