“Horas non numero nisi serenas” — is a Latin phrase carved on a sundial near Venice that means: I count only the hours that are serene.
This thought is reflected in the writings of Hazlitt (On a Sundial, 1827): "There is a softness and a harmony in the words and in the thought unparalleled. Of all conceits it is surely the most classical… to take no note of time but by its benefits, to watch only for the smiles and neglect the frowns of fate, to compose our lives of bright and gentle moments, turning away to the sunny side of things, and letting the rest slip from our imaginations, unheeded or forgotten!"
Some companies maneuver the numbers to a certain extent to achieve budgets and get bonuses. This is nothing new. But sometimes companies take it a bit too far with factors such as greed, desperation, immorality and bad judgment drive some executives to corporate fraud. Or even other times it’s like telling a lie and a white lie; it may not even be big lump sums, it could be a calculated diminutive manipulation (I’d recommend watching the recently released movie called “The Accountant”).
Sometimes, companies exclude bad news from their financial results on the pretext that negative events are "extraordinary" or "non-recurring". They use their spin-doctors to ease the effect of a loss or even make it sound confusing, vague or even ambiguous (Another movie recommendation on how the financial industry is filled with ridiculous jargon is “The Big Short”).
Stock traders follow the trend of the charts through technical analysis and value investors do fundamental analysis while looking at the cash flow, balance sheet and income statements but still it doesn't mean that they are looking for fraudulent or “cooked” reports. Although the previous weeks’ articles were about lazy investing strategy and having financial industry experts do these things for you, it is still a good to be aware and know how to spot some red flags and knowing where or what to look out for. This is also so one can protect their investments from financial disasters.
Here are some items/methods for you to look at and keep you alert for warning signs of manipulation:
* Accelerating Revenues
* Delaying Expenses
* Accelerating expenses
* Non-recurring expenses
* Other income or expenses
* Pension Plans
* Off-balance-sheet items
I am not saying these items listed are bad, but some can be easily abused such as “pension plans”. This doesn't mean that the company is definitely cooking the books, but if a company makes you suspicious, that's a sure sign that you should dig deeper before making an investment.
Unfortunately, as entrepreneurs as well as investors, we have to always take into account the sunny days as well as the darks hours of company’s earnings report, financial statements equally and not just be too biased on one side (balancing pessimism and optimism).
And lastly, since I’ve already made some movie recommendations tackling topics about the world of finance above, here’s more for you to consider to watch for learning, entertainment and to pass time: Capitalism: A Love Story (2009), Wallstreet: Money Never Sleeps (1987 & 2010), Inside Job (2010), Too big to fail (2011) and The Wolf of Wallstreet (2013).
The writer is an RFP® - registered financial planner of RFP PH, Licensed Real Estate Broker and Director of CERTA, Inc., a family estate planning and investment advisory firm. To know more, please visit www.certa.ph
Originally Published in Philstar - The Freeman Newspaper last December 06, 2016.