Dec 12, 2008
FirstCaribbean revenue, profit diminished
FirstCaribbean Inter-national Bank Limited (FCIB) is expected to report year-end profits that have fallen off by US$80 million or 31 per cent when its earnings report becomes available.
[ more . . . ]

Dec 10, 2008
Global crisis hits Agostini’s rights issue
Agostini’s Ltd has suffered a shortfall in its rights issue which closed on October 22, 2008.
[ more . . . ]

Dec 08, 2008
BSE not fearful of crisis
THE Barbados Stock Exchange (BSE) does not foresee any major impact on its operations as a result of the global financial crisis
[ more . . . ]

Dec 08, 2008
FirstCaribbean affected by global financial crisis
THE current global financial condition has significantly impacted the net income of one the largest banks in the Caribbean.
[ more . . . ]

<< Opinions and Analysis

Avoiding the Plague of Corporate Scandals

May 6 , 2004

Nortel, the Canadian telecommunications equipment giant added its name last week to the growing list of world wide accounting and financial scandals. The company fired its CEO and indicated to investors that it will once again have to restate results for 2001, 2002 and 2003. Preliminary indications are that the company's reported profit for the first half of 2003 will be wiped out and replaced by losses, and that its overall profit for 2003 will be cut in half. As if to offer some consolation the company said its losses in 2001 and 2002 should be reduced somewhat.

In addition to Nortel, over the past two years we have seen debacles at Enron, Global Crossing and World Com in the US and the collapse of the Italian giant Parmalat. All of these scandals have their root in improper and in some cases illegal finance and accounting activities. The consequences of these practices have impacted negatively on shareholder value as share prices plummet.

Relevant to T&T

The circumstances surrounding these scandals are relevant to us here in Trinidad and Tobago for while it is true that we are yet to come face to face with a local version of Enron, we should not be complacent as it is our ability to understand and learn from those experiences that will ensure that such situations do not occur here.

Even without going to the extreme of a financial collapse and more pertinent to our current situation is the fact that our interactions are becoming more and more regional and in some cases extra regional. The growth of the Jamaican and other regional stock markets has generated tremendous interest in T&T. Further as the US economy rebounds interest in investing in the US stock market is increasing.

“There is evidence to suggest that a growing number of investors are entering these markets purely on the basis of recent share price movements and neglect to undertake the necessary due diligence to ensure they are fully appraised of what they are investing in.”

Such investors may be unwittingly undertaking more risk than they are able to tolerate. So while I am in no way suggesting an imminent financial collapse of any company in these markets, I am saying that persons who do not take the time to do a proper analysis before undertaking an investment may be in for a rude awakening down the road.

A classic example in Trinidad and Tobago is BWIA whose share price rose to $3.00 at a time when the company was in the midst of severe financial turmoil. BWIA is currently trading at $1.80 so surely the persons who purchased these shares at $3.00 paid little attention to the company’s financial statements.

It should be noted that while the aforementioned scandals arose out of a deliberate attempt to deceive, even in those circumstances investors do have the wherewithal to safeguard their investments provided that they are so inclined. This can be done via an analysis of the reporting entities financial statements and keeping up to date on the latest financial information. Your ability to place the financial statements (or seek out persons who can) in the context of current and future market information allows you to determine a fundamental basis for the value of your investments. This activity will go a long way towards enhancing your wealth as you can then identify when to increase or decrease your positions in a manner consistent with your own investment criterion and tolerance to risk.

Creating the Best Fit

Here in Trinidad and Tobago the lack of a developed and up to date legislative framework governing finance and investment activities means that an investor has to rely even more on news and the information contained in the financial statements in order to protect their investments. It therefore is important to develop a clear understanding as to the limitations of financial reporting.

First of all it should be apparent that financial statements are prepared for many different stakeholders not just investors. The statements are prepared by the management of the company and passed on to the company’s auditors whose objective is to provide assurance on the credibility of these financial statements. A financial audit is not a test for fraud.

The above approach is very much a “one size fits all” which, while practical from the company’s perspective does limit the usefulness of the financial statements to its respective users. As an example you would note that investors should be primarily concerned with future earnings and cash flows for as I have explained in an earlier article purchasing a share with a P/E of 20 is essentially paying $20 now for $1 of current earnings. The investors return comes from future earnings yet financial statements are by nature a historical record of the past performance and so need to be placed in the context of currently available information.

In recognition of this fact accounting standards bodies have introduced the concept of marking to market of prescribed assets and liabilities. This has resulted in major changes to companies reported financial performance, the most recent example being Plipdeco’s revaluation of its property assets under International Accounting Standard 40.

Yet it should be borne in mind that the use of historical costs still pervades the financial statements and for good reason. For while in some instances marking to market brings financial statements closer in line with economic reality, it could also scare investors away from very good companies that are forced to incorporate wildly fluctuating market data into their financial statements.

In essence the market needs to wake up to these realities so that seemingly improved performance resulting from the adoption of accounting standards can also have the opposite effect some time in the future. Ideally investors should focus on operating performance resulting from a company’s operating assets as this is the record of the company’s core business activities.

Even with these new accounting standards the system is still open to abuse. The US has some of the tightest financial reporting standards, yet they were still susceptible to the introduction of subjective methodologies that can be abused. Enron, for example, manipulated its forecasts of energy prices to maximize the value it booked for long-term gas and electricity contracts.

Closer to home it is apparent that undue reliance on accounting standards which out of necessity operates on a “one size fits all” basis leaves investors terribly exposed. An update to the legislative framework governing financial and investment activities is urgently needed.

In addition the support infrastructure to assist the development of the secondary bond market and increasing the breath and depth of the local stock market are imperative if the desired levels of objectivity and transparency are to be achieved.

In the interim the role of your financial advisor becomes ever more critical. You are therefore urged to consult with a professional prior to making your investment decisions.

Ian Narine is the General Manager at West Indies Stockbrokers Limited. He can be contacted at iann@wisett.com

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