Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Thursday, 25 December 2014

Ethical reporting has never been more important

While the creation of the Internet has allowed information to flow more efficiently and effectively, it has also resulted in extreme volatility in the markets. An example of such is the oil prices, where its price can fluctuate more than 3% in a week due to a simple announcement of the performance of the US economy.
This led to the importance of information and especially the "appearance" of it.

What do I mean by appearance? People form views or perceptions on every piece of information they gather and how we perceive it is different from one another. Someone's good news may someone's bad news. As such, these perceptions create individual opinions of how the market will move, hence impacting the markets (or prices) differently.

While this might not be the only reason as to why more companies are falsely reporting their financial performance, I believe it is one of the main reasons causing the trend. Management is often paid based on the performance of the company and rewarded with share options. Hence, they are motivated to present a positive performance, some to the extent of cheating or lying.

With current rampant ethical issues, investors must now check and cross-reference the financial statements. Investors must also be equipped with skills to detect inconsistencies in the statements so as to protect themselves from getting caught in a financial scam.

I recommend the following book: Financial Shenanigans by Howard Schilit and Jeremy Perler. It consists of numerous guidelines on how the management manipulates accounting rules to adjust or beautify their companies' performance. All of which are illustrated with famous examples such as WorldCom and Enron.




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