Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.

Monday, December 2, 2013

Cook the books 做假帐

Recently, there are some comments and posts talking about some fraudulent activities. It may not be true yet there is some parties who support it while there are some who were against the statement. All this while, I didn't put much efforts on this kind of knowledge. It's a learning lesson for me as I'm more focus on the fundamental of the company for my investment all this while. So, if the management of the company is so freaking bad that make a 假帐 at the financial report so that his group performance looks good, hit the earnings benchmarks and the price forever at the up trend. I may be fooled by it and lost my hard earn money in the worst case.

I googled some info about this and found out that 假帐 actually is called Cook the Books in English. Cook the book? Sound funny, haha. Based on investopedia, it refers to fraudulent activities performed by corporations in order to falsify their financial statements. Typically, cooking the books involves augmenting financial data to yield previously non-existent earnings. Examples of techniques used to cook the books involve accelerating revenues, delaying expenses, recording debt payments as sales, moved debt into Special Purpose Entities (SPEs) while retained earnings in the mother company and implementing synthetic leases.

There is 2 case studies provided in this website, in fact it was really happened before for these 2 companies. Both companies also in the Fortune 500 Companies list that time. The first one is Enron. Enron's case is quite complicated. They're allowed to count projected earnings from long term contracts as current income. So, the revenue was inflated by manipulated projections for future revenue and appeared as the management was doing the good job in increasing the company performance years after years. Once the fraud being discovered, the group filed bankruptcy in Dec 2001 and its share price fell from $86 to 30 cents .... 开完笑. $86 to 30 cents wo... How many times is that?

The second case is WorldCom. WorldCom used the method of classified the operating expenses as long term capital investment and Capex so that the bottom line of its profit & loss statement looked good due to higher gross margin. 

There were some other fraud cases like Healthsouth & Qwest communications who manipulated their respective companies' earnings. 

Back to the quote, investment is simple but definitely not easy. I'm better equip myself for a better tomorrow. 

1 comment:

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