A new year and 12 new months to hatch investor swindles. The tail end of 2010 shined media spotlights under some interesting rocks. Scuttling out were assorted creepy crawlies. Each confirmed the need for caution when diving for deals in the oft-treacherous waters of Canada’s stock markets.
Also worth noting is that help in navigating those waters in 2011 will likely become increasingly hard to find among regulators, auditors, corporate financial statements and other sources that investors might have thought were on their side.
Word late last year that John Paterson, the former president of Southwestern Resources Corp., is now facing criminal charges in connection with falsely inflated gold assay drilling results from the company’s Boka project in China is yet another red flag reminder of the need for exercising vigilance.
Here are two more.
First, Canadian securities regulators, including the B.C. Securities Commission (BCSC), are considering simplifying compliance regulations for companies listed on the TSX Venture and other junior exchanges like the Canadian National Stock Exchange.
Nothing wrong with that.
Most business owners would favour eliminating duplication and other bureaucratic bilge that needlessly hinders enterprise. But changes that dilute company financial disclosure requirements and erode consumer protection in a marketplace already short on enforcement muscle make far less sense.
As Margaret Franklin, head of the CFA Institute’s board of governors, told the Canadian Club of Toronto last week, Canada’s securities enforcement is woefully inept.
For example, she pointed out that, at a cost of more than $100 million to Canadian taxpayers, the RCMP’s Integrated Enforcement Market Teams unit “has a grand total of five convictions from 26 arrests.”
In addition to aforementioned streamlining initiatives, Canada, as of this month, has switched the rules governing audited financial statements to International Financial Reporting Standards (IFRS) from Generally Accepted Accounting Principles (GAAP).
The implications of the regulatory change are huge. IFRS supporters point to various positives for Canada. They include making the country’s accounting standards compatible with those elsewhere in the world and establishing general auditing principles rather than abiding by accounting rules that cheats can circumvent. Good for companies, perhaps.
Even better for the accounting fraternity: helping companies retool their books and otherwise lower the auditing bar to comply with IFRS represents a revenue windfall for the number-crunching industry.
But there’s not much in the IFRS switchover for investors.
As forensic accountant Al Rosen points out in his instructive new book Swindlers: Cons and Cheats and How to Protect Your Investments From Them, Canada’s already dangerous stock market investment environment will get even more risky.
Among his roll call of IFRS shortcomings: “financial statements under IFRS do not have to explain in detail how a company determines net cash receipts, discount rates and other conclusions. … Cooking of the books using valuation changes will likely become a new field of study for financial swindlers eager to find ways of avoiding detection under IFRS.”
Depressingly, Rosen concludes that “audits and auditors’ reports in Canada under IFRS are in danger of becoming misleading or meaningless.”
Happy New Year!