Investors Diary

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Monday, July 23, 2007

Corporate Cook-Books, How safe are we?

Corporate governance
As the year slowly draws to an end, several companies that are quoted at the Nairobi Stock Exchange are releasing their results as per the corporate governance requirement for listed corporations.The quarterly reports for most companies are streaming into the market as investors ravenously delve to unravel what they might portend but the big question here is whether these results are trully reflective of the goings-on at the company?. Are these reports often witfully prepared and portrayed in the ever attractive, juicy presentations correct and factual or is it that investors are just among thr growing number of victims of the emerging trend of what i would call corporate 'cooking of the books' as was witnessed in corporate America a few years ago.

Enron Scandal
As was the case in the Enron scandal, the company was hailed by many as the symbol of effective corporate management, a great company by any standards, until revelations of its major corporate fraud started streaming in and spreading like wild fire accross the world media houses. As journalists, investors , governments, anticorruption bodies and all stakeholders went on to delve into the nitty gritty of this issue, it emerged that Enronwas in collusion with one of the top five audit firms in the world (Now collapsed) Arthur Andersen to doctor its books. It was later discovered that many of Enron's recorded assets and profits were inflated, or even wholly fraudulent and nonexistent. The company was putting debts and losses into entities formed "offshore" that were not consolidated with (included in) the company's financial statements and, in addition, by the use of other sophisticated and arcane financial transactions between Enron and related companies formed to take unprofitable entities off the company's books.

Tip of the iceberg
These is the tip of the iceberg in what has emerged as the growing trend of cooking of the financial statements by most firms inorder to show a rossy picture that would leave most investors scrambling for the company's pie through purchase of the stocks in the world major equity markets. This leads to skyrocketing stock prices as demands hits the roof. Though these results are not reflective of the company fundamentals, many investors out to make quick bucks and get-rick-quick find themselves in this gold rush only to remain trapped with massive losses once the market corrects itself, others will even loose substantial portions of the hard earned cash.

Why quibble?
Though many would be quick to ask, why quibble over flimsy murky details whereas the company is 'doing well' in most fronts? As you may wish to find out ,these companies are teetering on the brink of bankruptcy and drawing demise and its time investors be aware and beware.

Loss of objectivity
In Kenya, with 53 listed companies at the bourse (and the number is bound to increase with the entrance of Kenya Re and latter in the year Safaricom), the Enron debacle is also emblematic of another problem that has become all too evident in the last few years. It is from the hallowed Wall Street's of the grand corporate deals in America to the emerging Kimathi Street of the Kenyan capital, Nairobi that corporate linchpins have lost their objectivity in preparing and releasing their quarterly reports.

Auditors and Analysts at these firms often face conflicting loyalties. They are often in a dilemma and can be put in the position of having to worry as much about whether a chief executive might find a report offensive as whether an investor might find it helpful. These auditors are in business and though they are expected to maintain integrity and high standards of professionalism, sometimes this is compromised and sacrificed in the altar of business contracts and continued gains.

Prickly questions
Therefore, Investors should ask prickly questions and probe such juicy financial reports before making any investments decisions as they are often skillfully and strategically crafted to paint a well-to-do picture.

Be aware and Beware!

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