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!

Kenya Re IPO Opens 18th July 2007

Initial Public Offer (IPO):
It is now official that the Kenya Re IPO opens in a week (July 18) and most investors are bracing themselves ready to jump in on the bandwagon and get a piece of this national cake.

Retail Investors:
In most IPos from Kengen, Scangroup, eveready, acessKenya etc it has been evident that retail investors are the majority and more often than not have to contend with minimal share allocations way below their applications. This is then followed by a rigorous process of seeking from refunds which more often than not leaves many a discouraged lot wishing they had not in the first place plunged into this stock markwr mania.

Prospectus:
Most savvy investors are nonetheless waiting for the release of the prospectus for them to analyze the company fundamentals and assess the company credibility as a viable investment option vis other counters trading at the bourse.

Scandals:
The the compnay is still reeling from scandals that rock it, investors are waiting with bated breaths hoping to make a kill during the first few weeks if trends i nthe stock market point upwards. The books however have been 'cleaned' though many would stilldig deep down inorder to ascertain what would have led to the firing of the MD and its close Finance Director who were alegedly involved in the corruption racket. We are waiting...

Monopoly:
Kenya Re being a Reinsurer, that insures other insurance companies is a monopoly of some sort (more like Kengen and might follow the same trend) with alot of assets in its name that would provide a solid security base though the current trend of accidents and especially the Kenya Airways (KQ) Crash might have an impact on the company that has to compensate some employees of the company who lost their lives during the fateful day. The company has good growth prospects that is likely to create excitement at the stock market.

Corporate/institutional investors:
They have been allocated a substantial portion of the offerered shares.

Allocations:
Retail investors; 47% equal to 112.8 million shares of the 240 million shares offered.

Pyramid schemes:
This year witnessed the meteoric rise in the number off pyramid schemes that latter came tumbling down with a big thud going under with millions of shillings in investors money. Those who were lucky to have gotten their money back may rush again to invest at the bourse since this schemes had led to massive sales at the NSE as crious investors hoped to rake in millions from this rather lucrative deals supposedly referred to as the viable investment schemes that offered mind bloggling returns, its sustainability notwithstanding.

Statistics:
= IPO opens on July 18, closes on July 31.
=Result out mid-August and listing towards end of August or early september.
=minimum shares for retail is 2,000 shares @ 9.50 which is worth 19000.

Parting shot:
Is it true that institutional investors complains about refunds has been heeded and they dont have to pay any money for the shares applied until they get their share allocation confirmed?