Tuesday, 8 February 2011

Book Review: Swindlers by Al Rosen & Mark Rosen

An important subject but an opportunity missed. I was very much looking forward to this book, especially as the authors probably know at least as much as anyone about accounting and investment fraud. The sub-title promised much value to the individual investor - "Cons & Cheats and How to Protect Your Investments from Them".

Alas, the book left me disappointed. There is far too much ranting - however justified and true - against corporate crooks, lackadaisical regulators and accountants and the new IFRS accounting standard and too little of the detailed nuts and bolts dissection of how scams can be detected in advance for the investor to be able to avoid being taken in. We are left feeling vulnerable and frightened but not nearly enough better armed to defend ourselves.

That's a shame because the Rosens, especially the elder more experienced Al, could walk us through some case studies (there is one - National Business Systems - too briefly dissected in an appendix) they've encountered e.g. with excerpts from financial statements showing the telltale signs of danger. That would be really useful, for instance, when yesterday I blogged about Matrix Asset Management and the fact that it has reported transactions with related parties, an area that the Rosens state is often dangerous. In the absence of more specific guidance from the book on how to assess whether the transaction is bad or acceptable, should the investor stop right there and reject Matrix as an investment possibility? With this and other cautions regarding the latitude many if not all businesses have to manipulate their financial statements, we'd likely end up rejecting any investment except GICs as too risky. The Rosens don't say that is actually the best approach these days, though they do say this (page 200): "In the 1950s and 1960s, individual Canadians regarded the financial marketplace with grave mistrust. It took a major effort to encourage the public to invest in equities. Are we heading back to those days?"

The dust cover has the most intriguing inside dust cover photo (see scan of it below) I've seen in a long time.

I hope they are on site in an office of one of the cons and cheats and not in their own office! (To complete the image of the hard-bitten experienced detective, they could have rolled up the sleeves and loosened the tie. ... Wonder if they've thought of a TV series?)

Surprisingly, the book makes no attempt to quantify the fraud problem, except to list a number of known cases. Maybe statistics would be difficult to find given that so much goes undetected but that would bolster a case which might be dismissed by authorities as merely the complaints of someone whose recommendation to reject IFRS as a replacement for GAAP was not followed (there is an awful lot of ranting about IFRS in the book).

Surprising also in its absence, and something I would have wanted in a book purporting to provide practical protection advice, is a chapter or an appendix with links to investor protection groups, discussion forums, complaints bodies, ombudsmen and references to pertinent articles or books.

The book does have practical investor value - there is a fair amount of pointing to specific balance sheet, income statement and cash flow lines with indication of how they can be dishonestly manipulated. It's just not extensive and detailed enough, i.e. a bit more "textbook" is needed. Cutting the polemic content word count down to about a quarter would leave a lot more space for the practical.

Bottom Line: I have to applaud its important message and the truth it speaks but as a book it could be a lot better.

My Rating: 3 out of 5 stars.

1 comment:

larry macdonald said...

I was wondering whether or not to or add it to library. Maybe now just give it a scan at library.
I always did like those detailed analyses of financial statements and balance sheets. Aggressive accounting was usually a tip off to stay away. Kind of wish there was more such writing in financial press. U.S has a few blogs so focused -- but don't know of any in Canada.

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