Fiasco (still) ahead: the dark visions of Al Rosen

Dr. Al Rosen is clearly one of the most high-profile accountants in Canada, and has been for years.

No one has talked and written so consistently about the inherent limitations of financial statements, or tried so hard to shake users out of their potential complacency. Anyone who keeps track of Rosen’s articles and other public utterances will almost certainly be well-attuned to possible complexities and subtleties that might have evaded them otherwise.  For defining and fully occupying this space, he surely deserves his prominent status. His new book, Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth is available now, and although I haven’t read it, it sounds like his zeal and energy are undiminished

At the same time though, Rosen (often working and writing with his son Mark) has consistently adopted a vitriolic, often outright hysterical tone that threatens to drown out those positive contributions. Let’s go back to a Canadian Business article from April 2011, during the time of Canada’s conversion to IFRS:

  • “This is a matter of tight rules versus shitty rules,” argues Toronto-based forensic accountant Al Rosen. IFRS is a major step back from Canadian GAAP, he says, and will permit unethical managers to hide, massage and choose numbers to make their companies look good. “This is a Ponzi scheme in progress,” he says. Investors, who are supposed to benefit through increased comparability, could end up the victims of unfair accounting….“This is just going to dwarf the fiasco of Nortel,” he says. “There’s no doubt in my mind.”

By any fair assessment, the six years since then have not generated any IFRS-related scandals that dwarf (or even constitute a mini-Me version of) “the fiasco of Nortel.” Of course, if Rosen and the rest of us live long enough, there’s bound to be something eventually, and then he can issue a triumphant “I told you so”, regardless of the relative culpability in that of the standards themselves. But if IFRS is so utterly shitty and conducive to unsustainable manipulation, shouldn’t we be at least a bit more fiasco-ridden by now?

A more recent article addresses five main causes of “how Canadian investors get duped, and how to stop.” Four of these make good points, to varying degrees: worshipping reported yield that can’t be maintained; careless use of non-GAAP measures (of course!); allowing recent acquisitions to overshadow the decline in the ongoing business; and failing to focus on related party relationships. The fifth item is a warning against “believing the company’s numbers” – for instance: “Experienced financial cheats test the water by starting with elementary games such as using cookie jars to increase or decrease current liabilities and to alter revenue. If such games are not noticed, the manipulation escalates to much larger amounts, usually with a different trick.” The article advises: “Persistence is necessary in analyzing financial statements to uncover these tricks. Canadians have to be more willing to judge certain management actions and to call into question the deficiencies behind a company’s reported results.” But of course, there’s no way the average Canadian, or even a trained one, can simply look at financial statements and detect the presence of cookie jars or suchlike, and then somehow “judge management actions”. Since Rosen surely knows this, he has to fall back on the airiest and least scientific summation possible: “The best advice is to sell when you feel suspicious, and uncomfortable, even if the price continues to rise.”

But by then, Rosen has cast such pervasive doubt that someone following his lead would have to be suspicious of and uncomfortable about everything. Earlier in his article he refers to “financial cheats who can cook the books by inventing revenue, altering expenses and creating assets,” as if there were no meaningful safeguards against such schemes. Of course, as we know, a sophisticated fraudster might evade the best efforts of other honest employees and managers, internal controls, audit committees, auditors, audit regulators and so on – there can never be 100% certainty of detection. But it seems entirely unhelpful to paint a Walking Dead-like landscape in which these modern protections don’t even exist. “Why invest in Canada when your money can so easily be lost?” asks the Amazon blurb for his book. But the implied response – just don’t do it then – isn’t exactly helpful to Canadians.

This points to Rosen’s persistent failure – he reminds you again and again while investing in an entity might be a dumb idea, but never has a useful word to say about why it might be a good one, or about how financial reporting can enhance the prospects for identifying such appropriate opportunities. On reflection, he’s been a rather prophetic figure in this regard, ranting semi-charismatically about carnage and disastrous consequences, vaguely holding out himself as the only reliable saviour, without ever really telling us (except in generalized build-a-wall-type terms) how he would lead us to clarity and stability. The market for such figures has never been hotter, even as the inadequacy of what they ultimately offer has never been as clear…

The opinions expressed are solely those of the author

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