The $50 billion Madoff Securities scandal could have been prevented easily. So could much of the corporate and investment fraud that's taken place over the last couple of decades. Why? All these frauds shared at least one thing in common -- the people who committed them all produced their own financial statements. In my limited experience in academia, I have never seen a single student grade their own test or paper. So why should business executives be able to write their own report cards?

We don't know much about the Madoff scandal, but there's no question that Madoff securities could not have gotten away with it if a completely independent entity had been generating financial statements for investors. Instead of spending decades cranking out fraudulent statements that showed investors making 10% returns each year, an independent auditor would have stopped Madoff in his tracks.

Of course, for such an independent entity to work correctly, it would need to be structured, paid and staffed in the right way. As I suggested in Value Leadership back in 2003, the government would create an independent group of auditors who would create financial statements for investors. This group would be paid from taxes levied on corporations and its people would be promoted based on their ability to geneate timely, accurate, and thorough financial statements.

Continue reading A simple solution to investment fraud

A simple solution to investment fraud originally appeared on BloggingStocks on Sat, 13 Dec 2008 14:10:00 EST. Please see our terms for use of feeds.

I was privileged to read an article in my latest Forbes newsletter which addresses honesty in business practice. Most especially, the article points out the inherent value that clear, honest book keeping and deliberate management transparency impart upon any business. To illustrate its point, Forbes utilized the analysis of Audit Integrity, an independent Los Angeles firm that does research on corporate governance best practice (and which is a data supplier to Forbes.com). Audit Integrity developed its first list of 100 companies which exhibit the highest degree of ethical and business standards when dealing with their investors.

What brings the value of Audit Integrity's analysis closer to home is the cross reference of stock performance as relates to inclusion on the integrity list. Forbes reports that the group of 100 companies that made Audit Integrity's list of good guys provided an overall return of 33% on shares, double the return of the market on average. Forbes cites higher equity growth, reduced litigation costs and a reduction in regulatory interference as some of the reasons why the wonderful one hundred out performed their peers.

So, if you want to simplify your hunt for stock value and reduce your research burden, you might want to give the Audit Integrity list of 100 do gooders a long hard look. In this game of stock picking there are a lot of angles to consider. If Audit Integrity is willing and able to provide a clear pre-assessment of business integrity in such a comprehensive and easy to understand format, I think you owe it to yourself to consider the data. Investment based on information devoid of even a cursory view of honesty in business practice is investment made blind.

Integrity still translates as "Money in the bank" originally appeared on BloggingStocks on Tue, 03 Apr 2007 15:45:00 EST. Please see our terms for use of feeds.