Sometimes, it pays to be Canadian.
At a time when workers in several E.U. countries are feverishly banding together in protest of their governments’ austerity measures, Finance Minister Jim Flaherty is decidedly cheery. With a relatively positive economic record during the financial crisis, Canada stands as a beacon in the fog. We can feel proud as world governments look to our banking system for financial leadership.
However, not everyone has three cheers for Canada. Al and Mark Rosen, the father and son co-authors of Swindlers – Cons & Cheats and How to Protect Your Investments from Them, are on a mission to convince you otherwise. The preeminent thought leaders in forensic and investigative accounting, the Rosens point out that “Canada produces more stock fraud, at least per capita, than do other countries”. Apparently, Canada is chock-full of greedy corporate fraudsters out to get your hard-earned dollars, and there’s nothing that the lax accounting and securities regulatory system can do about it.
Calling upon their extensive collective experience in dealing with corporate fraud within Canada’s regulatory system, Al and Mark Rosen make it clear Canadian equity investors are on their own. Written in sharp and grave prose bordering on sarcastic, the Rosens’ criticisms of the securities industry strike a nice balance with the corporate fraud case studies they reference throughout the book.
One thing’s for sure – the situation in Canada is bad, and it’s only getting worse.
If you thought audited financial statements were created with the intention of helping investors make well-informed investment decisions, think again. According to federal and provincial legislation, auditors owe their primary responsibility to investors, but you only need to consider the Supreme Court of Canada’s ruling in the 1997 case involving Hercules Management, an investment company, and big four accounting firm Ernst & Young to see otherwise. Investors in Hercules claimed that they’d lost money after making investment decisions based on negligently-prepared financial statements audited by Ernst & Young.
The Supreme Court’s decision? Audited financial statements in an annual report are not produced to enable shareholders to make investment decisions. Rather, the sole purpose of audited financial statements is for existing shareholders to assess the performance of directors and officers, and to decide whether or not they should be replaced.
In one deft motion, the Hercules shareholders were severely compromised and it was made clear that in Canada, auditors owe no duty of care toward investors. AsSwindlers says, “an audited financial statement affords about as much protection from management fraud and manipulation as a leaky umbrella from a thunderstorm.”
The Rosens comprehensively dissect the investment landscape by showcasing the Hercules case as the epitome of Canadian regulatory inadequacy. An accessible yet verbose read, the book sheds light on the daunting risks encouraged by self-governing regulatory organizations (SROs), profit-motivated auditors, and a toothless legislative system in Canada. The reader swiftly understands that a serious case of conflict of interest is the lowest common denominator amongst these parties.
When investment fraud occurs in Canada, regulators and legislators seek guidance from the professional bodies whose members caused the problem in the first place. As it concerns audit firms, Canada allows an independent SRO to oversee the establishment of accounting and auditing rules. The Rosens believe that the lack of an independent oversight board empowers auditors to set their own vague standards in order to avoid offending their corporate clients. The regulatory organization’s responsibility to the public gets eliminated, they argue, when the public interest conflicts with that of the SRO’s members. Swindlers says Canadian investors are vulnerable in an inadequate system governed by SROs in contrast to the U.S. Securities and Exchange Commission that actively pursues most criminal activity.
An appealing supplement to the book’s discussion on Canada’s weak accounting and securities regulatory system provides a solid overview of various schemes and trickery that fraudsters employ. Among these are examples of corporate executive scams, cover ups, deceptive business income trusts, and infamous Ponzi schemes. Thousands of Canadian investors have been lured into Ponzi schemes attracted by their impossibly high average returns. An investor is sold on a too-good-to-be-true business investment, and quickly inks a deal to generate 15 per cent annual returns on a $10,000 investment. In actual fact, the fraudster is paying a return to the investor with money raised from new investors, while the person at the top builds his empire and inevitably runs off with the spoils. Real-life swindlers set up waiting lists to combat skeptical responses when supposedly savvy investors ask “Why me?” after being approached with a seemingly foolproof and lucrative investment opportunity. The Rosens' response echoes that of many others: if an investment sounds too good to be true, it probably is.
Swindlers is a cautionary tale. It frames Canada as the Wild West of the investment world, where investors traverse wild plains with little more than common sense for protection. For the average Canadian, a read through this book provides a disheartening glimpse into the true state of our country’s investment landscape.
A far cry from the prudent banking regulatory system touted by popular media, the Rosens succeed in convincing otherwise. While Canadians are generally kind people, it appears as if that premise is used to justify a toothless regulatory system that promotes corporate fraud and greed.
Sometimes, being Canadian can work against you.
