Financial legerdemain – nothing new

As we head towards the end of 2012 more reports are surfacing in respect of companies who have been camouflaging their poor performance with some suspect off-balance sheet shenanigans.

The latest example comes from the wrangle between the US short sellers Muddy Waters Research and the Singapore based commodity group Olam. At the heart of Muddy Waters' claims is how Olam values its assets.

According to the US firm, Olam now shows many of the assets as being more valuable than when it bought them. It has booked the difference in the purchase and as profit in its balance sheets.

However, it alleges that the difference in price is not because Olam acquired the assets at a bargain but because it revalued them at the time of acquisition.

The American company also alleges that some of the accounting practices adopted by Olam are uncannily similar to those followed by the collapsed energy giant Enron.

This is not an isolated event, think of the recent problems with losses incurred by various Banks.

However it highlights how vital it is that Senior Management set clear defined operational and reporting procedures.

In many companies the Directors simply do not have the understanding of the mechanics or the day to day activities of the business which they purport to run.

In trading environments it is not uncommon that totally unrealistic profit targets have been passed from Board level to trading departments. No cognisance having been given to the disproportionate risks which need to be taken to achieve these targets.

Some of the most spectacular financial flame outs have followed a period of ostensibly highly successful trading. In their desire to recognise these “profits” no thought were given as to how they were being made. In such times it would be well to take note of the old adage that is something looks to be too good it usually is!

If your company is bucking the trend in these difficult times it may well be that you are implementing a winning formula.

However history tells us that it is often a prudent course of action to look under a few stones – just in case.