Whether looking at the UK, US of any other stock market around the world, on a regular basis there seem to be accounting irregularities with large publicly traded companies. This is despite the fact that many of these companies are audited by some of the best-known names in the industry. How does it take so long for accounting irregularities to emerge?
False market in shares
Very often once accounting irregularities have emerged the new auditors will rebase profits going back years. Whether this is a different accounting policy or potentially fraudulent activity surely during the period of irregularities, the market in the shares could be deemed false?
A false market is simply a marketing where buyers and sellers are encouraged to transact (or not transact) based upon public information. The idea is that they are not aware of what is going on behind-the-scenes, often very few people are, and are taking the public statements at face value. So, where does this all end?
Insider trading
When we talk about insider trading in this context it is not the specific use of information which has not been made public. If you watch a share price, no matter the size of the company or the level of transparency, you will from time to time notice strange share price movements. Sometimes news will come out days, weeks or months further down the line while on other occasions no news is released.
Whether the authorities like it or not, share prices today reflect not only public information but also non-public information (otherwise described as insider information). People talk, emails are intercepted and rumours are very difficult to control where fraudulent activity is being carried out. So, while many of us are under the impression the share price we see today is based on public information this is not always the case.
Accounting standards
If we look at the acquisition of Autonomy, a UK-based company, by US giant Dell, this is a perfect example of different accounting standards. The multibillion dollar acquisition of Autonomy is going through the courts with Dell looking to instigate criminal action against directors of Autonomy. The UK based company is adamant that the different understanding of the company’s profits is simply down to very different US/UK accounting standards. On the flipside of the coin, Dell management are convinced there has been a degree of fraudulent activity and misrepresentation.
This is no small takeover, no quiet add-on but a multibillion-dollar acquisition of a UK-based company by a US giant. Surely their auditors must have spoken beforehand? Did Dell not ask questions about accounting standards and practices in the UK? Was there really any fraudulent activity?
Summary
Eventually all of the details regarding the case brought by Dell against Autonomy directors will be made public. In many ways this highlights the very different approach to accounting standards by different countries but also potentially fraudulent activity. So, when you see the facts and figures in public statements, yet the share price moves in a different direction, there may be more to it than meets the eye. Be careful!