Video: Financial Statements of Publicly Traded Companies. How reliable are they? September 3, 2008
Posted by Jeff Nabers in Precious Metals, real estate, Self Directed IRA/401k.Tags: 401k, arthur anderson, audit, auditing, enron, fannie mae, financial statements, freddie mac, gold, hard assets, investing, investment, ira, real assets, real estate, scandal, self directed, Solo 401k, stock market
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In this brief video clip, listen to CPA/CFP Eric Wikstrom relate his experience from dealing with financial statements from large corporations during his auditing years, including during his employment at Arthur Andersen before it went down with Enron.
Eric very politely touches on the issue of large corporations facing a difficult task in producing accurate financial statements. The unreliability of financial statements expands much further when we also consider the many outright scandals we’ve all seen in the news. Enron, Tyco, WorldCom, and that breed of scandals. Then there’s the Freddie Mac accounting scandal that misreported income several years in a row by up for $4 billion. Fannie Mae had its own debacle where $200 million of losses were shifted in order for top officers to receive their tens of millions of dollars in performance bonuses.
To me the message is clear: the system is flawed. The stock market is promoted as the investment market… but the time-tested value of real assets can’t be ignored, and we all must face the fact that we have absolutely no logical reason to confidently feel that our holdings in the stock market are not exposed to problems similar to those mentioned above. I think it’s silly to play the hoping game when hard assets offer predictable, sometimes even controllable profit performance.
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Private companies would be a great alternative, but SEC and state Blue Sky regs make investing in private companies virtually impossible for people who aren’t millionaires. The legal liability for the sponsors makes it untenable, and the outrageous legal costs of a true public offering that would allow non-millionaire investors make it uneconomic for a small ($10 million) offering.
Well direct investment into real estate or other hard assets (mineral rights, precious metals) does not create securities.
For those who want the diversification that is only possible through fractional ownership, we are about to unleash an investment network in which we facilitate partnering through the use of investment clubs – ownership and participation in an investment club is generally not treated as a security at all. This means SEC and state securities laws would not be applicable.
The message in the video is excellent. When too many estimates are used to create financial reports it is like imprecision heaped upon embellishment, misstatements —exaggerations, and half-truths (like a “throne of lies” -thank you Will Ferrell‘s Elf). This cannot be relied upon for investment decision support. The individualistic, independent business entrepreneur, needed for a competitive business market place, is the type of person that takes control and responsibility for their investing and rejects unreliable investment information.
I would be most interested in seeing how I could argue, with a straight face, to my state’s SEC-lite that my business is in fact an “investment club” and therefore exempt from its Blue Sky laws. In particular, a business owner (could be any business, I like mortgages and real estate myself) receives returns disproportionate to his personal financial investment, which is the whole point of bringing on outside investors. A fractional ownership scheme suggests the business owner is putting up an equal share, defeating the purpose of outside investors.
@Bob – Yes, an investment club would involve each investor getting a share of the club proportionate to their monetary investment. In this arrangement, if you did something besides invest (such as find the real property and tie it up in contract) you could charge a contract assignment fee or earn a real estate commission. Our investment club network & platform is intended for use with passive assets, such as income producing real estate, land, or debt instruments.
Any situation in which you get a percentage of a company that was capitalized by other people would create a security and could fall into the problems you described for small offerings to non-accredited investors. Also, raising capital for an operating company (as opposed to one holding a passive asset) will usually create a security and not be eligible for investment club status.
The fact that our investment club network will not be suitable for every situation should not defeat the purpose of fractional ownership. The purpose of fractional ownership is to enable diversification and gain access to investments which you could not acquire by yourself.
If you an investor aiming to own passive assets, the clubs may be a powerful tool. If you are looking to be an issuer (to raise capital) for a venture you will actively manage (thus substantiating your “sweat equity”), you will inevitably create a securities offering.
@Dan – Amen! Our country was built on individualistic, independent ideals (the Declaration of Independence might ring a bell). We had to fight for our independence, and now we are a society mostly of people who have voluntarily become dependent on others. The difference today is each of us can reclaim our independence through our own personal revolution – with education and sophistication rather than guns and cannons.
So I can have benefits other than a piece of the action, like a long-term lease of a property acquired by the club?
Bob, I don’t understand the question. Sorry. Can you restate it elaborately?
Let’s say a club buys a $200k house for cash. If there are 10 members, that’s $20k each. If I were a club member, I would have to put up $20k too. Unfortunately, my investment isn’t being leveraged by the other capital, which I don’t like. I could take an assignment fee, or a commission were I licensed (I’m not), but that’s not very interesting to me either. Instead of a fee or commission, or a piece of the deal I can’t have if I want to maintain club status, I’d like my benefit from the deal to be a long-term (10 or more years) master lease of the property. The Club signs a lease with me, then acquires the property. I manage the tenants under a sublease and take whatever net cash flow I can after paying the master lease. At the expiration of my lease the club either renews it or sells. I could even take an option to buy into the club at a later time.
@Bob – Sure, I think that’s a creative approach that may prove very useful.