Canada, the land of happiness, a land where its citizens are loved worldwide (for not being American) and a land where the government on the side of every citizen. Except if you are an investor.
In this book the Rosen’s (the father, Al, is a forensic accountant) point out how Canadas lax laws and weak enforcement of basic accounting principles have left the average Canadian exposed to the ravages of swindlers both inside and outside of corporations. How is this possible?
- Firstly, Canada does not have the equivalent of the SEC; there are provincial securities regulators, but they try to balance the needs of the investors with those of the corporations who bring business to the provinces
- Secondly, the accountants and auditors in Canada regulate themselves; in fact, “Canada is the only major country in the world that allows the same people who audit public companies to financially control the process that sets the auditing rules.”
- Thirdly, according to the Canadian Supreme Court ruled that audited reports are prepared for the guidance of current shareholders and that those reports and the auditors who prepare them have no responsibility to perspective shareholders nor creditors
- Fourthly, Canada has moved to the Financial Reporting Standards (IFRS) which standard throughout most of the world, as opposed to the GATT standard used in the U.S. In the opinion of the authors, the IFRS standard “…perpetuates toothless financial reporting and costly, but valueless, auditing in Canada.” where investors will have to do their own investigations to determine the value of the numbers.
All of this may sound a bit boring and mechanical, but Canada suffers from repeated financial disaster which have cost retirement funds and individual Canadians hundreds of billions of dollars of losses. Under the Canadian system, liabilities can be kept off the books to inflate the value of stocks which allows corporate executives to claim large bonuses, artificially drive up the price of stocks and provide insiders with major windfalls on stock options. In fact, under the Canadian system, the auditors can knowingly misstate the numbers and they have no financial liability. When corporations are caught, their punishments usually consist of a slap on the hand for the top securities regulator says that Canada believes in rehabilitation as opposed to punishment.
An example of outcome of Canadian practices is the closing of Nortel, Canada’s largest corporation. While Enron was a $50 billion-dollar disaster, the cost of Nortel was seven times larger (over $350,000,000,000). Given the difference in size of the U.S. and Canada, it would be as if Enron crashed and destroyed $5 Trillion of shareholders money.
This book has become more timely given the accounting practices that are being uncovered regarding companies out of China and the failure of regulators in Germany regarding the scandal with Wire card. Investing outside of the U.S. requires the average person to be much more circumspect and knowledgeable about the laws and accounting practices of any individual country. The difference in laws, procedures, enforcement and yes, accounting practices can expose the unwary to huge risks. There is a long record of disasters due to practices which would not be allowed in the U.S.; the crash of the Mexican Peso, the banking crisis of Japan, corruption in Brazil and most certainly the whims of the Party in China should make any investor concerned about any opportunity. When financial times get tough, no one stashes their money in China, Japan, Russia, France or, yes, Canada, and there are good reasons.
Although it deals with a topic that should be dry to the average reader, the authors writing will make the reader put the book down and laugh that such lax regulation and disregard for citizens can permitted in Canada.
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