Creative Accounting a Major Concern for Investors

Creative Accounting a Major Concern for Investors

December 10, 2019

As fears of a global economic downturn fuel investor caution, creative accounting is becoming a major concern for the Singapore investor community, with majority of investors believing these tactics are becoming more commonplace. According to a recent survey by BlackLine, 92 percent of investors believe more larger companies will resort to such practices over the next 12 to 18 months.

A global survey of institutional investors commissioned by financial automation software company BlackLine, reveals that 92 percent of Singapore investors believe companies in their portfolio often resort to legal but ‘creative’ accounting tactics in order to attract or satisfy investors, causing investors to increase scrutiny over portfolio company financials.

BlackLine commissioned independent global research firm Censuswide to survey over 760 institutional investors across the world, which included 100 Singapore institutional investors, to establish their attitudes to financial risk, due diligence and reporting. The findings reveal the financial practices that raise red flags for investors, as well as the factors they rely on to make informed investment decisions.

According to the survey, creative accounting, where companies exploit financial loopholes to present figures in a legal though misleadingly favourable light, was identified as a major concern for the Singapore investor community. Not only do the majority of investors believe that these tactics are commonplace at their portfolio companies, but 92 percent believe that more large companies will resort to these techniques over the next 12 to 18 months.

Worryingly, 91 percent of local investors surveyed also agreed on the likelihood of a global recession in the next 12 to 18 months, meaning businesses will need to work even harder to outstrip the competition.

According to BlackLine Senior Vice President APJ Terry Smagh companies should think twice before trying to manipulate their figures; more than a third (31%) of investors singled out evidence of creative accounting as the factor that would make them least likely to invest in a company.

“In many ways the international and local business landscape is more complex, uncertain and challenging than before. Companies especially in Singapore are therefore under increasing pressure to perform and retain a competitive edge. However, businesses cannot afford to have the integrity of their financial data questioned at a time when investors as well as the local regulators are evidently becoming more stringent about unnecessary and unwarranted financial risks,” says Smagh.

None of the Singapore investors surveyed say they will invest in a company with poor financial controls without taking some form of corrective action first, such as imposing changes on the company or its management team.

Close to a third of investors (29%) say risk of internal financial fraud or financial non-compliance make them less likely to invest. Meanwhile, more a third (33%) are put off by consistently late filings, with a slightly lower portion less likely to invest in companies that make adjustments post reporting (30%).

These red flags are encouraging investors to take a much closer look at the numbers, highlighting the importance of accurate and transparent financial data. When asked what the most important considerations were when deciding whether to invest, growth potential of the sector in which the company operates, global or domestic economic outlook, and access to real-time snapshots of company finances (47%) all three factors came out on top. This suggests that while Singapore investors are forward-looking, they also need a clear and realistic view of current financial data in order to make informed decisions.

“It’s likely that investors looking to Singapore firms will increasingly want to look ‘under the hood’ of their portfolio companies, to ensure they are getting a transparent and accurate view of their finances. The ability to access, and more importantly analyse, data in real time will not only be vital for driving business competitiveness, but also for maintaining investor trust,” says Smagh.

The full findings are outlined in ‘The New Age of Increased Investor Due Diligence’, the first of three detailed whitepapers on the subject.

(Ed. The research was conducted by Censuswide, with 763 institutional investors in six markets (U.S., UK, France, Germany, Australia and Singapore) at companies with USD 100M minimum (or equivalent) of assets under management. The survey was conducted online between July 22nd and August 8th 2019. BlackLine is recognized by Gartner as a Leader in its 2019 Magic Quadrant for Cloud Financial Close Solutions. Based in Los Angeles, BlackLine also has regional headquarters in London, Singapore and Sydney.)

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