Practice of falsifying stock data


The Stock Law was recently amended by the National Assembly so as to prevent violations of insider trading, price manipulation and information disclosure. However, it is not easy to issue effectively any terms, frameworks, or fines for violations related to falsifying data and manipulation of financial statements.

Illustrative photo.

Illustrative photo.

Practice of falsifying data in most stock exchanges

Remember the bubble from 2000 to 2002, which caused the US stock market to decline sharply, when giant businesses such as Worldcom, Enron and Xerox, with large-scale infrastructure and abundant capital, recklessly falsified data and deceived investors with prospective and prosperous business growth… Even businesses with reputable credit ratings were far too greedy because of large commission fees, that they overlooked mistakes and wrote off financial blunders, including Arthur Andersen, once the world's leading audit company, which subsequently paid a high price for ignoring violations of listed companies by finally going completely bankrupt.

Currently on Vietnam's stock market, more than 2,000 listed companies are following the practice of falsifying data or glorifying performance goals. Too many businesses have violated accounting standards such as JVC, TTF, DVD, FID, CDO, TNT, KSA and FTM. Though this wrong behavior of business leaders is for the purpose of releasing goods in the market, it is also causing a sharp drop in stock price because of loss of credible image. Individual investors, stock companies, institutional investors, even leading investment funds, stock companies such as Dragon Capital, Vinacapital, SSI and VCSC are being seriously damaged when they are involved with "weak" businesses that have glorified their financial statements.

 Manipulation of financial statements and income, falsifying flow of cash, applying tricks to increase ability to borrow and repay debts, and showing false increase in efficiency of using assets, tricks in hiding losses, and satisfying fasely the expectations of investors, is not new at the Vietnam stock market. During each period, every act of manipulation and the level of violations are expressed in different forms, with the main goal being to hide the actual financial status, and the actual ability to generate revenue in an enterprise.

Manipulating financial statements

The process to smoothen falsified data or "cook up" the financial books is all done in a sophisticated manner and in many cases very difficult to detect. Therefore, investors need to have enough practical knowledge as well as experience to be able to recognize these behaviors of enterprises. Although manipulation of financial statements is strictly prohibited and violating enterprises would face severe penalties under both civil and criminal law as well as monetary fines, it still does not deter listed companies from going ahead and committing these violations and adopting irregular practices.

Remember that at every stage when the stock market enters into active trading there will be a time when IPO activities and initial public listing of stocks will be more bustling like in the period 2005-2006, 2009, 2014-2015, 2016 and early 2018. New listings will be carried out more successfully when the market is going up. Astute investors are more excited and of course advisory stock companies will also price businesses with higher prices with growth assumptions of the business and asset value with not too much accuracy. This is the time when the data-smoothing activities of enterprises are easiest to perform.

For businesses that have stable activities, but for any reason the business situation goes down with negative business results, the adjustment of data will take place. Early profit recording or loss concealment will also be implemented, to avoid market underestimation affecting the stock price. Many businesses facing difficulties will apply income management tips, reduce operating costs, increase profits to avoid losses, and overlook warnings by the State Securities Commission.

Obviously, adjusting the data and adjusting the time of recording revenue of enterprises is relatively easy as investors often listen to news of listed companies to trade. Investors still often say "new news to sell", which could mean that stock prices have fluctuated before the official information is published on the market.

Remember, even big companies and companies with high credible reputations sometimes violate the rules. Credit rating agencies can also turn a blind eye to businesses with bad business results. Misconduct of businesses and the role of auditors is questionable when they ignore warning signs in financial statements.

Do not forget that the manipulation of financial statements is also a two-edged sword for businesses who dare to play with fire, because "cooking up" financial data can only bypass management agencies and unprofessional investors at a given time, but in the long run cannot stay hidden from experienced financial analysts. Once the cases are discovered they will greatly affect the image of the enterprise, the reputation of the executive board and that particular business will be boycotted by investors and shareholders.

Some ways to detect manipulation by enterprises

First, record revenue of enterprises very early, even before fulfilling any contractual obligations; recognize revenue that is exceeding the work completed under the contract; record sales before buyer accepts the final product; and record revenue from payments made by buyers which could be uncertain or unnecessary.

One of the noticeable signs is when the receivables increase sharply. This is hard to pass through experts or experienced investors. Early revenue recognition is most often observed in real estate companies. That is the accounting part or all of the project revenue. The number of sold apartments greatly affects revenue and profit in that period.

Second, record unrealized revenue as purchasing and selling goods and products without contracts is a technique that generally involves transactions involving sales to a related party, associate, company or joint venture partner. Unrealized revenue recognition can also come from recognizing cash received from lenders, business partners, or suppliers. Especially, when reading the financial statements, investors can pay attention to receivables which are growing much faster than sales.

Third, transfer costs to the next accounting period. This is a popular cost-adjusting technique. The adjustment of long-term depreciation costs reduces the cost of that particular period and thereby increases profits. A factory cost of five years must deduct annual depreciation, while the extension of the depreciation period to ten years will reduce the cost of businesses. In addition, this technique does not record annual asset adjustment when the asset value declines. Failure to record the cost of bad receivables is also a cost-shifting technique, reducing total costs and increasing profits.

Many techniques of glorifying cash flow and other costs make the financial statements of businesses appear more attractive that even very careful investors can detect. Nonetheless, irrespective of how strict the Stock Law, regulations and auditors are, there will still be many cases where businesses will intentionally violate and "cook up" the financial books without consideration of the consequences.

Translated by Mathew Hùng

Le Duc Khanh, Marketing Strategy Director, PSI

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