7 Reasons to Invest for Income -- Reason #4
Accounting Fraud Can Generate Fake Revenue on the Books, but Dividends Checks Require Real Cash in the Bank
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In 2002, thanks to Enron, WorldCom, Tyco and other such companies, we learned that many corporations have been using crooked methods to hide expenses and artificially enhance revenues. Incredibly, such formerly reputable accounting firms as Arthur Anderson continued to certify the books of these companies after their audits.
When I was an accounting major many years ago, there was an on-going controversy about whether or not companies should be allowed to expense or capitalize research and development expenditures. In those days, accountants were concerned about setting standards that reflected reality and were fair to both companies and investors.
Now, corporate accountants use many outrageous tricks to manipulate earnings. They play bookkeeping games with pension funds, off the books derivatives, offshore funds, subsidiaries and so on. What I've read about accounting practices at Enron, just for example, made no sense in terms of what I was taught. I'm sure that my teachers would have been shocked to hear of such shenanigans.
And there's no reason to believe that questionable practices are confined to the few companies that have been caught and put out of business.
So how do you protect yourself? You can't detect fraud yourself. Even if you know how to read the balance sheets and income statements published in annual reports (and most investors can't), you can't know the true story behind those numbers without closely examining the books. And if they're hiding something off the books, you can't find that from examining the books!
You can, however, insist on cash income from your investments. Cash is cash, no matter what the accountants call it. Whether it's from dividends or bonds, you can spend it.
The company may be manipulating its earnings, but it must make certain that its checking account contains enough real money so that your interest or dividend check clears.
Next: Reason #5 -- 1/2 of Historical Total Stock Returns
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7 Reasons to Invest for Income -- NOW More Than Ever
Rick Stooker
- The greatest secret to income investing (Einstein called it "The most powerful force in the universe")
- What -- historically -- gives stock market investors 1/2 of their total returns (from 1929-1954; 1966-1981; and 1999-mid-2008 it was the ONLY way to make money from the stock market!)
- How to avoid suffering from accounting fraud. Automatically keeps you from throwing you money away on future Enrons, Tycos, and WorldComs
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