Investors in arms race with ‘savvy finance directors’

Schroders, the fund managers, has said it believes companies will have made
mistakes using international accounting standards and has begun screening some
businesses looking for accounting practices that could cause trouble in an
economic downturn.

reports that in a note for investors the fund manager’s head of European and UK
credit research, Patrick McCullagh, wrote: ‘Investors are in something of an
arms race against savvy finance directors.’

McCullagh said that only when the economy is suffering ‘does the accounting
“spin” become unsustainable.’

He wrote: ‘During a long bull market of the sort we experienced from
2003-2007 we believe the requirement for companies to “make the numbers” leads
to increasing pressure to take an assertive approach to accounting.’

McCullagh said the downturn could lead to ‘accounting revisions and a
collapse in confidence in the company’.

‘Europe is now going through a recession for the first time since the
introduction of
in 2004 and the new accounting framework is now being tested, ‘ he said. ‘People
will have made mistakes; we are sure of it.’

Schroders, according to Reuters, has a list of indicators which it has
applied to 500 European companies. A number of companies triggered all the
danger signals. Schroders, however, was not invested in any of them.

Among the indicators detailed in the Reuters report is long-term divergence
between growth in net income and cash flow generation, while another is spotting
‘generic’ items on a balance sheet that change dramatically from year to year.
Schroders does not give away all its indicators for proprietary reasons.

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