Bookkeeping Questions American Realty 

Lessons From The Capital Scandal

Bookkeeping Questions American Realty Capital Scandal teaches us lessons that investors, regulators and executives can learn from. How will this scandal impact corporate finance?

American Realty Capital (ARG) came under fire after admitting to a series of accounting irregularities. The scandal wasn’t as serious as the fallout from Enron in 2001, but has still fueled ire among Wall Street investors. Executive Chairman Nicholas Schorsch and two other executives have resigned over the scandal.

While the case has significantly dampened sentiments of American Realty Capital investors, it has created even more significant concerns on Wall Street. Investors have raised a number of bookkeeping questions and answers about the practices at ARG, which other corporations will need to answer as well. Investors should learn the fundamentals of bookkeeping or hire a professional accountant to research a company before investing in it.

Bookkeeping Questions American Realty 

ARG first faced problems in October. The company admitted to SEC auditors that it had inflated operating revenue figures, presumably to inflate their stock price.

The SEC is still investigating possible accounting errors with the company. William Stanley was reportedly appointed as interim CEO until the company can find a permanent replacement. Stanley said that the discovery is a positive development, because it allows ARG to take the necessary steps to change its accounting practices and increase transparency. However, it still highlights a number of problems that have become a cause for concern on Wall Street.

Lessons for Executives and Investors

The problems with ARG have led to a number of bookkeeping questions American realty capital lessons for everyone that works with or invests in a publicly traded company. Here are some of the questions that stakeholders are probably asking:

  • Can investors trust other companies to report their finances honestly?
  • Should investors only invest in companies with the right compliance programs in place?
  • Will companies need to be more straightforward with their reporting to survive SEC audits?

The SEC has been trying to crack down on accounting malfeasance, insider trading and other financial crimes. However, the regulator’s power was recently called into question after an appellate court overturned insider trading convictions of two hedge fund managers. Therefore, investors will need to be more diligent about reading financial sheets and learn to identify possible bookkeeping errors on their own.

Reading Between the Lines with Corporate Financial Statements

Financial StatementsFinancial Statements

Every investor should read corporate financial statements carefully before knowing what stock to invest in. However, they also need to be wary of the figures, because they can be influenced by a number of factors. The Frankfurt Stock Exchange in Germany shared some tips that are also applicable to U.S. investors.

One of the most important takeaways from the ARG scandal is that companies have a lot of leeway with reporting Earnings Before Interest and Taxes. However, they don’t have the same flexibility with reporting net income, so investors should look at that revenue metric within accounting 101 the income statement very carefully.

Some companies may blatantly misrepresent their finances, but very few are willing to take the risk since the SEC monitors transactions so closely. The biggest mistake most companies make is trying to get too creative without breaking the law. They may unwittingly cross the line, but at least the majority of these errors are more noticeable. Here are some things that they need to pay attention to:

  • Unusual changes in revenues or gross profits
  • Earning trends that do not reflect news about demand
  • Changes in financial documents are grossly inconsistent with those in the industry
  • Few explanations are offered for significant changes in revenues

Every investor needs to be a detective answer any bookkeeping questions while reading a financial document. Keep in mind that companies are rarely entirely transparent when reporting income, so investors should always take these reports with a grain of salt.

Seek Help Reading Financial Sheets

Investors play a crucial role in studying financial profit and loss statements meticulously before making decisions to purchase common stock. However, recent cases like ARG provide evidence that corporations may not always provide completely honest information when reporting their earnings. This highlights the importance of raising critical questions and developing the ability to discern accurate information from these reports.

At Bookkeeping Basics, we understand the challenges investors face when navigating financial statements and interpreting complex information. Our team of experienced bookkeeping professionals is ready to assist you in understanding and analyzing these financial documents. Whether you have questions about specific line items, need clarification on accounting methods, or seek guidance on identifying potential red flags, we are here to help.

Our bookkeeping experts have extensive knowledge in reading and interpreting financial statements, and we can provide valuable insights to enhance your investment decision-making process. We can guide you in identifying key indicators of financial health, evaluating revenue and expense patterns, and assessing the overall financial stability of the companies you are considering investing in.

By partnering with Bookkeeping Basics, you can gain a deeper understanding of the financial statements and reports provided by corporations. Our aim is to empower investors with the knowledge and tools necessary to make informed investment choices.

Should you have any questions or need assistance with analyzing financial documents, we encourage you to reach out to our team. We are committed to providing reliable bookkeeping advice and guidance, ensuring that you have the necessary information to make informed investment decisions. Trust Horne Financial to be your trusted partner in navigating the complexities of financial statements and unlocking insights to support your investment strategies.

You might like these

Please subscribe to my monthly newsletter, Bookkeeping Basics E-zine. It tells you every month about the new information that I have added, including some great tips and advice from myself and other Bookkeeping Basics readers.

Enter Your E-mail Address
Enter Your First Name (optional)

Don't worry — your e-mail address is totally secure.
I promise to use it only to send you Bookkeeping Basics E-Zine.


New! Comments

Have your say about what you just read! Leave me a comment in the box below.