Study – A Penny Saved is a Penny Earned

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New York –  A recent study concludes that an early enough detection of financial shenanigans – decisions taken by a firm’s management with the intent of distorting the reported financial performance and condition of the firm,  can help investors avoid losses. Research providers in the forensic accounting space can uncover these financial shenanigans.

The study, titled A Penny Saved is a Penny Earned: Avoiding Investment Losses through the Early Detection of Financial Shenanigans, examined a sample of 202 companies listed on CFRA’s “Biggest Concerns List” between 2005 and 2008 and found that these firms underperformed on a risk-adjusted basis while appearing on the list. CFRA uses an exception-based forensic accounting methodology and publicly available financial information to uncover companies believed to have poor quality of reported financial results, operational metrics and/or corporate governance issues not fully appreciated by the financial markets. CFRA’s proprietary “Biggest Concerns List” includes those companies for which CFRA analysts have the highest level of conviction around these issues.

While the study based its analysis on CFRA’s research, the forensic accounting research space is a dynamic one. Integrity Research conducted an in-depth study on the space in 2007, with a follow-up study in 2009 and thorough survey work showed us two relevant facts: First, forensic accounting research is highly regarded both by mutual funds and hedge funds – the latter ones place more value on the short idea generation aspect of forensic accounting research than the former ones. The second relevant finding of our studies is that the space is populated by over 20 research providers recognized as valuable by buy-side users.

Of the research providers mentioned by investors in our study, CFRA was one of the 20+ of them. The research providers that surfaced in our study include hybrid firms such as CFRA (firms that offer a mix of quantitative and qualitative research), as well as firms in both ends of the spectrum – purely quantitative or purely qualitative firms. Examples of research providers in the hybrid category, other than CFRA, include Glass Lewis, Gradient Analytics, Disclosure Insights, Austin Stock Research, among others. Providers in the quantitative category include Audit Integrity, New Constructs, and StarMine. Providers in the qualitative category include Accountability Research, Assay, Behind the Numbers, Harris Business Solutions, Off Wall Street, and Voyant Advisors, among others.

The study A Penny Saved is a Penny Earned: Avoiding Investment Losses through the Early Detection of Financial Shenanigans raises a key point when it demonstrates how early detection of financial shenanigans can help investors avoid losses. A number of research providers in the forensic accounting research space can offer relevant insights to investors in terms of forensic accounting research.

 

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