VIDEO: Forensic Accountant Dr. Al Rosen of Rosen & Associates Discusses His Frustrations with Common Accounting Practices for Public Companies in Canada

Dr. Al Rosen of Rosen & Associates talks about his displeasure with accounting practices taking place in the Canadian capital markets.  His main area of concern is with the accepted practices in Canada vs the American system.  He believes a lot of the negative practices are a result of the adoption of IFRS accounting standards and that Canada should move towards the GAAP practices used in the United States.

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James West:    Al, thanks for joining me today.

Al Rosen: Thank you.

James West:    Al, the premise of your book, Easy Prey Investors, suggests there’s an ongoing issue where investors are not adequately protected by the accounting rules and firms that govern publicly traded assets that are typically populating pension funds and other investment funds. And I can’t help but infer, from reading your book, that the egregious nature of this regulatory breakdown borders on systemic fraud.

Al Rosen: Comes very close. The trouble with using the word ‘fraud’ is, you’ve got that proof beyond a reasonable doubt. But if you step back just millimetres, so to speak, away from fraud, that’s exactly what is happening in Canada. And this is because of the protections that have been given to the audit and accounting community; and this is why the Supreme Court of Canada, actually like 20 years ago, 1997. So the self-regulation stopped working, in our opinion, like 20 or so years ago, and yet they carry on by doing the degree of rules, the standard of rules, and that’s just not suitable for Canada.

We’ve had a long, long history of failures of businesses, many of which I’ve been involved as an investigator.

James West:    Can you give me some examples?

Al Rosen: Alberta Banks, 1985; Confederation Life, the Confederation Trust, the other trust companies…I’ve had dozens and dozens of these. The big one, Hercules Management, which is a Supreme Court of Canada, was one of mine, and Castor Holdings, a huge one, went on for 22 years. So they’re written up in the books that we’ve done, and the articles.

James West:    Now you sort of used the case of IFRS as the governing sort of accounting framework for auditing in Canada, and you suggest that Canada’s adoption of International Financial Reporting Standards, while the US has elected to stick with GAAP (Generally Accepted Accounting Principles) – why is that important? How is that a risk and a detriment to investors, and why?

Al Rosen: Okay, got to be a bit careful in the sense that it’s the accounting you’re talking about now, which is the IFRS, and US GAAP. And the auditing is another set of rules that go with it. But what’s wrong with IFRS is just ill-thought-out at the beginning. It was adopted across the world except for some major countries like the US, and it’s full of loopholes. So it’s very easy to totally change your profit. Like, you can take a number: if you’re a REIT, for example, you can change the interest rate that you want to receive as the owner, and by lowering the interest rate, you then can get a much higher value of the property. Well, under IFRS, what you’re allowed to do is take that difference from beginning of year, end of year, and put it into the income statement!

So you get these ridiculous things in Canada now where you can have 600 million of a reported IFRS profit, but Revenue Canada taxation is maybe taxing you on 120 million of that. So on that basis, why, if they have a chance to tax on this, why are they not taxing on that? Because it’s inflated. It’s non-cash, it’s unreal.

James West:    Right.

Al Rosen: So there are tons of audited financial statements in Canada that are showing these huge profits, huge cash flows, and they’re all management’s estimates. Because when you go in and you look what does the rules say on this type of thing, often it’s silent, or it’s so wishy-washy you can do what you want.

James West:    So essentially the standard of financial reporting, the bottom bar protections that investors –

Al Rosen: Has gone way down in Canada.

James West:    Right.

Al Rosen: Since 2010, 2011.

James West:    Okay. So is it a case where investors should look at every single financial statement, be it a start-up or a multinational based in Canada, with a high degree of skepticism?

Al Rosen: Absolutely. However, it’s not as bad if it’s on US GAAP.

James West:    Okay.

Al Rosen: But if it’s IFRS, like, we were writing a couple of years ago or longer than that, probably 10 years ago, that it was crazy to bring this stuff into Canada, because we’ve had so many failures over the years with these businesses, and why? It’s because the cash is not there. So when you show a monstrous profit and the cash you actually receive is only 5 or 10 percent of it, like, who are you kidding?

James West:    Right.

Al Rosen: But these things become audited. So we’ve written materials saying, auditing in Canada is becoming meaningless. When you see the word ‘auditing’, don’t take any reassurance; in fact, the concern if auditing is hooked up with IFRS, and you have these huge profits.

James West:    Okay.

Al Rosen: And there are just many, many examples of this.

James West:    Sure. So how does an investor, then, how do you assess what the real financial condition of a company is?

Al Rosen: Well, the only thing we could come up with, and we used it as a theme in two books, the Swindlers book and the Easy Prey Investors, is that you have to teach yourself what to look for. So we’ve written a whole bunch of articles in something called Canadian Accountant, saying, in this situation here, look at the tax expense number: is it a real tax, or has it been played with? So when you give management all of that power, when there’s silence in the rules, to pick what they want, right away it tells you something about the ethics of management. The ones who pick the dirty tricks, run away from that stock. The ones that are saying, you know, I want to be more ethical about it and want to do these things, then fine, you stay with them.

James West:    Sure.

Al Rosen: But the fact that it’s audited doesn’t mean anything; the fact that it’s IFRS doesn’t mean anything. You’ve got to learn what are the most common dirty tricks, and go looking to see if they’re there.

James West:    Okay. So if the pension funds that dominate most Canadians’ retirement future are loaded up with these companies that are reporting, in many cases, a completely wishful thinking sort of financial performance, then does that mean that the entire pension fund infrastructure for my future is in dire straits at this point?

Al Rosen: You’d have to look at it individually, but going through in speaking with actuaries, they scare me, because I ask them: what’s the basis of the information that you’re using when you’re coming out with your calculations of a future return on investment? And I don’t like the answers most of them are giving me, because they’re tending to take this government-produced information or they’re trying to take audited information, and you can tear your hair out! Why are you using that? And they say, well, first of all, it’s been audited, it’s been approved by the government, but the Federal government in particular is saying ‘that’s none of our responsibility’. So you’re starting with bad data, making projections about what is being earned; some of them, fortunately, enough of them now, are starting to get the infrastructure in other investments and are staying away from the public companies.

But the point is, you’ve got to really put the effort in to see who’s playing games. For example, this US GAAP versus IFRS: US GAAP says you need reasonable assurance that you’re going to meet the conditions of the contract, you’re going to collect the cash, and so on. Reasonable assurance: 70 or 80 percent assurance, like you’re happy with it.

The two countries tried to get together to come up with a uniform way of recognizing revenue, and revenue, of course, is the starting point for calculating income, so if it’s bogus, you’ve got problems!

James West:    Right.

Al Rosen: But then when it got down to the detail of application, you’ve got the problem of, one says 50.001 percent, the other one says 70—80 percent. So right away, those standards aren’t the least bit comparable.

James West:    Right.

Al Rosen: And there are dozens of examples of this, unfortunately.

James West:    Sure. Okay, so as Canadians, what should we do?

Al Rosen: You have to, first of all, convince the lawmakers of Canada that self-regulation is long gone in this country, it hasn’t worked, and do what the US is doing, which is then really get independent bodies to set the standards. Because if you set a low standard, then nobody is going to violate it – and that’s what’s been happening in Canada for 20, 30 years. So for sure, you have to wake up the lawmakers, and we’re not talking about one political party versus another; they’re all ignoring white-collar crime. There’s no Minister of White Collar Crime across Canada. You find it; it’s buried in Finance federally, and Finance produces enough of its own problems without getting into white-collar crime. So it just doesn’t get airtime.

James West:    Sure. Okay, well, that’s fascinating, Al. Thank you very much for coming today. We’ll leave it there for now and we’ll invite you back when we have another issue that would warrant your comments.

Al Rosen: That’ll take about one second to have another issue.

James West:    [Laughter] Thanks.

Al Rosen: Thank you.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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