A stranger to most of us last year, Bernie Madoff is now a household name and a hot topic of discussion in the financial world.
Unless you’ve been totally tuned out in the past months, you know Bernie Madoff was caught and arrested for running a Ponzi scheme. Another big name in the investment industry, Houston’s own Stanford Financial Group, also made headlines recently for allegedly defrauding investors out of billions of dollars through a Ponzi scheme.
A Ponzi scheme involves paying off investors with funds received from new investors, and con artists get away with it as long as they continue to attract new investors and maintain a client base large enough to support their original investors.
These scandals have increased the anxiety level of investors who’ve already seen their retirement savings dwindle in a very hairy bear market. Investors are increasingly cautious with their money, but that doesn’t mean they should stop investing altogether. There are still honest, reliable money managers in this country, and there are still safe and lucrative investments.
“Money and investments are a top priority for those who want to gather assets and, hopefully, retire while they still have time to enjoy it,” says Ed Gojara, CPA, CFE, an audit senior manager with Briggs & Veselka Co. “Risk and return have an inverse correlation. There are very safe investments, like treasury bills and CDs, with relatively low risk and low rates of return. At the other end of the risk spectrum, investments in penny stocks and start-up companies can yield higher returns but may result in larger losses.”
Gojara believes that now is as good a time as ever to invest, provided you know exactly what you are investing in, and the associated risks. Smart Business spoke with Gojara about making smarter — and safer — investments.
What should you be wary of when investing?
As a business owner, you may be investing for yourself, your company, your employees and numerous others who will look to you for guidance and advice. You want to have confidence that you’re working with trustworthy and reputable money managers and investment advisers.
Rule No. 1, if an investment sounds too good to be true, it probably is. If it’s ‘guaranteed,’ find out exactly how and by whom. Very little in life is guaranteed, so be skeptical. There are no free lunches.
Second, don’t invest if you don’t understand. It’s your money, and you need to understand where it’s going. Some investment funds are called fund of funds. This means they invest in other funds rather than directly in the underlying investments. If they invest in other funds, obtain audit reports for those funds so you can see where your money is truly going.
How do you know your advisers are working for you?
Ask how your advisers are compensated, what kind of fiduciary duties they have and what they are required to disclose to you. While brokers may disclose the fees you pay, they may not tell you that those fees are five times higher than the industry average.
Request and obtain audited financial statements from those with whom you invest and research the audit firm. It doesn’t have to be a national firm with thousands of offices. There are many qualified, good local and regional firms. And you should research the accounting firm’s reputation and resources by visiting the firm’s Web site or the Web site of the American Institute of Certified Public Accountants (AICPA) at www.aicpa.org. The AICPA maintains a database of those firms that have gone through the peer review process — a process designed to enhance the quality of accounting, auditing and attestation services performed by public accounting firms. You can also visit your state’s board of public accountancy (for Texas, the Web site is www.tsbpa.state.tx.us). There, you can search for the firm and individuals from the firm to verify they are registered with the state’s Board of Public Accountancy and discover if there are any disciplinary actions pending or previously taken against them.
Why is checking out the auditing firm so important?
Madoff’s auditor was Friehling and Horowitz, a three-person firm that was auditing billions of dollars. Stanford’s auditor was CAS Hewlett & Co., a tiny accounting firm with an office above a hair salon in London and a second office in Antigua — two rooms containing an old telephone book and a typewriter. If the audit firm and the scope of the work to be done don’t match (or if there aren’t any computers around), that’s a sign that something is wrong. If you can’t trust the auditing firm, how can you trust the businesses they’re auditing?
What other things should investors watch in today’s market?
Fraud is hard to detect on the outside, and usually when you do find it, it’s too late. However, you can take steps to prevent fraud. Always exercise proper due diligence. Monitor your investments before, during and after you contribute to them. As stated earlier, fully understand your investments, your advisers and the companies that audit your advisers. Don’t fall for the latest ‘get-rich-quick’ investment. The best investments are well planned and come to fruition over time. Understand your investment time horizons and the amount of risk you are willing and able to take.
Finally, don’t try to invest alone. Even if you are well versed in financial and business markets, it doesn’t hurt to seek advice from a trusted CPA and/or attorney.
ED GOJARA, CPA, CFE, is an audit senior manager with Briggs & Veselka Co. Reach him at email@example.com or (713) 667-9147.