If you wondered how a company can fudge its accounts, well here are some things that they do:

– show less expenses: if you want to be more profitable

-show more expenses if you want to be seen as less profitable from real life.

– increase profits by showing revenue expenditure as capital expenditure

– increase losses by showing more cap exp !

These are some of the legally accepted tricks that companies can do in order to show a picture which they want to show, rather than the truth as it is.

How long can a company play any of these tricks and how much support (or not caring) from the auditors do they need?

Well not too much because even if the auditor were to qualify the accounts of the company, the directors can give a round about explanation. Anyway shareholders do not read the balance sheet, auditors report or the director’s report so frankly it does not matter.

Unless the ‘shareholder’ decides that since he does not understand balance sheets (or takes the trouble to learn how to read a balance sheet) he should invest only in the large big companies. The small shareholders is protected by a mass of analysts when he invests in a Gillette, Oracle, P&G, Colgate, L&T, Hindalco, Tata Motors, Tata Steel, Cholamandalam, Coromandel International, EID Parry, ….etc.

However when he invests in companies with very low market capitalisation, he has to take the trouble of keeping track of the company himself. I can assure you that is not easy.

Am not a big proponent of the ‘big’ is good theory – so normally I do not like many big listed companies – some inspite of the fact that I have made money from. However in a public forum it becomes difficult to say ‘how to select a company’.

Even mutual funds – too many of my friends beat fund returns by a large multiple – but these are brilliant individuals who let their fund manager friends handle it. Most of them can control their emotions well and know when and what to do. So what they do cannot be a great ‘anectodal’ posting. It will be nice to write (and therefore to read) but may not result in any great learning for you – in the sense it may not be easy to replicate.