It would seem that if you were searching for a place to commit financial fraud, with limited probability of being incarcerated, Canada would be your country ! The authors of  “Swindlers: Cons and Cheats and How To Protect Your Investments From Them” pretty well sum up their view on the state of the nation of ‘true north strong and free’ on page 80 of this blunt and important text:

“We know for a fact that lax enforcement has encouraged many white collar con artists to target Canada with their schemes because they know that prosecutions are rare, convictions even rarer, and fines and sentences, if any, are minimal.”


Let me assure you that that passage is one of the softer, more diplomatic statements made by the Rosens. Rest assured, this disturbing book of revelations succeeds in tying a large cross section of characters to the whipping post. Just when you thought that the business press had done a fine job of identifying all of the people that can be less than trust worthy (including politicians, business executives, judges, lawyers, credit rating personnel, financial ‘advisors’, etc), the Rosens have an addition for the list: auditors. More on that particular crowd in a moment.

The timing of the launch of  SWINDLERS nicely coincides with the change of Canada’s accounting system to International Financial Reporting Standards (IFRS). The change promises to be both a disaster for retail investors and a windfall for the auditing community that endorsed it. It seems you always have to ask just who is going to make money from these processes – well, it won’t be you and me.

If you do the math, so to speak, the disaster formula as defined by the Rosens can include:

–      the lack of a national securities regulator, plus

–      the self regulation of the accounting & auditing professions, plus

–      provincial regulators (supposedly) balancing the needs of the retail investor against the will of corporations to do as they please, plus

–      the introduction of a loose accounting system that effectively enhances the ability of companies to cook their books (not to mention the latest Ponzi Scheme, plus

–      federal and provincial governments that seem to want to look the other way plus

–      auditors that have zero accountability towards investors

Retail investors have been told time and again, that in order to succeed in the investing process, they are required to do their homework. And the ‘textbook’ for the study of any corporation, is the set of financial statements (income / balance sheet / cash flow). Unfortunately for the ‘financial student’, the textbook is often corrupted due to the magic of number manipulations. Oh, and one other thing….the financial statements, per the auditors, are NOT tools to enable investors to make investment decisions.  I told you, you would be shaking your head.

Let’s go back to 1997 and review a decision by the Supreme Court of Canada (SCC). In a clash between  investors, an investment company (Hercules Managements) and an accounting firm (Ernst & Young), the SCC rendered the decision that audited financial statements are not assembled to enable shareholders to make investment decisions. Huh ? That’s right – and to add insult to injury, auditors can sign off on misleading financial statements without worrying about being sued. Effectively, the only value of an audit is (supposedly) to benefit existing shareholders, not new ones.

And sometimes, as the Rosens point out, the auditors can turn a blind eye to blatant data manipulation – Nortel provides the ideal example, in addition to the Castor Holdings case which is profiled in the  book.

The authors attempt to explain why, in their estimation, corporations win 90% of the time with  court battles with investors. Sadly, the legislation affecting the retail investor faces significant push-back from business-friendly law firms and lobbyists (to name a few). In too many cases, its actually the US authorities that detect Canadian corporate scams.

The Rosens can be forgiven for possibly creating the quintessential Canadian Con-Man’s Handbook. In vivid detail, they describe the nuts and bolts of the deceitful processes used by the likes of Nortel (with a few arrows slung at former CEO, John Roth), the Canadian film industry, a mussel farm (Cross Pacific), Business income trusts, insurance companies, and metal recovery firms. Who would have thought that your local scrap metal dealer could execute such sophisticated processes, including dealing with parallel companies owned by the same executives. Simply incredible. This explanation alone is worth the price of the book.

From the outset, the authors hammer on the fact that the retail investor has (will have) two stumbling blocks as they relate to successful future investing: a consistently weak regulation system and the even weaker IFRS accounting system. Based on the scathing review of the provincial regulators (with the guns pointed specifically at the Ontario Securities Commission), readers can be forgiven if they begin to think OSC stands for Only Supports Corporations. Ironically, as this review was being written, the newest OSC chairman was quoted as saying: “It’s really important for the OSC to become externally focused…to demonstrate to the public that the OSC is looking out for their interests.” I am certain the Rosen’s are watching closely.

In the back sections of Swinders, readers will find a short review of financial statements and what to look for within each document. As a special treat, the authors include a letter directed to the Secretary to The OSC, from Pamela Reeve, Associate Professor at the Toronto School of Theology, and a member of the OSC Investor Advisory Committee. Without providing too much detail, suffice it to say that she found a lack of any commitment by the OSC in truly representing the retail investor. A rather disturbing read.

In closing, there is a valuable lesson for each and every individual, retail investor: the world is a corrupt place. And until the human race is universally recalled and put through a badly needed re-design, this will always be the case. The Rosens repeatedly issued the following warning, that needs to be heeded until there are major changes in our Canadian regulatory system: you are on your own. Caveat emptor.

Further Readings:

Ponzi Schemes: US based Barry Ritholtz provides lessons that mirror what the Rosens warn of, and emphasizes the primary Rosen lesson: you are on your own.

Columnist Larry McDonald provides some real world feedback from a Toronto police investigator

re: weak regulation & Ponzi schemes

Current Events: the irony of book review timing

Lehman execs, auditor blamed for company’s collapse

Alan McLachlan

Alan McLachlan

Alan is a retired business manager with the Canadian Subsidiary of a Fortune 500 Company. He graduated from Ivey Business School at the University of Western Ontario and has completed four CFP courses. He has actively managed his personal portfolio for 20 years.