Wednesday, September 2, 2009

Who can you trust?

The comic Dilbert has recently had a few strips that very much relate to our industry:
  • Yesterday's, for example dealt with establishing industry standards off of Dilbert's company's specs (knowing how good his company is, we can only imagine what such a standard would look like)
  • On August 22 Dogbert struck on an idea to start 10 mutual funds with randomly selected stocks; they would market the one that did the best. (Sound familiar?)
Even with the greatest standards or rules, we know that there can be problems. Of late we've witnessed:
  • Arthur Andersen's questionable audits of some of their clients' books (think Enron)
  • the SEC's failure to respond to suggestions that Bernie Madoff's returns were most likely contrived
  • concerns with rating agencies who apparently didn't see all the risks in some of the companies they reviewed
  • a report earlier this year in Fundfire about a verifier who verified a hedge fund that turned out to be a mini-Madoff (i.e., a Ponzi scheme).
Just yesterday I had conversations with representatives from two firms that might not actually comply with GIPS, though they both claim to. One has never been verified, a telltale sign of a potential problem given GIPS' complexity; the other firm has been verified but clearly has some problems with how they're deriving their returns (I determined this in a two minute review). In these two cases neither firm is knowingly doing anything wrong but might be; thus the need for an objective, independent review. But if the review is done by someone that isn't providing the appropriate degree of analysis, then problems may be overlooked.

Back to yesterday's Blog: "Lessons learned." Surely we should be learning a lesson about the need for proper reviews; we're seeing way to many cases of them not being done, and yet prospects and customers rely upon the results. In the last year billions of dollars have been lost which might otherwise not have been: the notion of an "ounce of prevention" surely applies here, yes?

p.s., Question: How do you know when a politician is lying? Answer: His lips are moving. Couldn't help but think of that when I read of UK Prime Minster Gordon Brown's duplicity regarding the release of the Lockerbie bomber. So, who can you trust? As Reagan put it, trust but verify.

1 comment:

  1. Bloomberg also has quoted a statement from Ronald Reagan, "Facts are stupid things." I don't know why he came up with this statement, but this could mean that human beings will repeat the same mistakes over and over again.

    Besides verifiers with good analytical skills, we should expect Firms to have routinely internal GIPS discussion. These meetings should be constructive (I mean people attending should test and quiz each other's GIPS guicane / performance knowledge and not be afraid to rip through their attendant's comments. I wonder if my comments are realistic?)


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