In 2001, energy trading company Enron had well, let's call it a few problems. For that matter, so did Arthur Anderson, the company’s accounting firm...but we’ll get to that.
A handful of Enron executives had spent the previous few years using a variety of accounting tricks to hide massive losses at the firm. As a result, they got rich off of stock options and self-dealing side hustles using the company’s assets.Through it all, Arthur Anderson, acting as the company’s auditor (meaning the firm was fundamentally in charge of making sure Enron’s books were correct) signed off on the dodgy balance sheet. It all came to a head in 2001, when the company imploded in a flurry of massive write downs and indictments of top executives.
Eventually, Arthur Anderson itself was found guilty of various infractions, including shredding documents in an attempted cover up. The conviction was eventually overturned, but the scandal led to the so-called “Anderson Effect”...basically, after that, auditors would be reluctant to be push overs for the companies they worked for and conduct a more stringent review of results.
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Finance: What are the Five Principles of...0 Views
Finance- a la shmoop. what are the five principles of Finance?
well easiest way to remember these bad boys look at your hand. we're just gonna
take them finger by finger. your thumb the time value of money. the mantra a [man holds up hand]
dollar today is worth more than a dollar tomorrow.
why? because you can in theory always invest a dollar and get a positive
financial return from that investment almost guaranteed. well you could play it
safe investing in low-yield American Treasury bills, or you could show a bit
more gamble by investing that same money into a somewhat riskier index fund of
bonds or stocks. either way here's the magic formula take the dollar amount you
invested and multiply it by one plus the rate of return ^ years. so yeah you want
to be making your money work for you. if you invest it it collects interest, or
returns profits. keep it under your mattress and about the only thing it's [money on top of bond]
gonna collect are bedbugs. okay second principle second finger risk
and reward are related- kissing cousins- yeah so they can't get married shame
they look like such a cute couple. okay so here's a question. why do you get
8% returns from the stock market in equities and you only get 3% from safe T-Bills
bills. well a bunch of things affect rates of investment return but the
biggest issue revolves around whether you'll get your money back, and/or a
positive multiple of your money back when you're done. check out bond
performance over time. steadily onward and upward but nobody's becoming
spectacular ly rich off of them. stocks on the other hand while you might make a
fortune but he also might have to stomach some extreme lows along the way. [graph showing ups and downs of stocks]
you're basically putting your money on a virtual rollercoaster and hoping it
survives the experience, but hey no risk no reward.
over time the stock market has a whole lot of reward. alright third principle
the middle finger hey watch where you point that thing. the market as a
popularity contest versus a weighing machine.Thank You Warren Buffett. what
does this mean? well there's short term versus long term thinking. when it comes
to investing. you want to be long-term greedy because hopefully well you're
gonna be here for a while on earth. invest in a company like Google early in
its history and you're gonna be set for life. same do the Amazon Facebook and
those guys. invest instead in a crap company called fidget spinner mania who
knows what your fortunes gonna do it's risky. you might go from $10 to $12 in a
week but only wake up six months later when it's trading at 12 cents a share.
yeah you want to avoid fads duh. and yeah it's not that easy to spot the early [stocks of fidget spinners down ]
signs of the next google, but well that should be your goal. all right principle
number four your ring finger, cash is king.
well the dog toy company, bite me I squeak, yeah that's the name of it
might show a million bucks in profit, but you don't know how they've expensed
their plastic molding machine, what clever maneuvers they've used to pay
minimal taxes. well the only way to fairly evaluate the value of the company
is follow the cash. and look through accounting tricks which can change the
bottom-line earnings in a whole lot of different ways all right moving quickly
on and finally your pinky finger, agency problems. well you might be picturing [pinkie finger held up]
this guy in a slick suit in a Hollywood office selling clients time into a
studio system with let's do lunch a regular catchphrase.
well yeah it's basically the same thing in finance. a client hires an agent and a
relationship structure is formed. that is there are legal requirements around the
behavior of that agent. specifically the agent has to look out for the best
interests of his client, and he has to put his own best interest on the
backburner. well this structure is a really big deal in the financial world
because so many poor unsuspecting people have been screwed over in the process of
big city slickers taking their dough with no comeuppance. those fast-talking
grifters are really deserving of a yeah you know knuckle sandwich, yeah put all
five of those fingers to good use if that ever happens to you. [man holds up hand ]
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