Money matters

Everyone wants profit on their investment, but we all invest different amounts of resources in research. A modern bank or fund would be happy to invest $50 million into a venture and to spend $500 000 on a due diligence with lawyers. It would be unwilling to fork out $5000 on discreet enquiries and a chat with detectives in the FBI, Russian FSB, City of London Fraud Squad or similar. Due diligence has become ossified in its own rigorous blinkered thinking.
Fallacy: only banks, insurers, lawyers and accountants have the monopoly in professional investment knowledge.
Private investigators, from AON, Marsh, Control Risks Group, Pinkertons and Wackenhut all offer potential corporate added-value here. They also operate under the forensic accounting banner to undertake deep financial and behavioural analysis. A proper due diligence can win through more flexibility and discretion. One such due diligence by Dynegy on Enron made the correct call on risk hazard and called off the merger. It saved an unbelievable fortune.
Basel II enables Moodys and Standard & Poors, plus the corporations themselves, to certify the level of operational risk. Some groups will have become disposed towards offering a more tailored or sympathetic risk assessment. The traditional credit-rating visit cannot be so highly valued seeing that the target company has lots of advance warning. To paraphrase Heisenberg’s principle of uncertainty:
You can never be sure of the direction or health of a target company, because these are directly affected by the means you use to observe them.
Newer aspects of this investigative process show that company data are more accurate and accountable when the target is completely unaware of the observation carried out by snooping. Forensic accounting comes in useful; it is more akin to industrial espionage, but the data is less likely to be compromised by a public relations exercise. These forensic agents can be employed to separate performance from ill-deserved reputation. They can take the subtle, covert observation of the subject to get closer to the truth.
Then, they can get the metaphysical corporate handcuffs on the risk-offering crook. More flexible analytical activity clearly complements the bank’s own analysts and traditional due
diligence process. Forensic accounting comes in to provide a deeper investigation. Otherwise, banks and financial companies suffer when they are still locked in a narrow corporate group- think.

The media headlines tend to focus upon the wrong targets. These focus upon criminal managers’ activity, or rogue traders. But, most company underperformance or losses are the result of those innocent errors – operational risk and strategic risk. That means that a single top-level planning fault, or a dozen daily back-office errors, will often add up to much more damage than a single rogue trade or fraudulent activity.
We need to re-assess our risk-return appetite against the likely returns in the quagmire of mixed competencies and unrealistic expectations. Risk appetite must match the risk offer. The investor must meet the company, in person or by telecommunications, and grill it with questions:  “Is the CEO innocent but incompetent; or much worse?”  “What was his previous record?”  “How can I get past the PR to track him down?”
One of the potential hazards is that CEOs and CFOs are advertising the value of one asset – their innate management skill. This only enrichens their bonus pay, pension and stock options.6 Where the investor is faced with an unfamiliar company executive or a novel asset, then a risk management methodology such as RAMP may offer much benefit. A risk review by unbiased parties using forensic investigative techniques can provide a lot of benefit. A risk- mapping analysis by impartial experts can be obtained in a Delphi-group risk-reward analytical process.