AIM equates to 'Mind your eye'

Tuesday, 27th October 2015 14:37 - by David Harbage

Today's announcements from Globo -- following on from the stock's suspension on Friday - are shocking for its investors and a reminder to the wider investing community to be wary of companies listed on the Alternative Investment Market.

Post the issue of a report by US-based Quintessential Capital Management on Friday, which prompted the shares' suspension, the board of directors met on Saturday and heard that there had been falsification of data and misrepresentation of Globo's financial situation. The CEO and CFO offered their resignation, which was accepted, and the COO has been suspended.

Today the market was advised that yesterday the CEO advised the company that he had offloaded 42 million shares (11.25% of the total issue) in the period up to the 22 October, and secondly that one of Globo's joint corporate brokers has resigned with immediate effect.

All in all, a sad and sorry situation which will feature in both the financial and wider media for some time to come. With other examples of apparent miscounting (at best) and criminal fraud at worst in mind - Afren comes to mind and Enron before it - investors are likely to revisit their exposures to businesses and industry sectors where accounting issues could be suspect. In the United Kingdom, AIM listed companies are not subject to as much rigour in providing very detailed historic accounts as firms with a full or premium listing and will often feature overseas, high growth prospects.

In previous articles, the higher risks of owning businesses which are domiciled in places like China have been flagged, as well as those in their infancy which do not generate much cash. Ensuring that an investor understands terms such as 'accruals' and 'receivables' when looking at accounts (cash flow in particular) and just how the business model works (how it 'pays its way' and is financially sustainable) is essential. Bigger businesses than the £105 million market capitalised Globo - notably Enron - have failed, and professional fund managers have also struggled to identify shady accounting or quality (with big institutions like Standard Life, Fidelity and Blackrock owning positions in this latest casualty), to say nothing of auditors or regulators.

Private investors who choose to own a stake in individual British companies should ensure that they have a bias to fully listed ones, which they can understand and intelligently assess the risks and rewards of so investing. As well as implementing sensible strategies in making selections, like spreading such monies across a number of companies. In response to requests, the writer's next article will feature a portfolio of company shares which will be monitored and reviewed. Can't promise to avoid the odd 'basket case', but won't put any more than 5% of the total sum into any one company. Meantime, "mind your eye" on any companies whose accounts and business model are less than transparent; and continue to stay close to each of the stocks you own.

Written by David Harbage for lse.co.uk on the 26th October 2015

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.