When Warren Buffett acts, investors notice. And after he took a roughly $300 million position last month in Home Capital Group, a troubled Canadian mortgage underwriter, some investors saw it as a vote of confidence not only in that company, but also in Canadian stocks over all.
Al Rosen takes a different view. A veteran forensic accountant and independent equity analyst who predicted the collapse of Nortel Networks, the Canadian telecom company, two years before its 2009 demise, Mr. Rosen has a message for people investing in Canadian stocks: be wary.
It is a mystery to Mr. Rosen why Mr. Buffett bought into Home Capital Group, a company that has been the subject of a titanic battle between the investors who believe in the company and other investors — short sellers — who do not. Certainly, Mr. Buffett expects to make money on his deal. But in an interview, Mr. Rosen said he thought there was more to the story than the markets yet know.
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Mr. Rosen is certain of this: International accounting rules followed by Canadian companies since 2011 are putting investors in Canadian stocks — not just Home Capital Group's — at peril. Canada's rules, which are substantially different from the generally accepted accounting principles (G.A.A.P.) governing American companies, give much more leeway to corporate managers when it comes to valuing assets and recording cash flows.
In addition, a 1997 decision by the Supreme Court of Canada has severely limited investors in suing company auditors for malpractice. Combined, these two factors generally make Canadian stocks a danger zone, Mr. Rosen said.
American investors often fail to recognize this, though, because they assume Canadian companies are abiding by American accounting standards. "I've been trying to alert investors in the U.S. to this," Mr. Rosen said in an interview. "But there's just that belief that Canada is following U.S. standards when it's not."
Mr. Rosen provides forensic accounting services and also works with his son Mark Rosen at the Accountability Research Corporation in Toronto. The two men recently published a book called "Easy Prey Investors: Why Broken Safety Nets Threaten Your Wealth."
In Mr. Rosen's view, the international accounting standards followed by Canadian companies allow managers to apply overly rosy assumptions to the financial figures they report to investors. For a while, these assumptions can propel stock prices — and executive bonuses — well beyond where they would be otherwise, he said.
Canadian accounting rules can also mask problems at a company. How else, Mr. Rosen asked, to explain the events leading up to the June 22 bankruptcy filing by Sears Canada? The company's shares trade on both the Toronto Stock Exchange and the Nasdaq market in the United States.