Financial Development Report by World Economic Forum

Came across this Financial Development Report by World Economic Forum.
Financial Development Report link

Financial Development Index 2008 ranking.

We can learn a great deal from the report:
components of financial development, weak and strong points of each country etc..

The Financial Development Index is divided into 3 categories, 7 pillars:
Categories are :
factors, policies, institution – pillars 1 to 3
financial intermediation – pillars 4 to 6
capital availability and access – pillar 7

1st pillar: institutional environment
2nd pillar: biz environment
3rd pillar: financial stability
4th pillar: bank
5th pillar: non-banks
6th pilllar: financial markets
7th pillar: size, depth and access

Singapore is at rank #10 . Malaysia is at rank #20.
Maybe we can see what our country is weak at and learn from the best in class.

From Table 2 (page 14):
Wow, Malaysia actually gets #2 position in "bank", what a surprise !
Singapore gets #1 position in pillars 1-3, all the pillars related to policymaker !

Malaysia detailed report is at page 156, Singapore at page 204.

Seems like Malaysia’s bank is good at "financial information disclosure" (rank #1).

Technical Notes and Sources (page 331 onwards) provides information of where to get data for all the indicators for the Financial Development Index. Great resources to do country analysis, economic analysis !

Manage your energy

Came across this concept of "manage your energy, not your time" from one of the Harvard Business Review (HBR) article.
article

In the website, there is a "test" to check whether how well you are managing your "energy".
energy test
It touches on aspects below:
physical energy (body): sustainability
emotional energy (emotions): self-worth
mental energy (mind): self-expression
spiritual energy (spirit): significance

After the test, you will be able to read 3 related HBR articles in brief with great insights:
1. extreme jobs: the dangerous allure of the 70-hour workweek
2. manage your energy, not your time
3. overloaded circuits: why smart people underperform

Good read ! Good to ponder whether your job is too "extreme" and whether you manage your "energy" well.

The concept is from this company called Energy Project.
Energy Project website

Professional Skepticism - Beware of financial reporting fraud !

One of the important pillars of investment analysis is company analysis.

Let's say we analyse the account, we find that the account is audited by some famous audit firm. Everything points to a "strong buy". Can it be wrong ?

Yes, it can go wrong, even extremely wrong too.
We will be surprised by how many cases of accounting frauds that are uncovered (not counting those that are not surfaced yet).

Areas of reporting most susceptible to fraud
report pursuant to section 704 of Sarbanes-Oxley Act of 2002

In this SEC study, areas of reporting most susceptible to fraud, inappropriate manipulations and earnings management mentioned are:

• improper revenue recognition,
• improper expense recognition,
• improper accounting in connection with business combinations,
• inadequate disclosure in MD&A & elsewhere,
• failure to disclose related party transactions,
• inappropriate accounting for non-monetary & rountrip transactions,
• improper accounting for foreign payments,
• improper use of off-balance sheet arrangement,
• improper use of non-GAAP financial measures.

The number of cases in the report can shock you. Real cases for different types were mentioned.

Fraud risk factors
Frauds take time to be uncovered.

Often when it is uncovered, it is already too late for the investors. Share price plummets, "trapped" investors suffer big losses.

It is better to avoid them in the first place.

Look for the warning signs and red flags.
If we see the warning signs and red flags, if we are in doubt, avoid the firm.

3 conditions generally present when financial reporting fraud occur:

• incentives/pressures
• opportunities
• attitudes/rationalizations

Refer to Appendix (page 300-7 onwards) of the following document for list of fraud risk factor.
"(AICPA SAS 99) Consideration of fraud in financial statement audit"

(AICPA is American Institute of Certified Public Accountants.)

Though "areas of reporting most susceptible to fraud" and "fraud risk factors" are mentioned, be always aware that the list is not exhaustive. New instruments, new environment, make possible new ways of frauds. Buyer bewares !

Professional Skepticism

Today I will blog on something light-hearted. A story, instead of data or resources.
I like this insightful story very much. I read it in a book titled "Wisdom of Jews" (a chinese book).

One day, a man went to visit a Jewish Rabbi trying to seek on knowledge from the Rabbi.
Below were their conversation:

Rabbi: "This event happened in 12th century in United States of America. One day, two men came down from the same chimney. One’s face was smeared, the other’s face was clean, which one would wash his face first ?"

Man: "The one with a smeared face."

Rabbi: "No. It’s the one with the clean face, as he saw the other man having a smeared face."

Man: "Oh ya. That’s right. I understand now."

Rabbi: : "This event happened in 12th century in United States of America. One day, two men came down from the same chimney. One’s face was smeared, the other’s face was clean, which one would wash his face first ?"

Man (feeling confused): "Of course it’s the one with the clean face, as he saw the other man having a smeared face. Why do you ask again ?"

Rabbi: "You should ask, "Why both men came down from the same chimney, yet one face is clean, the other face is smeared ?""

Insights from the story:
When the man answered the smeared-face man would wash his face,
his scope : the one with smeared face

When the answer is the clean-face man would wash his face,
his scope: both men and their interactions (seeing each other after coming down)
questioning the implicit assumption : the one with smeared-face would wash his face first

When the question is raised about the impossibility of one smeared-face man, one clean-face man,
scope: both men, same chimney
questioning the implicit assumption of: one smeared-face man, one clean-face man, coming down from the same chimney

When we get whatever data/knowledge/model, we would need to know the scope and think hard on its implicit assumption. Be professionally skeptical on data you get !

There is continuation from the story…

Rabbi (asked again): "This event happened in 12th century in United States of America. One day, two men came down from the same chimney. One’s face was smeared, the other’s face was clean, which one would wash his face first ?"

Man (feeling confused again): ……

Think deeply on it… Would you be able to answer the Rabbi’s question ?
(Note: the answer is not: "Why both men came down from the same chimney, yet one face is clean, the other face is smeared ?")
(Hint: Go one more level up…)

Think again before mouse over the following paragraph..
Answer: The event didn’t happen at all. United States of America was non-existent in 12th century. It was founded in 1776.
Scope: the time it happens, 2 men, chimney
questioning the implicit assumption of: what the Rabbi said is true
We need to question the validity of the medium carrying the data/knowledge/model too !