A company’s future depends not only on the revenue generated but also on the investor psychology. If investors keep faith in the company, its chances of survival are high. This relation between the investor psyche and a company’s future makes most companies paint a picture-perfect future! However, the auditor steps in as a guardian and ensures that a true picture is projected.
MD & A may not always be the best indicator of the “real” deal.In the Pan Am case, Pan Am MD & A looks highly optimistic and uses positive indicators like “strong revenue and passenger traffic” and costs due to” efforts to improve” to describe the road-map. However, the auditor report draws a a grim picture with doubts about the going concern capability of the airline company. Similarly, Trinsic speaks of an optimistic future where they “anticipate” and “expect” higher revenue.
In most cases to boost investor morale, the company makes efforts to negate the effect of the auditor’s report. To justify the report, it may resort to use of English language, attribute losses to global events and “positive” efforts by the company to improve service. Few such examples are, use of positive words like “high”, “better” and “strong”, changes attributed to world currencies against US dollar etc.
Moral of the story: As an investor you may want to look beyond the silver lining, into the thunder and lightning!
