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YOU can't always tell when a company's going downhill, especially if managers are trying to cover it up.
In a study, the National Bureau of Economic Research has examined the behaviour of US companies accused of price fixing.
And as part of its working paper, Smokescreen: How Managers Behave When They've Got Something to Hide, it has identified some of the things managers do when they're covering up.
Most of it, the report says, is "signal jamming": They limit new, independent monitors on the company where they can, and try to distract.
Board members leave or retire more frequently, and are less likely to be replaced
"The motive for cartel firms not to replace exiting directors seems more clear: by leaving a board seat vacant, the company avoids the possibility of being monitored by a new individual from outside the firm," the report says.
Appoint busy or foreign board members
"Both of these types of directors have been shown in recent papers to perform poorly as monitors, due to such factors as distraction, distance, and their unfamiliarity with US accounting rules," the authors said.
Auditors seldom change
"The results are consistent with those found above documenting unusually slow replacement of directors for cartel companies, and they suggest that management attempts to reduce external scrutiny by restricting access by new monitors."
Misleading accounting
The study found that cartel firms are more likely to re-issue financial statements, in attempts to hide the company's financial performance.
Segment reclassification
In an attempt to make comparison between years difficult, cartel firms will reclassify business segments so they do not directly correspond to previous financial statements.
Managers exercise stock options more frequently
"Managers wish to withdraw their equity compensation before some future date at which the cartel might be exposed and the firm's stock price could drop," the report said.
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