Phew!
At last some analysts are seeing what I’ve seen for months now: A slowing economy but few signs of an imminent recession.
The economy will slow in 2023 but will not likely lead to a recession, new research from scholars at the University of Missouri and Indiana University shows.
The forthcoming paper in The Accounting Review titled “Aggregate financial misreporting and the predictability of U.S. recessions and GDP growth” finds that instances of manipulated financial statements correlate with U.S. recessions.
Put very simply, when corporate America sees an uptick in managers cooking the books, the risks of a recession increase.
“We draw on theoretical and empirical research suggesting that lax monitoring creates opportunities for misreporting and that misreporting itself can influence real economic activity,” states the report authored by Messod D. Beneish and David B. Farber at Indiana University plus Matthew Glendening and Kenneth W. Shaw at the University of Missouri.
In other words, if the regulators don’t crack down on corporations illicitly adjusting their accounts, there will likely be more dodgy corporate accounts. In turn, that will harm the overall economy.
This makes sense. During the dot-com recession around 2000, multiple examples of accounting irregularities cropped up including Enron, Tyco, Worldcom, and Adelphia, plus many other less well-known names.
The clear reason why a recession would occur after increased instances of unreliable accounting statements is that investors lose faith in the system. Why invest if you can’t trust what the company tells you? If you do then buying stocks becomes akin to gambling rather than helping the economy grow.
Fortunately, after the early 2000s pull back, investors regained their confidence in the U.S. stock market and economic growth began again.
What we have experienced lately is a modest increase in allegations of and reality of dodgy accounting and financial fraud. Theranos leader Elizabeth Holmes is set for a hefty jail term after misleading investors about he viability of her blood testing startup.
More recently, the collapse of crypto exchange FTX has brought fourth allegations of fraud, and JP Morgan’s decision to shutter the college aid company Frank it purchased.
However, we can deduce that so far at least, the level of book cooking hasn’t gotten so large that it will tip America into a recession imminently.
