Virtually every time you see a news item about a public company that has either fired their accountants or announced that their accountants or auditors have resigned, it is time to sell that stock. In this regard, a few examples come to mind, Enron, Lehman Brothers and, while not “accounting” related, the BP Gulf Spill.
It’s important not to second-guess or “re-analyze” the decision to sell, just sell it immediately. When it was announced that there was an oil rig explosion off the Gulf of Mexico and that oil company BP operated the platform, some traders sold the stock immediately, causing it drop by as much as 10% in that session. BP stock went from a glittering $62.38 per share to crude-oil-black $26.75 in a matter of weeks! Of course, this is a dramatic example, but if I were to back test similar occurrences in the past, the conclusions would be nearly the same across all industry.
Going back to accounting woes in a company, it has been my experience that the numbers are almost always suspect in assessing companies’ prospects. Companies can do amazing things with their books. When the auditors leave, or when the CFO exits, more bad news usually follows. Eventually, the stock may be a buy (since BP bottomed to $26.75 per share, it has traded in the $40s range), but in the time it takes to straighten out the mess, you could be using your money in much more profitable directions.
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