Regulation abroad: don’t oversimplify

Accounting fraud in foreign markets like Hong Kong and China have made investors wary over the past decade. And, though those fears may be overblown, advisors are right to be cautious.
“To say markets overseas are hindered by lack of regulatory and accounting discipline is simplistic,” said Jonathan Brodsky, managing director of Advisory Research, Inc., a subsidiary of investment bank Piper Jaffray. “The [International Financial Reporting Standards] maintains adequate supervision, and there’s been a sharp step-up in capabilities around the world over time.”
Instead, Brodsky stresses the importance of active management and research within domestic funds.
“Differing legal standards call for a need for caution,” he said. “But it all comes down to risk and reward, and the ability to analyze effectively.”
U.S. GAAP accounting standards have been fairly well adopted and remain considerably safer than standards found abroad. In some regions auditing standards are not as strong either, said Alex Crooke, fund manager at U.K.-based Henderson Global Investors.
“If [an advisor] isn’t sure about the value of assets in the balance sheet, there are ways to overcome this, like looking at depreciation policies,” Crooke said. “The key is to adopt a larger margin for safety, and allow more room for error.”
While the perception of fraudulent or wildly inefficient accounting or reporting practices overseas may be overblown, many advisors say, and a recent study from Morningstar concludes, that in terms of investor protection, transparency and fees, the United States remains the best market for fund investors.