There are numerous ways that company management may overstate revenues to make things look better in the present, even though the revenues may not be sustained or may eventually suffer.
For example, company management may offer an existing customer an incentive to sign a contract today, allowing the company to immediately book the revenue. Without that incentive, the customer might have signed the contract next quarter and the revenue would be booked then.
This practice isn’t illegal or even unethical, but it distorts the real performance of the company’s underlying business. It does this by stealing revenue from the future and pulling it into the present. In this example, if demand to sign contracts with the company was strong, management would have never engaged in this practice in the first place.
Forensic accounting pulls back the curtain on financial statements and assesses the quality of revenues, sustainability of margins, sources of earnings growth, and consistency of cash flow. This may help investors identify and avoid stocks that are on course to potentially lose value due to the poor underlying business results being currently masked.
Besides simply avoiding companies with “red flags,” forensic accounting identifies financial statements that are attractive because of their avoidance of aggressive accounting tactics. These companies are dubbed to have “high quality earnings” and may be favorable to investors over the long term.
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Investments involve risk. Principal loss is possible. The Funds have the same risks as the underlying securities traded on the exchange throughout the day at market price. The Fund’s investments will be concentrated in an industry or group of industries to the extent the Index is so concentrated, and the Index is expected to be concentrated in real estate-related industries. The composition of the Index is heavily dependent on a proprietary quantitative model as well as information and data supplied by third parties (“Models and Data”). The Fund is a recently organized, non-diversified management investment company with no operating history. As a result, prospective investors have no track record or history on which to base their investment decision. the Fund will be considered to be non-diversified, which means that it may invest more of its assets in the securities of a single issuer or a smaller number of issuers than if it were a diversified fund. The Fund is expected to invest substantially all of its assets in real estate-related companies. Investments in real estate companies involve unique risks. Real estate companies, including REITs, may have limited financial resources, may trade less frequently and in limited volume, and may be more volatile than other securities. The risks of investing in real estate companies include certain risks associated with the direct ownership of real estate and the real estate industry in general. Securities in the real estate sector are subject to the risk that the value of their underlying real estate may go down. The equity securities of smaller companies have historically been subject to greater investment risk than securities of larger companies.
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1 Correlation is a mutual relationship or connection between two or more things.