What’s your favorite salad dressing?
Ranch? French? Oil and Vinegar? You probably know that oil floats to the top of water, but did you know this “floating” led to one of the biggest accounting frauds in U.S. history?
The Story Begins
Anthony DeAngelis, a man with an interesting background, entered the vegetable oil business more than 60 years ago in Bayonne, New Jersey. Mr. DeAngelis traded vegetable oil futures, sold vegetable oil on the global spot market, and held an inventory that filled a host of industrial-sized containers.
Mr. DeAngelis’ company, Allied Crude Vegetable Oil & Refining, (No relation to Allied Property Management, we assure you.) like most commodity traders, was highly leveraged. The creditors insisted independent auditors attest to the company financial statements. Imagine an auditor from one of the “Big 4” accounting firms climbing to the top of a 200-foot tank to measure vegetable oil levels with a long dip stick.
The Oil Plot Thickens
The dip stick measurements showed plenty of liquid in the tanks, However, if the auditors had run a chemical analysis, as is required today, they would have discovered about six inches of oil, and a whole lot of sea water. Thanks to this floating deception, fake purchase orders and other fraudulent records, the auditors approved the financial statements.
The Truth Spills Out
Eventually, during a market down-turn, the banks came to collect their collateral, the oil, and the scheme (and the water) was discovered. Some witnesses said the sea water in the tanks took days to gush out. The end game sounds familiar: FBI involvement, bankruptcies, millions in losses, lawsuits, scandal, shame, and of course, blaming the auditors.
Now more than 60years later, what does this have to do with investing in multifamily real estate? The theme is the same: Trust but verify.
The Bottom Line of Where to Invest
Invest with honorable principals with clear track records who don’t mind if you verify what they tell you. I always say the most valuable part of our monthly financial statements is the bank statement. The plain, old, boring bank statement? Yes. Why? Because the bank prepares it, not the property manager or the Allied accounting department.
Sadly, the Salad Oil Scandal, as the affair came to be known, will happen again. The names, industries, and specifics will change, but it will have the same results. Fraudsters are good at what they do, and they daily burn over-trusting investors who don’t verify what they are being told.
At Allied, we welcome “verify” requests because transparency is part of our culture.
Next month take a look at that boring bank statement and see if it backs up the results of our financial reporting. We want you to be confident in our integrity and accuracy. So, we don’t mind if you verify any way you like. You can even use a dip stick and a chemist.