Resolve the NHT debate forensically

THE GLEANER’S long-standing and enviable tradition of incisive editorials on matters of national interest was evidenced on Monday, October 8, 2018, in which it postulated ‘Broadening the NHT debate’.

Since its inception in 1976, this debate has raged as to the level of efficiency and effectiveness with which the Trust has carried out its mission to increase and enhance the housing stock by promoting new projects, providing mortgage loans to our contributors, and offering funding for the housing construction sector.

Gleaner records will show that numbered among its most caustic critics has been the Rev Garnett Roper, who in an article published in The Sunday Gleaner of March 8, 2015, contended that the National Housing Trust was “addicted to failure”. Not surprisingly, numbered among the Trust’s defenders have been spokespersons such as Karlene Morgan, who was a senior communication coordinator of the NHT, and responded stoutly to the blunt reverend via a column on Sunday, March 15, 2015.

UNENDING DEBATE

We should go a step further than participating in an unending debate. The viability, sustainability and overall ability of this theoretically sound, innovatively unique, but historically troubled organisation are best established by empirically subjecting the past and present financials of the Trust to tried, proven, and internationally recognised forensic accounting methodologies designed for such a task.

Admittedly, modern forensic accountants still utilise the traditional accounting ratios used over the years for financial/accounting analyses to ascertain trends and other analytical work on matters such as income, profitability, liquidity, working capital, bankruptcy, and leverage. Traditional accountants mainly conduct their analyses from about a dozen well-established accounting ratios to retrieve value, filter, compute derived value, find extremum, sort, determine range, characterise distribution, find anomalies, cluster, and correlate data.

These customary ratios, though tried and proven, pale in comparison with the more than 300 ratios and methodologies employed by modern-day analysts such as forensic accountants who, after ascertaining these fundamentals, are able to apply more complex assessments by drawing from their forensic toolkit to delve more incisively into a wider scale of concerns.

Space prohibits detailed expositions here, but a few examples may better elucidate the point. For example, investigations regarding business operations and investment matters using BIC (Balance Sheets, Income Statements and Cash Flows) may involve use of related analytical tools and techniques like Altman Z-Score, Piotroski F-Score and Beneish’s M-Score.

For example, in testing the probability that the NHT will experience bankruptcy within two years, a formula developed by NYU Professor Edward Altman called a ‘Z-Score’ could be used. This ‘Z-Score’ was established to measure financial distress along a number of objective metrics that include five easily derived business ratios, weighted by coefficients.

Given its simplicity and accuracy, it is a common calculation used by investment analysts and can be applied relatively easily to a company’s investment prospect checklist. In its initial test in 1968, the Altman Z-Score was found to be 72 per cent accurate in predicting bankruptcy two years prior to the event, and in a series of subsequent tests covering three different periods over the next 31 years (up until 1999), the model was found to be approximately 80-90 per cent accurate in predicting bankruptcy one year prior to the event.

‘F-SCORE’

Sceptics or detractors who find limitations in Altman’s Z-score, may prefer to find comfort in a company’s ‘F-Score’, developed by Joseph Piotorski in 2000 while at the University of Chicago. Compared to Altman’s Z-score, which test five inputs, the F-score tests nine, but does not weight them.

Although Piotroski’s research in the US concentrated mainly on identifying strong companies for investing on stocks, the American Association of Individual Investors revealed that the F Score was the only one of its 56 screening methodologies that had positive results in 2008.

The more sceptical among us who feel that a company’s earnings may be manipulated so the above analyses may not be valid should also know that any possible manipulations can be tested by applying the Beneish Model, a mathematical model that uses financial ratios and eight variables to identify whether a company has manipulated its earnings.

In addition, in the advent of modern computing capabilities, organisations like the NHT, which necessitate ongoing public scrutiny, can be further monitored and dissected using digital forensics, which is the process of identifying, preserving, analysing and reporting digital evidence. It includes subdisciplines such as computer forensics, network forensics, and mobile devices.

The Gleaner editorial repeated some practical recommendations designed to keep this invaluable housing/financial agency healthy going forward. Yes, we must not only seriously consider these, and keep the debate rolling. However, we should supplement these with further steps such as applying internationally accepted forensic accounting bestpractice methodologies to continuously analyse and ensure the continued success of this national organisational treasure.