If you meet someone who doesn’t invest in the stock market, ask them: why not? You’ll usually get the same response: it’s too risky. Ironically, many of these people tend to put most of their nest egg in one asset that tends to depreciate over time: their home. Such a lack of diversification is itself a kind of risk, but the tangibility of real estate often leads investors astray.
Similarly, investors are led astray by high-profile controversies in companies. Enron is a great example; the 2008 crash is another. Both lead people to fear putting their money in stocks, only to have it evaporate because of something outside of their control. Never mind that the market has recovered since 2008 and scandals like Enron are very rare—they still remain a worry in people’s minds.
The biggest risk in owning a stock is simple: it will become worthless. Again, this is rare, but it happened in the case of Enron; it also happens a lot to penny stocks. It’s unlikely to happen to IBM (IBM), 3M (MMM), or Apple (AAPL) anytime soon, but sometimes it is a risk to smaller companies that seem more responsible and reliable. Enron is a good example. We might be seeing another example unravel before our very eyes: comScore (SCOR).
For those who don’t know, comScore is a ratings company that tracks how many clicks websites get. They’ve also expanded into measuring video and television. This is a useful tool for advertisers, who rely on third-party verification to determine whether people are actually seeing their ads. comScore’s biggest rival is Nielsen (NLSN), which is also the standard for much of the advertising world.
But not all is well with SCOR, and it has nothing to do with their business model. Nasdaq has warned the company that it needs to file its required financial reports or shares will be suspended and the stock will be delisted—and that could happen in a week. That’s little time, and SCOR may need to request a hearing to get this cleared up.
What exactly needs clearing up? Simply put, there is doubt around SCOR’s accounting. The company replaced its CFO and CEO after the problems surfaced. The company is also trying to get its books in order so that it can file its 10-Q. But there is still a delay.
This is somewhat ironic. SCOR is all about verifying the accuracy of advertising. In a sense, their job is accounting for ad impressions to advertisers, so that those advertisers know the publishers’ numbers are real. Yet SCOR could not accurately account for its own financials, so that investors can know its numbers are real.
Will these accounting problems bleed into SCOR’s actually business, make it seem less trustworthy and cause publishers to abandon the company in favor of Nielsen? That’s a longer-term risk. More immediately, there is a real risk that people holding SCOR will suddenly find it impossible to trade their shares after Nasdaq delists the company.
The even more disastrous risk is that massive accounting fraud is discovered in the company, and the firm’s financials are so wrong that the reality is much worse: the company is bankrupt. That could trigger the new management to announce a massively new balance sheet that, in turn, makes common shares worthless.
And this is the real risk SCOR is facing right now—and the risk that many individuals who don’t invest in the stock market are most afraid of. The reality, though, is that these things are rare. It’s happening to SCOR, but not to NLSN. It’s also not happening to the various other advertising companies that are publicly listed, let alone technology companies or the market as a whole. But the big headlines of accounting fraud are enough to trigger fear, no matter how irrational it may be.