We often get request from readers to add companies to our Alternative Energy Stocks list. Since the field is very active, we do some quick checks to make sure that the companies at least:
- Provide enough information to make an informed investment decision.
- There’s nothing obvious which indicates serious investors wouldn’t be interested.
We by no means feel that everything in the list is a good investment, but we do feel that our list a good place to start your own research. Usually.
Last weekend, we received a request from a shareholder to add Power-Save Energy Corp (PWSV.ob) to our list. It fell to me to check it out, and while I did check that they provide enough information to make an informed investment decision (they file audited financial statements with the SEC,) the contents of those statements would have made me flinch, at least if I had bothered to read them.
Non-Existent Internal Controls
Fortunately for us, we have many diligent readers, and one of them quickly pointed out that PWSV did not belong on our list. Here are a few things I should have read the first time around:
From the auditor’s opinion (italics mine):
The Company is not required to have, nor were we engaged to perform an audit of the Company’s internal control over its financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Since the auditors don’t have an opinion on internal controls (this is not particularly unusual for an over the counter or pink sheet company), I should have looked to see what I thought of any controls they might have. I would have found:
- Not only is the CEO Michael Forster also the Chairman of the Board, he is the Chief Financial Officer as well. Given no separation of duties, it is impossible for the company to have any sort of financial controls.
- The Board consists of Mr. Forster, a 38 year old relative of Mr. Forster, and a 23 year old whose most relevant experience was managing daily operations at a restaurant.
- Under the internal review of controls and procedures, "The Certifying Officers [who, you will note above, are actually one person, Mr. Forster] have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and believe that our disclosure controls and procedures are effective based on the required evaluation." At the very least a lack of separation of duties should have been highlighted as a material weakness in this section.
Why Internal Controls Matter
None of this is to say that Power-Save might not be a viable business. It may or may not be. I’d have to do more research to find out. But there is no reason to do more research, because even if the company had discovered a process for turning lead into gold, there is no reason to believe that shareholders would ever see any of the profits. Mr. Forster does not even need to write out a company check to himself, he can simply grant himself excessive compensation in the form of cash and stock so that all company profits flow directly into his pay packet.
Off the List
The shareholder who contacted me with the stock is probably going to be unhappy that I not only removed PWSV from our list, but wrote this article suggesting it is a bad investment. I’m doing this in order to reduce my workload: if you would like to add a stock to our list, please do some preliminary checks of your own before bringing it to our attention. You’ll save yourself money, and save us time, so we can continue bringing you information about stocks that really are worth investing in.
DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.