Investment Implications of a Restricted Universe: The Forbidden List in Accounting Firms

Abstract

Accounting firms have generally used a broad range of measures and internal procedures in an effort to prevent running into potential trouble. The nature of their controlling tasks suggests they might become privy to price sensitive information, which could lead to abuse or suspicion of abuse if the accounting firms (senior) partners are trading at the stock exchange. To avoid these problems accounting firms forbid partners to invest in all stocks. Such a policy has the disadvantage that it limits their partners. Alternative investment possiblities show low returns at this moment. An alternative for this severe policy is that partners are forbidden to invest in stocks of companies that have a relation with the accounting firm. These companies are placed on “a forbidden list”. KPMG, one of the “big four” accounting firms has provided us with their forbidden list. Our research shows that a strategy based on the “forbidden list” is possible, creates value for the partners and does not harm the policy of the accounting firms to prevent running into potential trouble caused by (mis)using price sensitive information.