A person's greed will drive them to bend the rules for their dishonest advantage. The problem of "cooked books" has been around for hundreds of years.
For a publicly traded company (and it's shares) the truth in their accounting is necessary to establish a proper value of the companies worth. We've seen large companies cheat the investors repeatedly. And these are big name companies that you'd expect would do honest reporting. And the cheating isn't limited to just the books. As an example, take Volkswagen's cheating on their emissions software.
For these reasons many people would rather put their money under their mattress or into Real Estate or do Day Trading. Hiding from the problem is one solution, but not the best solution... just the easy one.
I mentioned the VW problem because it affected the value of the shares. The potential cost (law suits, fines, loss of future sales) is reflected by investors selling off their shares to the faithful. The prices will probably come back again in a few years. Trust will need to be regained. But the panic affects the investors for the next years. They will lose money because the investment wasn't what they believed it was.
The greed-driven people inside the company knew, or ought to have known that this was happening. Since there isn't any personal consequences (jail time), these things are likely to continue. The point is, this isn't going away because some new corporate penalty comes along.
How do I know if they are honest?
There are a few categories you can avoid for investing, and then we'll get to the normal stocks. The categories to avoid are Penny Stocks and anything that seems too good to be true (not the normal improvements). The BreX gold was a big story back in the 1990's, and it rose on the strength of fake announcements with nothing else backing it. No real evidence. Not much history of tangible success.
Of course, you should be spreading your investments among a few companies so that your boat isn't sunk by one bad loss.
For normal companies, the books are posted and audited, but that doesn't always mean they truly reflect reality.
Lawsuits for deceptive accounting practice and obstruction have been filed against many companies (even ones run by Vice President Dick Cheney). This hasn't changed the potential for theft by corporate pirates like Martin Shkrile. And the lawsuit doesn't generally help the investor. The fines against the company aren't paid to the mislead investor. I'm repeating the main point to be clear that it's really up to you to be diligent in where you place your money.
"Good" companies like VW and Halliburton can be pirates. Being fooled is really shame on them. However, to protect your money, being a long-standing "good" company isn't enough. It's important to look at their corporate personality for clues about theft. VW would have fooled anyone. Let's call VW an average company. Then we need to look for higher quality corporate personality. For growth investing, we might not be as caring since we will sell out in 6 months or a year. But for true buy-and-hold investing that some people do, the corporate personalty is essential. "Play the player." We'll never know what we can't know. The ethics are the only good clues for IF they would hide things from investors.
There is also a trend for many non-green stocks to cloak themselves as Green. It's better to find a reliable website for tracking truly Earth-friendly companies than to take the time to do all the research yourself. Use Google to search for "Ethical Investing" or "Socially Responsible Investments". We'll never know about the dirt some people are hiding until it's revealed to all (and too late).
As an example of what an investment manager is willing to do, look at this article by Huffington Post about the CPP. Canada has a Pension Plan (albeit small benefit for it's citizens). You'd think that being run by a country that has agreed to not support war criminals, they'd be careful in what they choose. Apparently, they aren't paying attention or don't really care about living up to their requirements ethically or legally.
My point is, you don't need to so much work yourself. Follow a few good sites and reduce your very long term investments to companies that are known to be upright and honest.
