AHEAD OF PRINT Financial Shenanigans: Detecting Accounting Gimmicks that . week of the third quarter but that Since learning to read press releases with a .. Yet my new edition of Financial Shenani- be more helpful to the businesses. Gimmicks Fraud in Financial Reports, 3rd Edition. ID.: QB Category ePub | *DOC | audiobook | ebooks | Download PDF. From the Sherlock Holmes of. Financial Shenanigans 3rd Edition - Download as Word Doc .doc), PDF File . pdf), Text File .txt) or read online.
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Schilit, Howard - Financial Shenanigans - Ebook download as PDF File .pdf) you-can-be-a-stock-market-geniuspdf Financial Shenanigans 3rd Edition. Editorial Reviews. About the Author. Howard Schilit, Ph.D., CPA, is the founder and chief Financial Shenanigans, Third Edition 3rd Edition, site Edition. Read PDF Financial Shenanigans: How to Detect Accounting Gimmicks Fraud in Financial Reports, 3rd Edition | PDF books PDF Free.
Skip to main content. Log In Sign Up. Financial Shenanigans: Detecting Accounting Gimmicks that Destroy Investments. Lelo Habibi. Most companies leave telltale signs of their fraudulent behavior, but auditors and analysts must be independent, imaginative, and skeptical in their examination of company accounts if they expect to find these signs.
Such behavior occurs in both ings can be organized into seven categories: In fact, 1. Recording revenue too soon, many of the companies that I cite in my examples 2.
Recording bogus revenue, are highly regarded companies, so I am not pointing fingers at any particular type of company. But all of 3. Boosting income by using one-time or unsus- the companies I cite have at least one thing in com- tainable activities, mon: Their management sets a tone that encourages 4.
Shifting current expenses to a later period, the use of tricked-up accounting. For example, con- 5. Employing other techniques to hide expenses sider the words spoken at an employee meeting at or losses, Qwest Communications International by Joseph 6. Shifting current income to a later period, and Nacchio, the CEO at the time: Shifting future expenses to an earlier period.
Howard Schilit: Financial Shenanigans [Book Review]
The most important thing we do is meet our numbers. Sometimes, the numbers. Lower income and The intention of this presentation, therefore, is higher expenses lead to lower taxes. In this EM identify some of the telltale signs and behaviors that technique, a company does not fabricate revenue can indicate such shenanigans are happening.
For example, if a company is having ence held in Boston on 16—19 May SEC complaint March Computer Associates was particularly per- revenue on the sale. The customer must not only sistent at recording revenue before any obligations order the product but also take possession of it, test were complete. Its specific technique was to keep it, and approve it as acceptable for its needs. Cus- open the last month of any given quarter until it was tomer acceptance is an important step in the process, able to produce enough revenue to satisfy Wall yet some suppliers try to maneuver around this final Street.
Computer Associates was infamous for its step.
Financial Shenanigans 3rd Edition
Sunbeam Products was notorious for acceler- day months. Generally, a receivable is recorded at the cleaning products. The retailers would not pay for same time as the revenue, and one would expect the the products, and Sunbeam would not ship the customer to pay within 30—60 days, not days products.
In fact, Sunbeam did not even bill for the later. When a company shows long-term receiv- products, so the name of the strategy is a misnomer. For example, if a software com- The warning sign that Sunbeam was playing pany signs a five-year licensing deal, the company fast and loose with its revenue recognition was will receive payment over that month period and detectable in its gross margins, which were initially should not be picking up all of the revenue in the low and fairly stable.
The margins hardly fluctu- first month. But that is exactly what Computer ated, yet Sunbeam was not the manufacturer. It Associates was doing. Companies can use this tech- Mart Stores. Soft- math was wrong.
Because Sunbeam was using the ware companies often use this kind of contract.
For bill-and-hold strategy, however, it continued to example, when Apple sells an iPhone, part of its hold the product. Inventory was not being con- revenue is from selling hardware and part is from verted to cost of goods sold, which resulted in a the two-year contract for iPhone service. Certainly, misleadingly high gross margin. Therefore, beware this is a legitimate way of doing business, but it can of gross margins that skyrocket or fluctuate wildly also lead to accounting shenanigans.
Kendall Square Research was aggressive at picking up ever larger portions of its notorious for recording revenue even when its cus- revenue at the front end and smaller portions at the tomers were unable to pay. Such sales are simply back end. One sign that helped me discover this bogus. Therefore, when analysts are trying to deter- behavior was that new accounts began appearing on mine whether a company is overly aggressive in the balance sheet.
When I see a new account, only recording its sales, they should examine not only the two explanations seem logical: The company is cre- ating a new business, or it has decided to account for practices of the company that is making the sale but things in a different way. Such accounts as unbilled receiv- Another way of carrying out this same trick is ables and receivables in excess of billing began to to make sales based on extended payment terms. A business typically takes cer- One indicator of such behavior is a big increase tain steps—such as developing a product, shipping in receivables.
Companies typ- skeletons are buried. From transactions lacking economic substance, attention. On receipts from nonrevenue producing trans- 75 days. From appropriate transactions but at inflated calls with management, and the stock price came amounts. Then the DSO suddenly Some examples of this type of shenanigan dropped from 70 days to 37 days.
I took this message as a cue to immediately reporting bogus revenue on round-trip sales, and look for accounting shenanigans. I examined the Overstock. It simply reclassified some of those receiv- bank borrowing as if it were a sales, not a borrow- ables as prepaid expenses. Finally, consider the behav- end of a quarter to cover normal operating ior of software company MicroStrategy. During the expenses—to meet payroll, perhaps, or to pay height of the Internet bubble in early , I began down some of its debt.
Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports
Such repos, or redownload following MicroStrategy, and on 5 October , just agreements, are normal business transactions in five days after the end of the quarter, I noticed that which the lender expects collateral. But Lehman it had issued a press release containing two oddities. Brothers did not treat these transactions as loans First, the timing was too early to include earnings but rather as sales of assets.
It took the assets that numbers; they usually appear about three weeks were used as the collateral in the repos off its books after a quarter ends. Second, the press release and never reported the debt side of the transaction. An important It had no effect on the income statement. It struck lesson I have learned is to be very critical of any press me, and should strike any analyst, as unusual that release a company issues.
In fact, whenever I receive MicroStrategy was engaging in investment-related a press release, I first ask myself, What message is activity with the same party that was becoming a this company trying to sell? The intent of the release customer. This sort of activity muddies the waters is not necessarily devious, but most press releases and almost always indicates that something bad is are crafted to sell a message. It is up to the reader to about to happen.
Earnings Shenanigan #1: Recording Revenue Too Soon
I was told that the transaction was its net leverage had come down. Nevertheless, I continued to have questions saw that the cost of goods sold surprisingly increased about the company.
Then during the first week of by 9 percent. So, that clearly did not explain how the January , lo and behold, MicroStrategy issued operating profit grew so rapidly.
As I went further into the docu- to download software from MicroStrategy. In essence, however, MicroStrategy billion, but when I examined the income statement, was booking revenue for doing nothing at all.
Management had pany has another relationship, such as an investor not done such a wonderful job controlling costs. It relationship, should alert auditors and analysts to had simply used a one-time event to boost the com- the potential of accounting shenanigans.
Companies typically Period. Businesses use a variety of methods to shift use one of two strategies—one-time events or expenses and thus improve the appearance of their misleading classifications—when undertaking this revenue numbers.
Four methods bear noting: For example, Enron 1. Improperly capitalizing normal operating inflated its income by pushing losses from its var- expenses, ious ventures to its balance sheet, Lucent Technol- 2. And, of course, a bonanza for short sellers.
So, what kinds of ruses do companies use? Schilit explains these ploys in easily understandable prose and illustrates them with case studies. In Valeant and Canadian-based Biovail agreed to merge and, for tax purposes, to locate the headquarters of the combined company in Quebec.
Pearson was ousted as CEO, the SEC began investing the company for fraud, and all the debt raised to finance acquisitions came back to haunt it. Analysis in hindsight, of course, is much easier than analysis in real time, but with the proper tools investors can avoid companies poised to crash and burn—or short them.
Financial Shenanigans is a great place to start learning the ropes.
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Its specific technique was to keep it, and approve it as acceptable for its needs. I was told that the transaction was its net leverage had come down. Boosting income by using one-time or unsus- the companies I cite have at least one thing in com- tainable activities, mon: For example, con- 5.