Posted on Tuesday, January 8, 2013 by sccl_smart_investing

Financial Shenanigans Financial Shenanigans  Certainly, most companies are ethical, but some do take advantage of reporting gray areas or ignore the rules in order to present financial results with a deceptively positive spin or in an altogether misleading way. Given the potential for accounting manipulation and gimmickry, financial statement readers need to exercise skepticism and rigorous due diligence. Schilit and Perler, two recognized forensic accounting experts, have revised and updated their 2002 title. The book hits hard on the many changes in GAAP accounting and how masterful accountants try to fool business analysts with gimmickry. What I like most about the book is that it doesn't’t just expose the tricks that businesses use to fake their financials. Instead, the authors go to great lengths to give examples, and then explain how you can fact check the accounting of any public company.   In total there are:

  • 7 Earnings manipulation shenanigans – These run the gamut from simple revenue recognition discrepancies to very disingenuous sales processes that allow a company to record revenue before a sale is even made. The author boosts this section of the book with high-quality examples from leading public companies including Sunbeam and IBM. You won’t believe the extent to which high-profile companies report earnings beats with fictitious accounting numbers.
  • 4 Cash flow shenanigans – The cash flow statement is one of the most difficult to engineer – a company produces cash, or it doesn't’t. However, accounting teams still have four methods to boost cash flows when a business would otherwise produce very little free cash. This section primarily focuses on how businesses shift financing cash flows (money from stock and bond sales) into operating income. Also, this section uncovers how acquisitions and disposition can be used to make cash flow look stronger than it really is.
  • 3 Key metric shenanigans – This section targets the key metrics used by executives when they talk about their business and brand. In particular, it examines how corporate brass can turn attention away from struggling businesses with non-GAAP measures like “same store sales” or “average revenue per user.”

When all is said and done,  this is a must-own book for any serious individual stock investor. It’s easy to read, easy to follow (there are literally hundreds of examples), and easy to apply what you learn to companies you watch immediately after reading.  Peruse these other resources for information on safeguarding your identity and watching out for fraud.

Tagged: forensic accounting, fraud, fraud, misleading financial statements, Perler, jeremy, schilit, howard