Financial Shenanigans | Howard Schilit

Summary of: Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports
By: Howard Schilit


Deceptive financial practices can result in tremendous loss for investors, who often struggle to detect such trickery. ‘Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports’ by Howard Schilit divulges how companies occasionally misrepresent their economic performance through dubious accounting techniques. The book identifies thirty accounting tricks and discusses the rationale behind such unethical moves. It also provides insight into reading auditors’ opinions, recognizing early warning signs, and detecting gimmicks related to acquisitions. This summary will guide you through crucial information to identify accounting fraud and help you make investment decisions wisely.

Unveiling the Deceptive Accounting Practices on Wall Street

In recent times, Wall Street has been rocked by scandals resulting from deceptive accounting practices, which have left investors high and dry, losing billions of dollars. The Center for Financial Research and Analysis (CFRA) has identified 30 unethical techniques, grouped into seven categories, used by dubious companies to deceive investors. These fraudulent practices range from minor accounting estimates to bogus revenue recognition. There are two strategies, both aimed at manipulating earnings- inflating or deflating them. Underestimating a company’s financial position can lead to favorable future performance projections, hence the decision to deflate earnings.

Unscrupulous managers have various options to choose from when it comes to accounting methods, and while some choose the one that best reflects their firm’s performance, others opt for strategies aimed at exploiting the system. The opportunities to commit such financial shenanigans are numerous, with many executives having a vested interest, given that bonuses and stock options are usually tied to a company’s financial profile.

Furthermore, the chances of getting caught are slim, with unaudited quarterly financial reports presenting fewer checks and opportunities for manipulation. Experts recommend more scrutiny around revenue inflation shenanigans since these can have severe implications compared to those that affect expenses. Therefore, it is crucial to evaluate a company’s reporting while being cognizant of any misguided management incentives. Executives often prioritize the bottom line, making it vital to question the validity of a firm’s numbers.

Financial Report Distortions

Financial reports can be distorted under certain circumstances, such as weak oversight environments, closely held boards of directors, and lack of competent independent auditors. Be wary of companies with executives of dubious character, facing competitive pressure or experiencing a slowdown in growth. This is especially true for previously high-flying companies. For struggling companies, be cautious of their inner workings. Keep an eye out for early warning signs to avoid being misled by manipulated financial reports.

Auditing for Investors

Auditors use opinion letters to give a clean or qualified view of a company’s financial statement. An absence of an audit committee or compromised members can signal red flags. Investors should be wary of companies with qualified opinions and the mention of “going concern.” Compensation structures that prioritize profits can encourage accounting fraud. Companies on the NYSE are mandated to have audit committees, but this isn’t required for most publicly-traded companies.

Tricky Ways Financial Reports are Distorted

Whether or not you are into investing, it is essential to be aware of the tricks some company managers use to distort financial statements. It turns out that keeping track of revenue is not as easy as it sounds, and investors may need to examine the company’s balance sheet carefully to stay safe. This passage highlights nine distinct methods of book-cooking, ranging from recording bogus revenue to special charges and expense-shifting strategies. Investment gains might only be one-time gains such that counting them as income may not be a wise strategy. In the long run, failure to report future liabilities accurately may lead to a loss of credibility. Allowing reserves to be suddenly counted as income or creating feigning rebates may also put the company’s reputation on the line.

Unveiling Corporate Scammers

Learn how to identify potential corporate scammers through online financial report screening using various databases.

Discovering financial scams among corporations can be challenging, but thanks to multiple internet databases, uncovering malpractice has never been easier. These databases provide assistance in filtering data to check for any downside. With Compustat by Standard & Poor’s and Factset Corporation being two of the most commonly used databases, scrutinizing a company’s financial reports can be a breeze. These databases allow users to filter companies that have the sharpest decline in cash flow or the largest year-to-year sale decline, among others. Learning how to use these tools can ensure that individuals are equipped with the knowledge to unveil corporate scammers.

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