About book Financial Shenanigans: How To Detect Accounting Gimmicks & Fraud In Financial Reports (2002)
Financial Shenanigans is by Howard Schilit, president of the Center for Financial Research and Analysis. It is a very readable step-by-step guide to detecting fraud by reading financial statements.Most of the big corporate scandals in the past few years have been in one way or another accounting scandals. Either accounting was the primary method of committing fraud, or else accounting was used to cover up other malfeasance. Schilit identifies seven "shenanigans" and the ways they are typically performed. They are:1. Recording revenue too soon or of questionable quality2. Recording bogus revenue3. Boosting income with one-time gains4. Shifting a current expense to a later or earlier period5. Failing to record or improperly reducing liabilities6. Shifting current revenue to a later period7. Shifting future expenses to the current period as a special chargeAll of this has to do with accounting arcana, which is what makes these kinds of scandals so opaque to the public. The public understandably doesn’t understand what's been done, much less how anyone was hurt by it. One misunderstanding that one sees in newspapers occasionally is what a reserve is, and why not having one or underestimating one is bad. The impression given is that reserves are actual money--rainy day funds to pay for future litigation or bad debt.That's why a readable book like this is useful. It really goes into accounting detail, and explains what the various financial statements are, and how to read them. It gives lots of examples of specific companies caught engaging in specific shenanigans. (Some, like Sunbeam, seems to have engaged in about every kind of shenanigan possible.) He always shows stock price graphs so one can see what the result is to equity when the chickens come home to roost. (He also uses the graphs as a way to brag on the CFRA's ability to see trouble early. They always seem to issue warnings well before the shenanigan is discovered. But, Cassandra-like, their warnings are ignored by investors. If their record at detecting shenanigans is so good, you would expect stock prices to drop every time they issue a warning on a company. Hmm.) Occasionally he offers a pungent detail or two on the company's story, but it would be better if he gave a little more--like this executive went to jail, or that executive was forbidden by the SEC to ever run a publicly traded company again, etc.I think this would be a good book for undergraduate and graduate business students, especially those interested in becoming analysts. Aside from giving a lot of practical advice, it would be an entertaining counterweight to the (let's face it) fairly tedious accounting textbooks that one necessarily has to read.
Read this book for my audit 2 class. Really amazing how many sneaky ways companies have of trying to show improved performance. No wonder so much fraud is never caught - it's got to be hard to find a lot of this stuff! Another thing that really surprised me was the number of example companies used in the book (other than the big obvious ones). There were companies who had gotten in trouble with the SEC for all kinds of things that I hadn't even heard about. No wonder everyone always talks about corruption in the big companies (and small ones too, apparently!). It's actually a little disheartening, though I am sure there are many honest companies and CEOs out there, as well. Just makes me glad I'm not going into audit as a profession.
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Fantastic Book about all the shenanigans/tricks the management can play to manipulate the financial report. It showed how important it is for the term "quality of earning", when management simply has too much operational flexibility to manage the earning, and manipulate almost every single entry of the financial report. Reading all the details of the financial report especially the footnotes become essential to dig all the shenanigans they are playing to have a good view of what the real earning is.
—Brian Zheng
An excellent book. The author goes on a step-by-step investigation of a wide array of possible accounting manipulations by fraudulent or ill-intentioned companies. After reading it, you'll learn to be healthily skeptical of quarterly results and conference calls.For me, an interesting lesson to be taken out of this book is how it's so easy for management to trick investors in a given quarter if they're willing to do so, even if you've read this book before - oh boy, accounting can be so easily manipulated. Some subtle gimmicks cited here could be applied for quarterly earnings-management purposes and get unnoticed if management takes care of "reversing" them in a short period later. The danger, of course, like many examples here show, is when they feel tempted to just carry on with the theatre, with tricks getting compounded over time until we have a bomb to be disposed or get exploded.And by the way, despite being an accounting-focused book, writing is very casual and flows pleasantly and easily, with even some humorous passages here and there. Definitely don't be afraid to read it even though there's an "accounting" word in the title... this book is definitely recommended!
—Marcelo
