schilit - financial shenanigans; how to detect accounting gimmicks & fraud in financial reports (2010)

[...]... Message about Financial Shenanigans While most companies report their results honestly to investors, a significant number use accounting or financial reporting tricks to hide the truth Since they are likely to be unaware of management’s integrity level, smart investors would do well to maintain a healthy skepticism and perform rigorous due diligence with regard to financial reports Additionally, financial. .. fueled the increase ENRON: Financial Shenanigans Identified Earnings Manipulation Shenanigans • Recording Revenue Too Soon • Recording Bogus Revenue • Boosting Income Using One-Time or Unsustainable Activities • Employing Other Techniques to Hide Expenses or Losses Cash Flow Shenanigans • Shifting Financing Cash Inflows to the Operating Section • Shifting Normal Operating Cash Outflows to the Investing Section... Other Techniques to Hide Expenses or Losses • Shifting Current Income to a Later Period • Shifting Future Expenses to an Earlier Period Cash Flow Shenanigans • Shifting Financing Cash Inflows to the Operating Section • Shifting Normal Operating Cash Outflows to the Investing Section • Inflating Operating Cash Flow Using Acquisitions or Disposals • Boosting Operating Cash Flow Using Unsustainable Activities... devotion are both endearing and enduring To Marc Siegel, a mentor, colleague, and friend, who led me to the crossroads of accounting and the financial markets and showed me how to direct traffic To the accounting faculty at the University of Michigan’s Ross School of Business, who cultivated my curiosity for navigating a financial maize and blue the wind that lifted my accounting sails To my parents, Vicki... Shifting Future Expenses to an Earlier Period Cash Flow Shenanigans • Shifting Financing Cash Inflows to the Operating Section • Shifting Normal Operating Cash Outflows to the Investing Section • Inflating Operating Cash Flow Using Acquisitions or Disposals • Boosting Operating Cash Flow Using Unsustainable Activities As Bad as It Gets 21 Key Metrics Shenanigans • Showcasing Misleading Metrics That Overstate... lagged behind net income, a sign of poor earnings quality SYMBOL: Financial Shenanigans Identified Earnings Manipulation Shenanigans • Recording Revenue Too Soon • Recording Bogus Revenue • Boosting Income Using One-Time or Unsustainable Activities • Shifting Current Expenses to a Later Period • Employing Other Techniques to Hide Expenses • Shifting Current Income to a Later Period • Shifting Future... From Howard Many wonderful and generous people have been invaluable in nurturing and shaping my career dedicated to studying and teaching others about ethics in financial reporting First thank you to my parents, Irving and Ethel Schilit, for giving me the confidence to believe anything was possible with hard work To my siblings, Audrey, Keith, and Rob, for your lifelong friendship and support in all... While that story line is essentially correct, detection of red flags required no special accounting skills or even advanced training in reading financial statements It simply required the curiosity to notice and question a stupendous five-year jump in Enron’s sales revenue from 1995 to 2000 Warning for Enron Investors—Revenue Growth Defied Reality Enron ranked number seven in Fortune magazine’s list... blocks of his stock to support other business ventures (timber) and his lavish lifestyle (yachting) As the stock declined in 2001 during the technology meltdown, Ebbers found some extra cash that he needed by borrowing against (i.e., margining) his stock holdings As margin calls from brokers increased, Ebbers convinced the board of directors to give him corporate loans and guarantees in excess of $400... for a combined total of approximately $29 billion While some of the acquired companies were large businesses, many were so small that Tyco did not even bother disclosing them to investors in its financial statements Tyco probably liked the businesses that it was buying, but more than that, the company loved to be able to show investors that it was growing rapidly However, what Tyco seemed to like best . designed fraud involving the use of thousands of off-balance-sheet partnerships to hide massive losses and unimaginable debts from investors. While that story line is es- sentially correct, detection. Financial Reporting Failures We believe that the best training for professionals who are involved in preparing, auditing, or evaluating financial reports is an im- mersion in case studies to learn. revenue without de- tection for all those years by using a little-understood method known as mark -to- market accounting and by improperly “grossing up” sales to give the illusion of being a much larger