Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 3rd Edition
Howard Schilit, Jeremy Perler
From the “ Sherlock Holmes of Accounting,” the tools you need to stay a step ahead of the crooks
“Howard Schilit is the authority on forensic accounting. Financial Shenanigans is invaluable reading for market participants seeking to identify deceptive behavior in company financial statements.” Julian Robertson, legendary investor and founder, Tiger Management
“A must-read! The authors teach forensic financial statement analysis in an easy-to-digest format with lots of war stories. Guaranteed to help investors in their quest to avoid ticking time bombs in their portfolios.”
Marc A. Siegel, board member, Financial Accounting Standards Board
“This is a timeless guide to better understand how financial malfeasance can be spotted early. Financial Shenanigans teaches all of us fraud-detection-made-easy.”
Jules Kroll, pioneering private investigator and founder of Kroll Associates and K2 Global
“Required reading for every investor who desires to avoid financial losses. This new edition is a classic and better than ever.”
Thornton L. O’glove, author, Quality of Earnings
“If the original Financial Shenanigans was the Bible of detecting accounting frauds, then this latest version is the Talmud of cooked books. Regulators, audit committee members, and business journalists should be required to read this work if they are involved in public companies.”
Boris Feldman, partner, Wilson Sonsini Goodrich & Rosati, Palo Alto
“An incisive and entertaining review of the recipes used by corporations and executives to ‘cook the books.’ It’s a must-read for investors, lawyers, corporate directors, and anyone else interested in the integrity of the accounting and governance process.”
Joseph A. Grundfest, professor of law and business and codirector, Rock Center on Corporate Governance, Stanford Law School
About the Book:
With major financial scandals popping up in greater numbers―and with more inevitably on the way―it has never been more important for you to understand what dishonest companies do to trick investors. Since the early 1990s, Financial Shenanigans has been helping investors unearth deceptive financial reporting at the most critical time― before they suffer major losses.
Now, the third edition broadens its focus to include the newest, most sophisticated techniques companies use to mislead investors.
Referred to as the “Sherlock Holmes of Accounting” by BusinessWeek, Howard Schilit and renowned forensic accounting expert Jeremy Perler take you deeper into the corporate bag of tricks, exposing new levels of accounting gimmickry and arming you with the investigative tools you need to detect:
- Earnings Manipulation Shenanigans: Learn the latest tricks companies use to exaggerate revenue and earnings.
- Cash Flow Shenanigans: Discover new techniques devised by management that allow it to manipulate cash flow as easily as earnings.
- Key Metrics Shenanigans: See how companies use misleading “key”metrics to fool investors about their financial performance.
Financial Shenanigans brings you completely up to date on accounting chicanery in the global markets, shining a light on the most shocking frauds and financial reporting miscreants. This insightful, detailed guide written by recognized experts on the subject provides the knowledge and tools you need to spot even the most subtle signs of financial shenanigans.
East West Bancorp Inc. had provided helpful additional disclosure about problem loans (i.e., loans that were about to go bad) and the change in reserve levels by loan category. This disclosure, while not required, gave investors extra insight into East West’s asset base. However, as the real estate market deteriorated in 2007, the company figured that it was better off not disclosing this additional data. By now you know that when important metrics disappear, you should also head for the exits.
situation. As a result, many investors failed to notice that Boston Chicken had been losing money in its core restaurant operations. Indeed, all of the company’s profits came from noncore activities, such as interest income on loans or various service fees charged to these same franchisees. One huge (but apparently ignored) warning in the 1996 annual report was that franchisee-owned restaurants were losing a ton of money. The losses grew to $156.5 million in 1996 from $148.3 million during the
meant that Oracle would no longer record its pro rata share of Liberate’s earnings (or losses) on the Statement of Income; instead, Liberate’s periodic results would not affect Oracle’s earnings at all. And the timing could not have been more fortunate. It just so happens that the decision to cease using the equity method (which affects the Statement of Income) came at the exact time when Liberate’s earnings were plummeting and would have dramatically hurt Oracle’s profits. During that fiscal
private companies, which care more about shortchanging the tax collector. Publicly traded companies, however, certainly care about reducing taxes, but they often direct more attention toward impressing investors with smooth and predictable accrual-based earnings growth. As you recall from Chapter 3, when we introduced EM Shenanigan No. 1, Recording Revenue Too Soon, management used the techniques in that chapter because it believed that current-period results were more important than
boost is considered perfectly permissible, even the most honest companies will benefit from inflated CFFO after making an acquisition. Moreover, this boost may cause “quality of earnings” measures (such as CFFO minus net income) to improve, particularly if a company does not engage in any Earnings Manipulation Shenanigans at the time of the acquisition. Serial Acquirers Receive This CFFO Boost Repeatedly So far, we have established that by their very nature, acquisitions serve to boost