Sound Investing: Uncover Fraud and Protect Your Portfolio
Kate Mooney, Kerry Marrer
Are there dangerous red flags in the financial statements you've been receiving?
Do you know how to spot signs of trouble in the financial statements of firms you've invested your hard earned dollars in? Do you know what to look for? How to find it? What to do about it? This valuable knowledge could mean the difference between retiring with a healthy portfolio and suffering the devastating fallout of a scandal such as the Enron debacle.
Sound Investing is your insurance policy against fraudulent financial reporting. Financial accounting expert Kate Mooney gives you clear, easy-to-follow direction on finding red flags in financial statements, as well as the steps to take to act on these warning signs and build a solid wall of protection around your investments. You'll discover how to:
• Interpret the financial disclosures of public corporations
• Uncover clues to fiddling on the balance sheet
• Detect truth on the income statement and statement of stockholder's equity
• Identify the ruse in notes to the financial statements
• Evaluate evidence in the annual report and SEC filings
when the product is delivered and payment is likely. The matching principle requires that all the expenses associated with generating that revenue be included on the income statement that recognizes the revenue. This means that the cost of the warranty must be included in the same income statement as the sales revenue from the product. The problem is that those warranty costs usually happen in a later period. Because the precise cost of the warranty is unknown in the current accounting period,
interest rate charged is dependent on the credit rating of the company, which is based on repayment history and earnings. Higher earnings also support higher borrowing limits, giving the company the chance to take on more new projects with high returns but that require borrowing. To get more favorable debt terms, including a lower interest cost and higher loan limit, executives will choose accounting rules that present results most favorably. The Financial Pressure External forces are
won’t be collected. The amount of that estimate is disclosed, but that estimate is subject to judgment and based on historical patterns of nonpayment. This works just ﬁne if the customer proﬁle remains the same, but if a company begins to increase revenues by selling to less creditworthy customers, the payments will not follow the old pattern and the estimate will be too low. Inventory valuation is tricky. Accounting rules allow lots of ﬂexibility in valuing this asset, but if done consistently,
collection of control deﬁciencies that could allow a small misstatement to exist undetected. A material weakness is a signiﬁcant deﬁciency or collection of signiﬁcant deﬁciencies that could allow a material i n t e r n a l con t r ol misstatement to exist undetected. The three-tier system relies on the likelihood of the deﬁcient control allowing a misstatement and the materiality of the misstatement. If a company identiﬁes a material weakness, it is a big problem. In January 2007, Broadcom
Signiﬁcance of the Different Types of Audit Reports? The audit report, or opinion, can take several forms. The most common type of opinion is an unqualiﬁed opinion. An unqualiﬁed opinion consists of ﬁve paragraphs and opines on three things. The opinion states that the assessment of internal control over ﬁnancial reporting done by management is fair, that the internal control over ﬁnancial reporting is effective, and that the ﬁnancial statements are fair and in accordance with generally accepted