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Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports

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Presents tools that one who is potentially affected by misleading business valuations can use to research and read financial reports, and to identify early warning signs of a company's problems. This work contains chapters, data, and research that reveal contemporary shenanigans that have been known to fool even veteran researchers.


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Presents tools that one who is potentially affected by misleading business valuations can use to research and read financial reports, and to identify early warning signs of a company's problems. This work contains chapters, data, and research that reveal contemporary shenanigans that have been known to fool even veteran researchers.

30 review for Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports

  1. 4 out of 5

    Robert W

    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 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 quality 2. Recording bogus revenue 3. Boosting income with one-time gains 4. Shifting a current expense to a later or earlier period 5. Failing to record or improperly reducing liabilities 6. Shifting current revenue to a later period 7. Shifting future expenses to the current period as a special charge All 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.

  2. 4 out of 5

    Irrelephant

    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 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.

  3. 5 out of 5

    Rabeya

    Extra one star for the style of presenting the cases and real life situation! Accounting gimmicks and ethical business always been my favourite research area and I never found such an interesing book in this area before! I think the newest edition will also cover changing situation under IFRS vs GAAP in details!

  4. 4 out of 5

    Rohit Kadam

    What makes this book unique is that there is not a lot of material out there on this topic which is easily relatable to a practicing analyst. While the book could be even mote detailed, I think it serves well to identify and address the main methods companies to use for aggressive accounting to mislead investors. Must read for someone interested in this topic but not very experienced. The book uses not just theory but numerous examples and case studies to drive home the point. What makes this What makes this book unique is that there is not a lot of material out there on this topic which is easily relatable to a practicing analyst. While the book could be even mote detailed, I think it serves well to identify and address the main methods companies to use for aggressive accounting to mislead investors. Must read for someone interested in this topic but not very experienced. The book uses not just theory but numerous examples and case studies to drive home the point. What makes this book unique is that there is not a lot of material out there on this topic which is easily relatable to a practicing analyst. While the book could be even mote detailed, I think it serves well to identify and address the main methods companies to use for aggressive accounting to mislead investors. Must read for someone interested in this topic but not very experienced. The book uses not just theory but numerous examples and case studies to drive home the point.

  5. 5 out of 5

    May Ling

    A solid basic book on what to look for when analyzing the shenanigans of a company. It gave me a few good ideas on adjusting my process. I woudl recommend to those that are learning to become skeptics of management teams and earnings releases.

  6. 5 out of 5

    Alex Song

    best book ive read all year

  7. 4 out of 5

    Tom

    Reads like a novel with the content of a textbook.

  8. 4 out of 5

    InvestingByTheBooks.com

    Greed is as old as mankind. Unscrupulous people will try to trick others out of their money. One arena for this is the business sector and especially after the IT-crash there was a number of high profile accounting scandals. Financial Shenanigans has become the de-facto standard work on detecting accounting gimmicks and fraud in financial reports. Howard Schilit is a former accounting professor who left academia and founded two consultancy firms specializing in so-called forensic accounting. Greed is as old as mankind. Unscrupulous people will try to trick others out of their money. One arena for this is the business sector and especially after the IT-crash there was a number of high profile accounting scandals. Financial Shenanigans has become the de-facto standard work on detecting “accounting gimmicks and fraud in financial reports.” Howard Schilit is a former accounting professor who left academia and founded two consultancy firms specializing in so-called forensic accounting. Having sold the prior Centre for Financial Research and Analytics, the author is today the CEO of Schilit Forensics, helping clients research companies of interest. Schilit is, as Barron’s puts it, a financial sleuth and this book will provide the reader plenty of advice on how not to be taken advantage of. The second edition of this book contains five parts. After an introduction the meatiest part of the book is the second where The Seven Shenanigans are presented, i.e. the most common ways to intentionally distort a company’s financials to make the current profits and the financial strength look stronger (or weaker) than is warranted by actual performance. In order the shenanigans are 1) Recording revenue too soon or of questionable quality, such as recording revenue before a service has been provided, before a shipment has been made or before the customer’s full acceptance or recording sales to an affiliated party and much more; 2) Recording bogus revenues, as when recording cash from lending transactions as revenue or any recording of sales without economic substance; 3) Boosting income with one- time gain, which includes increasing profits by selling undervalued assets or creating income by reclassification of balance sheet items; 4) Shifting current expenses to a later or earlier period, for example capitalizing normal operating costs, amortizing costs too slowly, unduly reducing asset reserves etc.; 5) Failing to record or improperly reducing liabilities, such as failure to record expenses and related liabilities when future obligations remain or recording revenue when cash is received even though future obligations remain; 6) Shifting current revenue to a later period by for example creating reserves and releasing them into income in a later period or improperly holding back revenue before an acquisition closes and; 7) Shifting future expenses to the current period as a special charge - that could include improperly inflating the amount of a special charge or accelerating expenses into the current period. The first five of those shenanigans aim to inflate the current period and to make it look better than it is. The last two instead deflate the current period to be able to look better than merited in the future. The creative accounting that tweaks the revenues is in a way worse than that which misrepresents costs as the revenues form the basis for the entire profit and loss-statement. The topics discussed are all relevant but to some extent I feel that the book is too profit and loss-centric. The balance sheet get’s very little attention. The chapters include a number of guiding accounting principles and there is an appendix tutorial describing the basics of financial reporting. Despite this, it is a clear benefit for the reader to have some basic understanding of accounting principles and concepts. The much shorter parts three through five handle areas such as how to search for signs of improper accounting by using databases and analysing company reports, trickier areas such as acquisition accounting and financial reporting in companies that due to their business model don’t fit into standard accounting models, and finally there is a short historical review of financial tricksters with special attention given to Enron. Especially the history part is so short that it becomes close to unnecessary. However, the part on analysing financial reports does its job. To sum up, this book should be mandatory complementary reading in every accounting class. Apart from learning how accounting ought to work, everybody should know how some people come to misuse accounting.

  9. 4 out of 5

    Chris Esposo

    The best of it's kind, a case study approach to forensic accounting, similar to "What's Behind the Numbers?", published by Wiley competitor McGraw Hill. "Financial Shenanigans" has a simple theme -there are all kinds of ways to obfuscate business activities when non-GAAP accounting practices are reported to the public, and many of these tricks center on a range of things from simply allocations of liabilities to profits, to more sophisticated measures like coordinating with The best of it's kind, a case study approach to forensic accounting, similar to "What's Behind the Numbers?", published by Wiley competitor McGraw Hill. "Financial Shenanigans" has a simple theme -there are all kinds of ways to obfuscate business activities when non-GAAP accounting practices are reported to the public, and many of these tricks center on a range of things from simply allocations of liabilities to profits, to more sophisticated measures like coordinating with vendor/supplier/buyers to quicken/slow down/exaggerate purchases often manifesting themselves as channel stuffing, double counting, or mis-attributing profits from serial acquisitions to name a few. The later is probably the best known trick as the lack of strict government oversight in this case led to several M&A booms (and busts) over the past few decades. As a personal aside, I found it especially funny that one of the small-fry cases the text reviews was one from Kevin O'Leary, currently a co-host of "Shark Tank", the so-called "Donald Trump of Canada". Specifically, his potentially underhanded sale of his company "The Learning Company", a sort of shell firm that was able to portray itself as a profitable company by rapid acquisitions of other companies and listing those as assets for the black in their books, to Mattel, who themselves were doing the same thing. Unfortunately for Mattel, their accountants failed to do their due diligence and dramatically overpaid for a company made up of smaller entities, many of which were bleeding capital quarter-over-quarter. Mattel's CEO resigned shortly after reporting multi-billion dollar losses, and in hindsight, we've seen Mattel in general declining in relative to terms since that deal with other main competitors, like Hasbro. The book outlines this trick several times in many different cases, and it never. One case of this that is briefly mentioned at the beginning of the text, but not actually cases was that of CUC, who's acquisition of Sierra Online destroyed that company, a story that has still not been properly written on but any text in the market. What makes many of these tricks hard to stop is they often deal with activities that are not outright fraud, i.e. writing bogus numbers to the book, but instead deal with manipulating business operations in sales and supply chains to shift regular institutional activity to meet or exceed quarterly reports. In recent time, company's like IBM have been accused of this sort of thing in the business press. The book is a good intro to this field and combined with either a formal course in accounting and/or forensic accounting, especially focused on fraud analytics, could probably serve one well in a plethora of applications from traditional corporate finance and audit/accounting, to informing valuation of companies for investment and/or IPO purposes. For the later use-case, it's especially good that so many case-studies of accounting trickery are outlined, to provide historical context in ways the recently (or imminently public) company could be portraying themselves more desirable than they really are, especially since many of these newer firms will be engaging in high-volume sales in their first few quarters at least, an activity that is definitely rife with potential manipulation. Highly recommended

  10. 5 out of 5

    Tee

    For investing, think Warren Buffett. For detecting accounting gimmicks, think Howard Schilit. "Accounting is the language of business, and you have to learn it like a language To be successful at business, you have to understand the underlying financial values of the business," said Warren Buffett. To understand the language of business, read Financial Shenanigans. Financial Shenanigans is the best book about accounting gimmicks that I have ever read. I read it like watching a detective horror For investing, think Warren Buffett. For detecting accounting gimmicks, think Howard Schilit. "Accounting is the language of business, and you have to learn it like a language… To be successful at business, you have to understand the underlying financial values of the business," said Warren Buffett. To understand the language of business, read Financial Shenanigans. Financial Shenanigans is the best book about accounting gimmicks that I have ever read. I read it like watching a detective horror movie with my heart pounding along the way. This book is a real page-turner and hard to put it down. I immersed myself in the book all day while my wife and kid were doing their things around me over the weekend. Warren Buffett explains businesses and investing in such a way that laypeople could understand, so do Schilit, Perler, and Engelhart for detective accounting. This book should be the required reading for all investors and used in basic accounting or finance classes. It will benefit financial world tremendously. I am a fan of Schilit. I read all four editions of his books and use them as a reference from time to time. The book is very easy to follow. Schilit, Perler, and Engelhart make creative accounting fun and easy to detect. They explain gimmicks after gimmicks in plain English. It is a rare gem. Investors may also want to check out the second and third editions which have the wonderful checklists at the end of the books.

  11. 4 out of 5

    Bùi Hà

    I started this book around 1 year ago and have had hard time to finish it due to my lack of knowledge in accounting and my lose of interests while reading the book. I expected the books to be more like a seminar documents with more detailed examples / problems rather than broad claims and general examples (Who don't know Enron, Worldcom, Toshiba were a fraud?). However, the book does provide useful accounting knowledge, especially for accounting beginners so I rate it 4 stars. ## Pros ## This book I started this book around 1 year ago and have had hard time to finish it due to my lack of knowledge in accounting and my lose of interests while reading the book. I expected the books to be more like a seminar documents with more detailed examples / problems rather than broad claims and general examples (Who don't know Enron, Worldcom, Toshiba were a fraud?). However, the book does provide useful accounting knowledge, especially for accounting beginners so I rate it 4 stars. ## Pros ## This book teaches you how to read through the line and connect accounting items in the finance reports to understand the health of beneath business. In presents various ways accounting items can be manipulated and methods to detect those manipulations. Each chapter also includes various real life use cases of businesses, whose managers intentionally manipulated their businesses' earnings, cash flows, key financial metrics, to deceive investors. ## Cons ## The examples in this book is not detailed enough and you might need to actually dig into the company's IR report to find the gimmicks. Some companies were requested by law enforcement at the time the gimmicks were detected, so you might not able to find the problematic report. Some points in the books to me don't sound like a gimmicks to me as they are not 100 percent illegal, so you were left with uncertainties whether the fraud was there.

  12. 4 out of 5

    Stefan Bruun

    While none of the ideas in this book are mind-blowing. I really liked the framework. Im sure the framework will help asking the right questions when evaluating the financial performance of potential acquisition targets. I gave the book four rather than five stars because it didn't give me a feeling of having learnes something new. Rather, most people with flair for accounting or finance would probably be able to come up with similar explanations after the fact when fraud has been detected, but While none of the ideas in this book are mind-blowing. I really liked the framework. Im sure the framework will help asking the right questions when evaluating the financial performance of potential acquisition targets. I gave the book four rather than five stars because it didn't give me a feeling of having learnes something new. Rather, most people with flair for accounting or finance would probably be able to come up with similar explanations after the fact when fraud has been detected, but the book will probably be a solid starting point as a checklist for the most common things to look out for - it will save time in terms of researching on how companies historically have fitted the numbers to look in a particular way.

  13. 4 out of 5

    Ray Smith

    Very informative. And surprisingly entertaining, though mostly to chuckle at the incredible ways that companies would cheat gullible investors. I liked how the authors used real-life examples (e.g., Enron, WorldCom, etc.) to back up their points. Next to Warren Buffett's letters, this is the best book on investing I've read, though admittedly I haven't read a lot.

  14. 4 out of 5

    Ashfaque Reza

    If there is an option to give 6 star, I would like to give. The author gives extensive effort to showcase financial gimmicks with real life example. But sometimes the author stretched few points to give more emphasis. Overall, Its a solid book.

  15. 4 out of 5

    Aditi Yadav

    Amazing read for anyone (with or without accounting background) who wants to understand how to detect accounting frauds by companies. It has an extensive explanation for each type with examples. Easy and fun to read. Will read it again!

  16. 5 out of 5

    ajay Kumar

    good book..lot of things which ideally you should and can put into practice while researching a stock

  17. 5 out of 5

    Stacy

    Didn't finish this book since as a cpa lawyer, the discussions are pretty much basic knowledge....

  18. 5 out of 5

    Jared

    Probably a good book for somebody better versed in accounting.

  19. 5 out of 5

    Giedrius Andriunaitis

    What A book! What ‘A’ book!

  20. 4 out of 5

    Michael Burg

    How can you make accounting interesting? Read this book. But you will first need a solid understanding of GAAP.

  21. 5 out of 5

    Pedro Zagury

    Tiring read but with good illustrations on accounting schemes. Hard to memorize them all.

  22. 5 out of 5

    Fengyang Song

    4.5 stars. Great details on how creative one can get when interpreting and defining each line item to their benefit.

  23. 4 out of 5

    Maciek Lesiczka

    Informative book filled with many real-life examples. Must read.

  24. 4 out of 5

    Jason

    This book was a fun read.

  25. 4 out of 5

    Andrew Holmes

    A clear and readable account of how companies bend - and sometimes break - accounting rules to flatter their results.

  26. 5 out of 5

    Kartikeya Agarwal

    If you thought investing was easy, read this book.

  27. 5 out of 5

    Anandh Sundar

    The must read for folks interested in uncovering financial statement fraud

  28. 5 out of 5

    Julia

    Very in-depth look at the different accounting tricks and assumptions used in order to beef up a company's performance, with plenty of helpful real life examples featuring companies' actual financial information and footnotes. Useful for investors and accounting students

  29. 4 out of 5

    Maxim

    A must read for financial analysts and investors. I found this book useful even as I read it after completing my CFA. The author describes most common accounting tricks management may use to manipulate fin reportings, he names signs of a possible accounting fraud as "red flags". The book is full of recent real life examples, some humour also presents. There is a usefull summary of all technics in the book's end. Main lessons I learned from the book are: 1) you should always be sceptiacal about A must read for financial analysts and investors. I found this book useful even as I read it after completing my CFA. The author describes most common accounting tricks management may use to manipulate fin reportings, he names signs of a possible accounting fraud as "red flags". The book is full of recent real life examples, some humour also presents. There is a usefull summary of all technics in the book's end. Main lessons I learned from the book are: 1) you should always be sceptiacal about any fin statements you read, especially in the case when management has high motivation to manipulate and corporate control mechanisms are weak 2) conservatism is a virtue for management when preparing fin statements, look for agressiveness to identify red flags 3) look for material changes in statements for the different years. THis one is particulary useful, as when I was reading the book I took fin statement of one company to better learn the key concepts, and when I was was comparing reports for the two consecutive years, I found company materially changed discount rates while evaluating inventory, which substantially inflated reported inventory. So I strongly recomment you to read the book and looking through the statements at the same time - that really helps to better understand and remember the technics of spotting financial shenanigans.

  30. 5 out of 5

    Marcelo Bahia

    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 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!

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