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.
2003 (the quarter before the fraud was revealed), Parmalat’s unreported debt amounted to an astonishing €7.9 billion. The company’s net worth, reported to be €2.1 billion, was actually negative €11.2 billion—an inconceivable €13.3 billion overstatement! The centerpiece of Parmalat’s fraud seems to have been the company’s use of offshore entities to fraudulently hide fictitious or impaired assets, fabricate the reduction of debt, and create fake income. The scope of the fraudulent activities that
later convicted felon) O. J. Simpson was assigned the duty of faithfully protecting investors’ interests by serving on the audit committee of Infinity Broadcasting in the 1990s. It’s difficult to imagine O. J. navigating his way through the intricacies of a Balance Sheet, let alone overseeing financial reporting and disclosure. Investors should ensure that outside board members have the essential skills and serve only on appropriate committees that suit their technical skills. Failure to
Time The larcenous executives at Tyco paid an enormous price. On top of a $50 million SEC penalty, the company agreed to pay a record-breaking $3 billion in restitution to settle shareholder lawsuits. Moreover, Kozlowski and Swartz were convicted of looting the company and inflating its stock price, and both were sentenced to up to 25 years in prison. Warning for Tyco Investors—Negative Free Cash Flow, Net of Acquisitions Detailed cash flow analysis would have helped investors notice
On the Statement of Income, COGS is subtracted from revenue to yield a company’s gross profit, an important measure of the profitability of the company’s products. The Statement of Cash Flows is sometimes not as straightforward. The economics of purchasing goods to be sold to customers suggests that these purchases should be classified as an Operating activity on the Statement of Cash Flows. Normally, this would be the case. Curiously, some companies treat these purchases as an Investing
example, a retail chain may present cash flow excluding a substantial one-time cash payment for a legal settlement. Some common metrics used include pro forma operating cash flow, nonGAAP operating cash flow, free cash flow, cash earnings, cash revenue, and funds from operations. * * * Accounting Capsule: Pro Forma Numbers—“Apples-to-Apples” Comparison Whenever management makes significant accounting or classification changes or even makes an acquisition, comparisons with earlier period