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

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By Howard M. Schilit and Jeremy Perler

Top executives at publicly listed corporations are almost always under pressure to provide
positive news, keep the share price high and report healthy financial reports that show growing profits for each quarter– it’s the first thing that knowledgeable investors look at. Now, pressure doesn’t always bring out what they want. In this case, it may even tempt some executives to practice creative accounting to meet their performance targets. Experience shows us that occasionally, some companies over-step professional and legal boundaries to employ extreme financial fraud, to post deceptively positive results. Most of us find out about these dishonest schemes in the media long after they occur, by which time the masterminds have cashed out their money and flown out of the country to enjoy early retirement in another world.

In his book, Financial Shenanigans, Howard M. Schilit discloses some sneaky methods that corporations use to cook their books, and create seemingly-flawless financial reports. Schilit believes that the best training accountants can get to help them sniff out ‘book keeping shenanigans’ in financial reports is a crash course in real-life financial reporting failures from the past. This concept was explained by Robert j. Sack, a former chief accountant of the Division of Enforcement at the U.S. Securities and Exchange Commission (SEC), who suggested in an interview, that accountants should be trained more like medical students who study historical findings to solve today’s problems.

To further articulate this point, Schilit quotes some wise words by King Solomon in one of the book’s opening paragraphs: “What has been will be again, what has been done will be done again; There is nothing new under the sun.” Ecclesiastes 1:9. With over two decades of experience, in accounting and finance, Schilit has become a popular authority on financial shenanigans – his book is a priceless resource for anyone looking to protect themselves and their clients from deceptive accounting practices. This interesting book gives readers a clear approach to spot and decode the red flags of financial shenanigans in publicly traded companies.

Schilit classifies financial reporting shenanigans into 3 distinct classes: Earnings manipulation tricks: Cash flow shenanigans and Key metrics shenanigans. He goes further to describe the shenanigans in even greater detail. Some of the tactics he outlines include: Non-operating income manipulation: Hidden liabilities and Shifting expenses off-balance sheet. The writing style is exciting. Schilit does a great job of breaking down complex accounting concepts in a way that is both comprehensible and engaging. He uses real-world examples of financial shenanigans to explain his points, making the information come to life for readers. Schilit also looks at use of key performance indicators (KPIs) to identify potential fraud, providing a list of common KPIs that can be used to assess a company’s financial health. To fully understand and appreciate the book, the reader should have some general knowledge of accounting and some interest in the subject. The book covers accounting tricks, both big and small, from well-known cases such as Enron and World-com to more recent examples like Valeant and Hertz.

In addition to providing guidance on detecting financial shenanigans, the book explores a wide range of related topics. It discusses how to evaluate the quality of financial statements, and how to detect if a company’s financial results are too good to be true. It also explores the role of auditors and credit rating agencies in spotting financial shenanigans, and avails insights into how investors can protect themselves from being cheated. Financial Shenanigans is clearly a valuable addition to any bookshelf. Not only is Mr. Schilit a leading authority on this subject, he is also a good writer. He is a teacher, and you can tell by the way he conveys the information, which is easy to understand and retain. This version has been updated to reflect key case studies and most important lessons from the past quarter century.

This book is available in leading bookshops and online.
Reviewed by Angela Mutiso
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