Customer Reviews

Business Fairy Tales: Grim Realities of Fictitious Financial Reporting

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I found "Business Fairy Tales" engrossing and remarkably readable. When one considers the mystique that surrounds the scandals of questionable accounting techniques and poor corporate governance it is easy to believe that only an accountant could follow the details. Not so. Dr Jackson presents all of the material facts in very human narrative making it easy to follow the methods applied. He develops the key characters enough that I could sense the opportunities that tempted them and felt I gained some insight into their motivation.
After exploring each case the author presents straightforward tests or indicators that any investor can apply.
Perhaps the recent corporate scandals are themselves indicators that we have naively relied too much on regulators, analysts and auditors to protect us from risky investments. The measures set out in "Business Fairy Tales" won't replace professional guidance, but they can equip both investors and their advisers to spot risks early and raise the right questions. All this and an enjoyable read!

This book is a series of case studies of accounting malfeasance over the last twenty years. The author reviews Enron, Worldcom, Sunbeam, Xerox, and about a dozen others whose transgressions range from too-aggressive judgment calls to massive and continuous deception. Each chapter has a natural progression from the history of the company and the leading actors, to the specific mechanisms by which they misled the investing community, and then most importantly, to the red flags in their financial documents that should have raised eyebrows long before the truth became common knowledge.

The wheat-to-chaff ratio is extremely high. Much of what passes for financial education in the popular press are storybooks and pablum. If you're investing in individual companies, the only way to move beyond gambling is to get your hands dirty with financial statements. Accounting textbooks will give you the theoretical knowledge to do this, but they won't tell you the slippery ways corporate brass can manipulate operations to fudge the numbers.

A few common schemes:

* Recognizing an arbitrarily high, one-time restructuring expense immediately after an acquisition, which is then released back into earnings in later periods to inflate income

* Recording future and contingent merchandise sales, or future income from contracts, in the current period

* Understating operating expenses by pretending as if the money had gone to the purchase of an asset

* Understating cost of goods sold by failing to account for loss of inventory through shrinkage

* Hiding liabilities in ostensibly independent holding companies that are actually controlled by the principal

While the author deftly unwinds this duplicity in a retrospective, it isn't within his power to suggest ways to determine with certainty whether fraud is occurring. That isn't the point of the book. No outside investor is privy to the full details of company operations, and many of the larger shams were so intentionally convoluted that unraveling them wasn't even within reach of the firm's auditors.

What he does suggest are certain high-level metrics for which the change, or lack of change, over time should raise suspicion. Few companies act fraudulently from the outset. They almost always have a period of normal operation that can be used as a point of comparison for their current behavior. Moreover, even when a company is violating GAAP, the numbers in their financial statements still have to be internally consistent; the paper trail must end somewhere. While actual fraud is difficult to detect, this book will provide you with the tools to cast enough doubt to steer clear of questionable prospects. In context then, it's a bargain.

Business fantasies (including turn-arounds) sound really good, until reality crashes in. How do the manipulators get away with it? Well, people don't understand what the manipulators are up to, and the fantasy is much more appealing. People looking for investing opportunities want to believe in a bright future, so they overlook minor issues like false and deceptive financial reporting.

This book describes many of the financial techniques used to create the fantasies. It can be quite useful to serious investors who want to avoid investing in fairy tales, but a reasonable knowledge of accounting is necessary to understand the material. Many of the suggestions would be very difficult to implement by anyone without access to internal records, so don't expect to use everything directly.

This is really two books in one.

First, and by far the biggest part of the book is a detailed report on how a series of companies published financial reports that were basically Fairy Tales. It goes into detail on what these companies did - almost a primer on how to do it to your own company - It's fascinating to see what these companies did.

The second part is only one chapter long, Chapter 9. It's on how to fix the problem. And the biggest factor in trying to solve the problem is the Sarbanes-Oxley Act, otherwise known as SOX. SOX puts in a bunch of rules that may or may not solve the problem but which might also be called the 'Giant Boost in Revenue for Auditing Firms Act.'

Chapter 9 is short, but is the overall view of SOX that I've seen. For instance he reports on companies going private, or not going public to get around the expense. He reports on some aspects of SOX like a mandate for a whistle-blower hotline conflicts with the law in some European contries where anonymous whistle-blowing is illegal.

Mr. Jackson, in your next edition, when you cover the new Fairy Tales that crooked management will inevitably devise, please expand Chapter 9, especially the parts about how it's working in the real world.

I highly recommend this book to anyone who works for or invests in big corporations.

This book provides a better analysis of financial accounting problems than you can find in the news media. But it's not thoughtful enough for me to recommend it. The author sounds like an academic who has little experience as an investor.
The book provides little perspective on which mistakes did the most harm. I can't tell whether the author sees any difference in seriousness of Enron's inconsistent reports to the SEC about when it adopted mark-to-market accounting and the absence of market prices to guide its so-called mark-to-market accounting (it seems obvious to me that the former is trivial and the latter is outrageous, but I wouldn't have learned that from reading this book).
I'm also disappointed that the book never takes the perspective of the villains to ask why they thought they could get away with bad accounting. Were they all confident that perpetually rising stock prices would ensure that investors would never complain? Could they have have thought they would make enough money before getting caught to profit even if they were punished? In some cases I can guess why the answer might have been yes to one of these, but in most cases I'm as puzzled as I was before reading the book.
The book suggests a number of signals that investors might look for to detect fraud. But none of them are valuable enough to change the way I read financial reports. A few, such as sales growth not meeting expectations or rising inventory / sales ratios, are valuable signs of an overrated company even though they rarely indicate accounting problems. Most of the signals the book recommends involve things like increases in receivables where there's no obvious way to distinguish routine fluctuations from changes that indicate problems, so I suspect the number of false alarms would make these signals useless.
I suspect that avoiding the stock market during bubbles is a more practical and effective way of avoiding harm from accounting fraud than trying to follow this book's advice. I'd guess that 10% of investors will learn to avoid bubbles if they try, but I doubt more than 1% will succeed at identifying fraud. If you do try to identify fraud, pay more attention to people such as Jim Chanos who have found ongoing frauds than to books such as this that only do post-mortem analysis.
The book claims that a benefit of Sarbanes-Oxley is that it restored investor confidence in corporate financial statements. This seems misguided. The stock market decline that prompted Sarbanes-Oxley was largely due to mistaken extrapolations of real trends in internet-related profits. Many investors prefer to exaggerate the role played by fraud because it distracts attention from the mistakes they made at the peak of the bubble. It's unclear whether increased investor confidence is desirable. Accounting fraud is most common at peaks of bubbles because investor confidence makes it temporarily easier to avoid questions about suspicious accounting practices. Stock markets appear to function best with moderate amounts of suspicion among investors to help keep corporate reports honest.

One of the major functions of my department is to perform financial due diligence on companies we may purchase or involve in a joint venture. Just the author's list of points to consider in examining financial statements and the potential fraud they may contain is worth the price of the book. I have the book in my office and have suggested that our staff review those major points each time they begin a new due diligence. The points are also good to review before making personal investment decisions.

The tales of corporate shenanigans are used to illustrate how his points indicated that something was going on and are very entertaining. You don't have to be an accountant to benefit from this book.

This books a very "heavy" and to some tedious subject understandable and even enjoyable. In my opinion, anyone interested in the subject of financial statement manipulation will find this book well worth while.

I found Business Fairy Tales interesting particularly in its style of presentation, it captures the facts and insight of the events which brought out one of the worst ever financial scandals in US corporate history. I would highly recommend this book for people who are interested in getting to know the details of the events preceding Enron's collapse and want to further learn about the techniques which were used to carry out these frauds, and thereby find out that Enron was not the only player in the market.

The authors' style of capturing these techniques by showing them as signals are lucid enough to understand and also comprehend the vast complexities of financial reporting, even for those who are not familiar with mainstream corporate economics.

My understanding of the book is that it was never meant to be a treatise or any reference or guidebook for investors and capitalists, but more so for audiences be it students, professionals or researchers who simply wanted to know "what happened, how it happened and why anybody did nothing to stop it"- was it simply ignorance or was it ignorance bought off by influences; without going into long investigative reports, accounting statements and balance sheets. The book provides all the essential references from SEC filings to corporate financial reporting.
As a reader, this book has brought in a lot of realization towards how Corporate America functions in spite of Governments boasting of strict regulations to curb fraudulent activities.

Fraudulent financial reporting as shown in the book referring to post Enron corporate scandals has now become a popular area of research in various universities across the country. As the Director of the California Council on Economic Education for University of Southern California, I think it was important for the author Dr.Jackson to come forward and share his knowledge with people in the academic area through his book since Forensic Accounting is now catching on as a trend, thanks to the loop-holes in corporate financial reporting and regulations.

Keeping this in mind I would also recommend this book to future accounting aspirants who are looking for a career in this field as to get an insight of malpractices in corporate accounting.

This book gives you exposure to all kinds of financial shenanigans that have taken place in the corporate world. He gives you real world facts. It makes one aware of what you should be concentrating on when analyzing a business that you are interested in putting in your investment portfolio. The author is also a great story teller and ends up with the outcome of the executives involved if they live happily ever after or had to serve time.

This is a fairly interesting book to read. I purchased this book for a class and it was easy to read. I was fortunate to be taught by the author himself. I think this book is fun to read outside of class too.