Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition [Hardcover]

Howard Schilit (Author)

Book Description

Publication Date: March 1, 2002

Techniques to uncover and avoid accounting frauds and scams Inflated profits . . . Suspicious write-offs . . . Shifted expenses . . . These and other dubious financial maneuvers have taken on a contemporary twist as companies pull out the stops in seeking to satisfy Wall Street. Financial Shenanigans pulls back the curtain on the current climate of accounting fraud. It presents tools that anyone who is potentially affected by misleading business valuations­­from investors and lenders to managers and auditors­­can use to research and read financial reports, and to identify early warning signs of a company's problems. A bestseller in its first edition, Financial Shenanigans has been thoroughly updated for today's marketplace. New chapters, data, and research reveal contemporary "shenanigans" that have been known to fool even veteran researchers.

Editorial Reviews

Review

"Regulators, outside auditors and investors should all keep a copy handy." -- Barron's, October 2002

From the Back Cover

"Regulators, outside auditors and investors should all keep a copy handy."—Barron's

Secrets for Protecting Yourself—­­and Your Investments­—from Today's New Breed of Financial Schemes and Scams

Inflated profits ... questionable write-offs ... hidden expenses ... These and other dubious financial maneuvers have become more widespread, and harder to detect, as companies pull out the stops to satisfy Wall Street. Financial Shenanigans, 2nd Edition, describes how investors and analysts can use today's state-of-the-art tools and tactics to decipher convoluted financial reports­­and identify early warning signs that a company is in trouble.

Praise for previous editions of Financial Shenanigans...

"Is there any way an ordinary investor can protect against being torpedoed by financial scams and gimmicks? ... The answer lies in investors, large and small, becoming more skeptical and informed consumers of glowing financial reports, and efforts like Schilit's may help us get there."­­ —Louis Rukeyser

"Financial Shenanigans is must reading for every investor who desires to avoid financial losses created by the mine fields associated with 'generally accepted accounting principles.'"­­ —Thornton L. O'glove, Publisher, Quality of Earnings Report

"Deftly guides analysts through the obstacle course which financial statements can present. Financial statement users will find that study of the many examples and case studies presented in this work will greatly aid their financial task."­­ —Leopold A. Bernstein, Author, Financial Statement Analysis: Theory, Analysis, and Interpretation

"Indispensable to investors who are so often victimized by 'cooked books,' as well as those attorneys, forensic accountants, and government regulators whose work involved the discovery and pursuit of financial statement fraud."­ —William S. Lerach, Partner, Milberg Weiss Bershad Specthrie & Lerach

Today's tumultuous corporate and financial markets and blinding new technologies combine to make accounting fraud much more high-impact and difficult to detect than in the past. As an investor or decision-maker, you must arm yourself with the latest investigative tools and techniques­­or run the daily risk of falling prey to these increasingly complex, costly scams and schemes.

Financial Shenanigans, 2nd Edition, helps you fight fire with fire, giving you the state-of-the-art weapons you need to identify warnings of a company's problems before earnings come out and the damage becomes irreversible. Detailing the seven fundamental tricks that companies have used to fool auditors and investors for decades, yet providing updated information and techniques on how these shenanigans are being used in today's technologically advanced, financially savvy investment world, this fast-paced book provides updated explanations of how anyone can uncover and sidestep:

• Revenue tricks­­—Side agreements lacking economic substance, investment income listed as revenue, release of revenue improperly "held back" before a merger, and more
• Expense traps­­—Shifting of current expenses to an earlier period, costs amortized too slowly, impaired assets not written down, and others
• Liability scams­­—Failure to record expenses and their related obligations, creation of sham rebates, reducing liabilities by changing accounting assumptions, and more

Also included in this one-of-a-kind primer are recommendations of oversight committees charged with investigating questionable financial practices. Insights are provided into history's most well-known and financially devastating frauds­­including the all-too-familiar warning signs behind this decade's massive Enron debacle. Numerous checklists, graphs, tables, and an accounting tutorial appendix make in-depth explanations both clear and accessible, even for those with little or no background in accounting or financial analysis.

Though much has changed in today's business world, dishonest company executives will still stretch and even hide the truth in their search for faster revenue growth, attractive balance sheets, and higher stock prices. Financial Shenanigans digs deep into both the age-old psychology and up-to-the-minute tactics of corporate greed, and provides a step-by-step procedure for looking into a company's black-and-white financials to protect your investment­­while you still have an investment to protect.

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Product Details

• Hardcover: 296 pages
• Publisher: McGraw-Hill; 2 edition (March 1, 2002)
• Language: English
• ISBN-10: 0071386262
• ISBN-13: 978-0071386265
• Product Dimensions: 6.3 x 1.1 x 9.3 inches
• Shipping Weight: 1.7 pounds
• Average Customer Review: 4.4 out of 5 stars  See all reviews (38 customer reviews)
• Amazon Best Sellers Rank: #148,874 in Books (See Top 100 in Books)

Most Helpful Customer Reviews

72 of 74 people found the following review helpful

2.0 out of 5 stars Great Idea, But Not Very Filling. October 17, 1999

By A Customer

Format:Hardcover

The concept is obviously worthwhile, but this book is not nearly as useful as it might be. What's most annoying about "Financial Shenanigans" is the author's habit of showing a large graph of a stock's price at the time a particular shenanigan is detected by the investing public (can you say "book filler shenanigan"?), instead of providing an illustration from an actual financial statement. The author has a sloppy inclination for sketchiness and over-generalization when the subject cries for careful detail. "Financial Warnings" by Charles Mulford, is quite a bit more methodical and clear, even for the novice forensic accountant.

69 of 72 people found the following review helpful

5.0 out of 5 stars Instructive, smooth read, but not for the casual investor March 27, 2002

By Tony Ursillo

Format:Hardcover

Over the past decade, Howard Schilit has built a reputation as a financial statement bloodhound through his organization, Center for Financial Research and Analysis (CFRA). His focus is on rooting out elements of public company financial reports that lessen the quality of reported earnings. Financial Shenanigans was originally published in 1993 and much of the discussion in that book is reprinted in the current edition (with more contemporary examples to support the concepts presented). Some may accuse Schilit of glossing over the details of the specific situations and companies used to illustrate his concepts. However, that is the hidden beauty of the book. Peeling back the layers of the financials to uncover fundamental weakness before it hits the stock is not a simple task. I think Schilit does an admirable job of keeping the discussion focused and relevant, without losing the reader in too many details that aren't germane to the topic at hand. Primary topics discussed center around three areas: "aggressive" accounting (recognizing revenue too soon or delaying recognition of expenses), "conservative" accounting (delaying revenue recognition or front-loading expenses), and other misleading elements of financial statements (nonoperating items, misleading disclosure of liabilities). After a clearly worded explanation of the concept, Schilit then illustrates each breach of reporting with real-world examples. He also provides a useful (but certainly not comprehensive) tutorial at the back which explains very basic accounting concepts - I would read it first and then tackle the main chapters.

I think this book is most appropriate for investors who manage their own portfolios and spend serious time investing in (or shorting) stocks. It is not for those whose primary investment vehicles are 401(k) accounts or mutual funds and who casually buy a stock or two just to keep life interesting. Shenanigans is a good next step to investing in stocks after you have worked through the basic principles espoused in texts such as Peter Lynch's "One Up on Wall Street" or one of the Buffett books. As an investment professional, I can attest to the validity of the tools taught in this book, and I wholeheartedly recommend it to those investors who are serious about building - and protecting - their investments in the stock market.

17 of 18 people found the following review helpful

4.0 out of 5 stars Spinning Up - Getting inside Accounting Issues September 15, 2004

By Toby Lucich

Format:Hardcover

As a non-CPA, non-Auditor, I haven't spent my career learning to see through the ingenious little deceits that accounting professionals have dreamed up over the years.

"Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition" by Howard M. Schilit provides an excellent 101 on basic tactics that have scarred public companies in recent years. Schilit makes the issues very accessible for the non-accountant, and provides real world examples that tickle the long-term recall.

Looking at seven basic shenanigans, Schilit walks the reader through the logic, the implications, and how to root out these issues:

1) Recording revenue too soon,

2) Recording bogus revenue,

3) Boosting income with one-time gains,

4) Shifting current expenses to a later or earlier period,

5) Failing to record or improperly reducing liabilities,

6) Shifting current revenue to a later period, and

7) Shifting future expenses to the current period as a special charge

An excellent primer for new financial managers.