Customer Reviews

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

5 star:		(25)
4 star:		(9)
3 star:		(2)
2 star:		(1)
1 star:		(1)

 

 

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.

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.

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.

FINANCIAL SHENNANIGANS How to Detect Accounting Gimmicks & Fraud in Financial Reports 2nd Edition - Howard Schilit

Former SEC Chairman Arthur Levitt once noted that the investment markets exist through the "grace" of investors. That grace is a fragile trust easily undermined by intentional distortions of the financial performance of publicly reporting companies. Those distortions that erode investor confidence are author Howard Schilit's 'Shenanigans'. The infractions described range from benign to aggressive to outright fraudulent and Schilit is always ready with the specifics of companies who have demonstrated an excess of creativity in their arithmetic. It should be said that the information in this book is very accessible to the non-accountant. This is an illuminating read. A brief accounting tutorial in the Appendix is almost worth the price of admission. Serious investors should read this book. The "seven financial shenanigans" Schilit discusses at length are painfully familiar to portfolio owners. They are clearly explained and amply exampled. Reading this book may or may not provide an investor with the expertise to prevent a future mistake, but it will certainly add to an appreciation of the seriousness of issues as they surface in the financial media.

This accounting book covers everything we wished we learned in our introductory accounting class, namely "How do we know if the managers are lying to us?"

In a very easy to read format, the book groups accounting tricks into seven major accounting shennanigans and then cross-references them to a variety of accounting scandals. In the end, you're left with a deeper understanding of the major ways people can manipulate financial statements for their own game.


This is a surprising interesting book given how dull most accounting texts are. It's appropriate for novice investors and accounting students as well as more advanced accountants. The book practically reads itself.

Financial Shenanigans is written apparently with a popular audience in mind, but you really ought to have some previous experience in reading financial statements. Individual investors should should be practiced at researching firms with at least the resources available free/cheap on the web.

The book covers the same disasters as 2 or 3 others I've read, but is more subjective/judgemental in tone and less thorough. It also tends to sound like an promo for the author's business (research institute), where you get absolutely nothing for less than $300 (which works out to about $100/pg I think for reports.)

The book is also marred for non-professional readers by careless editing than left typos, misplaced phrases. A number of the tables for example financial statement analysis are riddled with what I imagine might be a spreadsheet font/formating problem that truncates 4 digit numbers to the left 3 digits. Most can be spotted by the form "x,xx" with the comma separator the clue, but three digit numbers chopped to two aren't so obvious, and to get the numbers to add up correctly you have to do a little tinkering to figure out which are missing a digit. Not critical, but very annoying, and doesn't look good for a book about meticulous ferreting out of subtle accounting ploys.

Still, it may help improve do-it-yourself research & analysis.

This book was updated on the heels of the WCOM and ENE scandals. There are many interesting techniques available for the researcher here. It requires a meticulous person to properly apply these techniques. However, the average person with a limited number of holdings might do very well with applying these techniques to their portfolio. See the table of contents for a listing of the 7 "financial shenanigans".

Some of the items on Schilit's governance wish list are dealt with by the Sarbanes-Oxley legislation. This will do away with much of management's self-dealing and sleight of hand when presenting pro forma earnings. Some of the "shenanigans" have been dealt with FASB promulgations so there are less of an issue.

Schilit is too harsh on the FASB over the failure to expense stock based compensation the first time it was considered. The forces that oppose the FASB n that issue generated a considerable political threat to FASB's existence in Washington. FASB backed down was preserved and we are all the better for it. FASB is addressing this issue in an exposure draft and it appears likely that it will move forward this time despite the same forces trotting out the same vacuous arguments a second time. Schilit should have given better context with his critique of the FASB.

I remember seeing a piece in Grant's interest rate observer (a newsletter) about a presentation by Trevor Harris (an accounting expert employed by a bulge bracket firm). The article stated that hedge fund managers treated Harris like a rock star, because they needed to learn how to analyze the names in their portfolios better. Harris was simply presenting topics much like are found in this book.

In this book you will learn about many of the manipulations that have been used in the past by companies. Schilit uses the "case" method of teaching. The examples almost all have a real life demonstration of how the trick manifested itself.

At times, the book reads like an advertisement for Schilit's CFRA subscription service. There are 13 such references in the index. I guess this is to be expected, but is still a distraction in an otherwise fine book.

Is this book perfect? Of course not. But, it is a well-written, useful guide for anyone who wants to understand how companies continually mislead investors by using aggressive and sometimes fraudulant accounting. Schilit gives us tons of examples of different kinds of crooked accounting including improper capitalization of expenses, revenue acceleration, receivables collection, off-balance sheet debt, etc and reviews many classic accounting frauds like Boston Chicken, Enron, Rite-Aid, Informix, and MicroStrategy. This stuff isn't the good stuff that the CEO always talks about, but rather the fine print in tedious, long 10Ks and other SEC documents. While he is very brief and doesn't always cover all of the bases, he does more than enough to educate 99.999% of investors and make them smarter and more educated in the long-run. After reading this book, you will be a cynical investor and not take anything at face value. It's strange, but most investors never seem to learn from the same accounting tricks. One person said that this book is appropriate for a college freshman, which is absurd. You do need to know the basics before you delve into this book. Unless you have been investing for 20 years and know every single accounting fraud, this book is clearly worthwhile. As someone who works in the hedge fund business and remembers college, I can say with confidence that Schilit's book is a must-read and is great as a learning resource.

Financial Shenanigans was required reading at the first hedge fund that I worked at. I now keep a copy in my office and use it for reference. This book is written in simple language that allows the novice to benefit from the insights of a true industry professional. Many mutual funds and hedge funds subscribe to Howard's institutional research service because of the quality of his work. This book helps level the playing field for individual investors. It helps by explaining medthods that investment professionals use to find corporations that mask poor financial performance.

NOTE: You are viewing the original version of the book (published in 1993). Schilit released a new edition in March 2002, which you can also find on Amazon.

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, though it remains as relevant today as it was then (maybe more so). 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.