An insider's guide to understanding and eliminating accounting fraud How do these high-profile accounting scandals occur and what could have been done to prevent them. Hidden Financial Risk fills that void by examining methods for off balance sheet accounting, with a particular emphasis on special purpose entities (SPE), the accounting ruse of choice at Enron and other beleaguered companies. J. Edward Ketz identifies the incentives for managers to deceive investors and creditors about financial risk and also shows investors how to protect their investments in a world filled with accounting and auditing frauds. J. Edward Ketz, PhD (State College, PA) is MBA Faculty Director and Associate Professor of Accounting at Penn State's Smeal College of Business. He has been cited in the press nearly 300 times since Enron's bankruptcy, including The New York Times, The Wall Street Journal, and The Washington Post.. He has a regular column in Accounting Today.
"Ketz' discussion is fascinating, although all too useful to future scamsters wanting to find out just how those clever guys at Enron did it." (UPI Business and Economics, August 11, 2003)
From the Inside Flap
The parade of catastrophic accounting scandals, chief among them the Enron debacle, has intrigued business and the general public as few corporate scandals ever have. The extraordinary number of people materially affected by these episodes, coupled with the irresistible spectacle of base human greed run wild, guarantees that public attention will not soon recede. Everyone agrees that "mistakes were made." There are two very different responses, however, on what to do about it. Are there simply a few bad apples whose just punishment will bring the financial stars back into alignment? Or are the scandals the product of profound systemic failures, the remedy for which can only be revolutionary reform? Accounting professor and renowned authority, Edward Ketz, emphatically proclaims the latter and offers a comprehensive analysis of how firms bury risk, why nobody stops them, and what to do about it in Hidden Financial Risk: Understanding Off-Balance Sheet Accounting.
In Hidden Financial Risk, Ketz thoroughly and accessibly explains the dubious methods by which firms hide debt and the failings by managers, directors, auditors, regulators, and investors who allowed these methods to poison financial reporting. Ketz places particular emphasis on understanding Special Purpose Entities (SPEs), Enron’s preferred method of deception. Among other services, this compelling analysis:
Identifies the incentives for managers to deceive investors and creditors about the firm’s financial risk
Illustrates the equity method, lease accounting, and pension accounting, popular methods of Off-Balance Sheet accounting, and explains how investors can deconstruct them
Examines the failure of boards of directors, accountants, the FASB, and the SEC to minimize accounting failures
Discusses what must be done to reduce the number of corporate managers who lie in financial reports
Shows what individual investors must do to protect their investments in a world filled with accounting and auditing fraud
Explains how the Sarbanes-Oxley bill will affect financial reporting
Ketz concludes with an illuminating look at Arthur Andersen who, while one of the biggest losers in the accounting scandals, may nevertheless hold the key to the industry’s resuscitation. Financial reporting is in critical condition. Edward Ketz supplies a compelling diagnosis, prescription, and vision of its road to recovery in Hidden Financial Risk.
J. Edward Ketz, Ph.D., a member of the Penn State faculty since 1981, has authored and edited 17 books as well as numerous articles. His book Hidden Financial Risk (Wiley, 2003) examines the corporate culture and the institutional setting that engendered recent accounting scandals, informs investors how to protect themselves, and suggests improvements for the profession. Accounting Ethics (Routledge, 2006) investigates the accounting profession over the last century by scrutinizing its positions on ethics and its roles in myriad accounting scandals and by exploring how to reduce the number of accounting frauds. Fair Value Measurements (BNA, 2007), co-authored with Mark Zyla (Managing Director at Acuitas, Inc.), summarizes the FASB's efforts in this area, supplies the conceptual ideas behind this topic, describes methods employed by valuation assessors, and reviews criticisms of fair value measurements.
Professor Ketz has been cited in the popular and business press, including The Wall Street Journal, The New York Times, The Washington Post, Business Week, Bloomberg News, USA Today, and Chicago Tribune, on topics such as accounting for stock compensation, business combination accounting, accounting for derivatives, the meltdown in the subprime mortgage sector and related CDOs, and evaluations of specific corporate accounting practices at Enron, Tyco, Rite Aid, HealthSouth, AIG, CVS, Starbucks, Merrill Lynch, Citigroup, and other corporations. He also has appeared as an accounting commentator on CNBC, CNNfn, and National Public Radio. Some recent citations are:
* Benner, "Why Investors Should Steer Clear of Blackstone," CNNMoney.com (March 11, 2008). * Weil, "Lehman Brothers Should Come Clean on R3 Capital," Bloomberg (July 31, 2008). * Gordon and Bernard, "Banks Want to Suspend Accounting Rule in Bailout," Associated Press (September 28, 2008). * Beck, "Meltdown 101: 'Goodwill' During Bad Recession," Associated Press (March 4, 2009). * Healy, "Losses in Good-Will Values Compound Bank Troubles," New York Times (April 27, 2009). * Gordon, "U.S. Accounting Board Tightens Loan Rules," Associated Press (May 19, 2009). * Henry, "Faulty Numbers," Business Week (May 19, 2009). * Freed, "General Electric Debt Rating Still Looks High," The Street.com (July 8, 2009).
Dr. Ketz writes a column about financial reporting issues, "Accounting Cycle." Some recent essays are (http://accounting.smartpros.com/x28479.xml): * "Enron and the Banking Fiasco," (October 13, 2008). * "Goodwill Impairment Losses for Fiscal 2008," (November 10, 2008). * "Representatives Perlmutter and Lucas: Accounting Truth or Consequences," (March 16, 2009). * "Citigroup Remains in Critical Condition," (May 11, 2009). * "CVS Caremark Leases," (September 7, 2009).
14 of 18 people found the following review helpful:
5.0 out of 5 starsAccounting for the Investor, August 3, 2003
By A Customer
This review is from: Hidden Financial Risk: Understanding Off Balance Sheet Accounting (Hardcover)
While experts wring hands and say "mistakes were made," this book gives average investors the "how to" in order to make sense of annual reports and balance sheets. It seems to blow the lid off of the various methods that managers used to hide bad debt and shaking investments. Undoubtly, good for most investors who want to avoid a repeat of Enron. It also offers a pretty explanation of why major accounting and auditing firms can't be trusted. At last, a book that allows investors to keep their investments and earn money--instead of CEOs and corporate executives. Favorite Chapter: How to Hide Debt with Pension Accounting.
Help other customers find the most helpful reviews
This review is from: Hidden Financial Risk: Understanding Off Balance Sheet Accounting (Hardcover)
An expert describes some the main devices used to distort financial information for public consumption, focusing on those which hide debt. I found it both informative and highly readable. Some background in business accounting is helpful but not necessary for the reader.
Help other customers find the most helpful reviews
This review is from: Hidden Financial Risk: Understanding Off Balance Sheet Accounting (Hardcover)
This is a book that elevates investors to another level. The author describes how management can hide debt with the equity method, lease accounting, and pension accounting. Looking at the consolidated financial statement is not enough to determine the financial condition of a company. Investors must dig deeper and read the footnotes. This book educates investors about how to read some of these footnotes. Remember what Warren Buffett said:
* Rule No. 1: Never lose money
* Rule No. 2: Never forget rule No 1
This book helps investors do just that. I highly recommend it.
- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market
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First Sentence:
Financial events in the last two years raise questions about the role of modern-day managers. Read the first pageKey Phrases - Statistically Improbable Phrases (SIPs): (learn more)
net pension cost, synthetic leases, accrued pension cost, analytical adjustments, unrecognized items, prior service cost, prepaid pension cost, projected benefit obligation, year during retirement, nonaudit services, denote negative numbers, accounting court, accounting restatements, accounting ethics, financial statement readers, independence codes, capital market line, lease accounting, auditor independence, pro forma numbers, pension accounting, materiality standard, accounting abuses, pro forma earnings, security market line
Key Phrases - Capitalized Phrases (CAPs): (learn more)
New York, White Paper, Arthur Andersen, Wall Street Journal, Boston Chicken, John Wiley, Waste Management, Big Four, Financial Accounting Standards Board, Harvey Pitt, United States, General Mills, Global Crossing, Lease Payable, Washington Post, Accounting Principles Board, Accounting Today, Nittany Fireworks, Continental Vending, Tangible Asset, Upper Saddle River, Financial Corporation, Independence Standards Board, Coca-Cola Enterprises, Delta Air Lines
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