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

~ Howard Schilit (Author) "Mention the word whopper to hamburger lovers and many of them will think of the fast-food giant Burger King..." (more)
Key Phrases: recording revenue before shipment, capitalizing normal operating costs, shenanigan used, Wall Street, Boston Chicken, Problem Indicated Evidence Shenanigan Aggressive (more...)

Editorial Reviews

Review

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

Product Description

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.

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Product Details

• Hardcover: 240 pages
• Publisher: McGraw-Hill; 2 edition (March 1, 2002)
• Language: English
• ISBN-10: 0071386262
• ISBN-13: 978-0071386265
• Product Dimensions: 9.1 x 6.1 x 1.3 inches
• Shipping Weight: 1.7 pounds (View shipping rates and policies)
• Average Customer Review: 4.4 out of 5 stars  See all reviews (38 customer reviews)
• Amazon.com Sales Rank: #14,821 in Books (See Bestsellers in Books)

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Customer Reviews

Most Helpful Customer Reviews

63 of 66 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 (Norwood, MA USA) - See all my reviews

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.

62 of 66 people found the following review helpful:

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

By A Customer

This review is from: Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports (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.

38 of 39 people found the following review helpful:

5.0 out of 5 stars Great Book For Learning About Financial Trickery, February 27, 2002

By	Peter Hupalo (MN United States) - See all my reviews (REAL NAME)

This review is from: Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports (Hardcover)

"Financial Shenanigans: How To Detect Accounting Gimmicks & Fraud In Financial Reports" by Howard M. Schilit should be read by all serious, long-term, stock investors.

Schilit writes: "Financial shenanigans are actions or omissions intended to hide or distort the real financial performance or financial condition of an entity. They range from minor deceptions (such as failing to clearly segregate operating from nonoperating gains and losses) to more serious misapplications of accounting principles (such as failing to write off worthless assets; they also include fraudulent behavior, such as the recording of fictitious revenue to overstate the real financial performance). Since management is clever about hiding its tricks, investors and others must be alert for signs of shenanigans."

Schilit goes on to discuss a wide range of financial shenanigans which devalue the investment worth of a company. The shenanigans range from "recording revenue when important uncertainties exist" to "failing to accrue expected or contingent liabilities."

Each financial shenanigan is discussed in detail, and a real-world example of a public company affected by the shenanigan is given. Stock-versus-price charts are also given to show the stock-price behavior of the company's stock following the disclosure of the shenanigan (usually the stock price drops like a rock after accounting trickery is discovered).

For example, Tie Communications stock fell from a high of $40.38 per share in 1983 (five years after going IPO) to a low of $0.31 per share by 1990. The 1983 stated profits of the company were "given a shot in the arm by the sale of some investments at a substantial gain...." Schilit goes on to explain that some companies use the sale of appreciated assets to hide losses from normal business operations and make the company appear more profitable than it really is.

"Financial Shenanigans: How To Detect Accounting Gimmicks & Fraud In Financial Reports" is very easy to read, unlike many books which deal with the topic of accounting. Investors will read through this book rather quickly and that is a tribute to Schilit's writing. Yet, most investors will learn a great deal about financial reporting. Most importantly, readers will learn how to protect themselves as investors.

In addition to shenanigan busting, Schilit gives an excellent tutorial to help readers understand the basics of financial reporting and accounting. Plus, he does an excellent job of pointing out the logic of sound financial reporting.

For example, Schilit writes various "guiding principles" throughout the book to help the reader, such as "Guiding Principle: An enterprise should capitalize costs incurred that produce a future benefit and expense those that produce no such benefit."

Schilit explains that capitalizing costs which have no future benefit is one way to enhance current earnings at the expense of future earnings. Shilit discusses De Laurentiis Entertainment, a producer and distributor of motion pictures, as an example. In 1987, the SEC charged Laurentiis Entertainment with improperly capitalizing expenses which should have been charged against current earnings. Schilit's stock chart shows that shares of DEG fell from a high of $19.25 in 1986 to a low of $0.06 in 1989.

Serious, long-term investors don't want to hold stock in companies such as De Laurentiis Entertainment in 1987 and Tie Communications in 1983. Schilit gives a list of fifty-two techniques to help the investor spot financial shenanigans in advance when evaluating a company for investment.

These techniques range from looking for management incentives which encourage false reporting, to not being fooled by profits enhanced by retiring debt, to watching for worthless investments the company is making. Examining these factors together should help the investor evaluate the overall honesty and viability of the company long-term. The investor will gain insight as to whether the company is being conservative in its accounting or being too aggressive in its accounting.

I highly recommend "Financial Shenanigans" to all investors who buy individual stocks and who focus upon buying solid businesses. The book will help weed out the businesses which are only reporting "accounting" profits for the temporary benefit of management.

Peter Hupalo, Author of "Becoming An Investor"