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Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 3rd Edition Hardcover – May 5, 2010
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About the Author
Howard Schilit, Ph.D., CPA, is the founder and chief executive officer of Schilit Forensics LLC. Dr. Schilit is a pioneer in the field of detecting accounting tricks in corporate financial reports that mislead investors. Howard was the founder and CEO of CFRA, a global forensic accounting research organization. He has been a leading spokesman before the US Congress, the SEC, and global media outlets about the causes and early warning signs of accounting tricks in public filings. Dr. Schilit began his career as an Associate Professor of Accounting at American University and continues to teach and lecture all over the world. Dr. Schilit holds his doctorate in Accounting from the University of Maryland.
Jeremy Perler, CFA, CPA, is the Director of Research at Schilit Forensics and co-author of Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports (3rd edition, 2010). Previously, Jeremy served as the in-house Forensic Accounting Analyst for CoatueManagement, a long/short equity hedge fund; Director of Research for CFRA; and auditor for PricewaterhouseCoopers. In addition, Mr. Perler serves on the FASB's Financial Accounting Standards Advisory Council (FASAC) as a representative of the Investor Community. Jeremy holds a Master of Accounting and a BBA from the University of Michigan Ross School of Business.
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Top customer reviews
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The book hits hard on the many changes in GAAP accounting and how masterful accountants trick business analysts with gimmickry.
In total there are:
7 Earnings manipulation shenanigans – These run the gamut from simple revenue recognition discrepancies to very disingenuous sales processes that allow a company to record revenue before a sale is even made. The author boosts this section of the book with high-quality examples from leading public companies including Sunbeam and IBM. You won’t believe the extent to which high-profile companies report earnings beats with fictitious accounting numbers.
4 Cash flow shenanigans – The cash flow statement is one of the most difficult to engineer – a company produces cash, or it doesn’t. However, accounting teams still have four methods to boost cash flows when a business would otherwise produce very little free cash. This section primarily focuses on how businesses shift financing cash flows (money from stock and bond sales) into operating income. Also, this section uncovers how acquisitions and disposition can be used to make cash flow look stronger than it really is.
3 Key metric shenanigans – This section targets the key metrics used by executives when they talk about their business and brand. In particular, it examines how corporate brass can turn attention away from struggling businesses with non-GAAP measures like “same store sales” or “average revenue per user.” This section curiously touches on the subject of “bookings,” a metric used by recent IPOs like Groupon to hide their true revenue per user metrics. This is a must-read section for people who tune into corporate conference calls or who read conference call presentations.
This book will also help anyone who:
Invests in individual stocks – Particularly in large cap companies, where the sheer complexity of one or many businesses can hide the true operating performance of a company, this book gives investors a way to “fact” check the going-ons of a company from quarter to quarter. If you invest in individual stocks, this is a must-read book.
Values stocks on cash flows – The cash flow shenanigans are absolutely incredible. Anyone who uses a discounted cash flow analysis to value companies will appreciate the wisdom in Financial Shenanigans. The cash flow statement is not as impenetrable as investors seem to believe.
Wants to learn more about financial history – The book takes you through the evolution of corporate scams and accounting frauds. The author makes frequent references to massive scams like Enron and Worldcom, and even goes back in time to show you how investors could have caught onto the false accounting that made these companies the biggest frauds in Wall Street history.
What I like most about the book is that it doesn’t just expose the gimmicks that businesses use to fake their financials. Instead, the authors go to great lengths to give examples, and then explain how you can fact check the accounting of any public company.
All in all, at little more than $18 for the hardcover, this is a must-own book for any serious individual stock investor. It’s easy to read, easy to follow (there are literally hundreds of examples), and easy to apply what you learn to companies you watch immediately after reading.
Very clear graphics to follow.
Very clear break down of how companies manage money inappropriately.
Easy to follow and actually a fun read from a typically dull subject.
If anything the only two downsides from this book are below:
The transitions between sections and sub sections are repetitive, and a little annoying.
The author occasionally talks down to the reader, and I think this is unintentional.
The overall content, author knowledge, and easy to read breakdown of accounting gimmicks gets a 5 from me.
To set the expectations, this book is useful in looking behind the numbers and understanding the real significance of the swings year over year( or quarter over quarter). It will empower you in a whole different way and you will be able to get more insight into the operational strength/growth of the underlying company.
I have been reading 10-K and 10-Q reports for over 3 years now. I never buy a stock unless I have read through the recent filings. This helps me understand the state of the business, the growth prospects and to some extend the risks in the sector. I would say though, out of experience, that just looking at the numbers is not going to help much. Doing the vertical and horizontal analysis will give more insight as to the growth of the company. For sometime now I was searching for books that shed light on the analysis of "Statement of Cash flows", but I did not find any. After reading this one, I no longer need to refer to any book for analysis of annual and quarterly reports.
The author has done an amazing job of explaining how companies can manipulate( or outright break) SEC guidelines for accounting rules. The book provides easy to understand guidelines to review the company reports with a new perspective and help build our own framework for the analysis. If you understand basic accounting, what 'Income Statement', ' Balance Sheet' and "Statement of Cash Flows' stand for, you will benefit largely for reading this book.
You will mostly hear people say that its very important to read the section 7 ( or 7A) in the annual reports. This is where the management explains the growth of the company, talks about the strategy and future plans. This is the place where management tells you( the investor) what they want you to know. And they hide all the important stuff ( like revenue recognition changes, changes to depreciation schedule etc) in the foot notes, where we rarely go ( they are at the end of the reports which are already about 100 pages long). What I found surprising is that its so easy to manipulate the data to portray a stronger operational growth for the company.
One word of caution though, this is not a read and forget exercise. Once you read the book and understand the shenanigans, you will have to put considerable effort to read behind the numbers. I would say that you will require at least twice as much time to do this as compared to the time you invested earlier. But take my word, that it will be well worth it and you can save your portfolio from the shock when the companies are penalized for these tricks.