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Financial Shenanigans

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Financial Shenanigans

How to Detect Accounting Gimmicks & Fraud in Financial Reports

McGraw-Hill,

15 min read
10 take-aways
Audio & text

What's inside?

Do you know how to spot signs of fraud in your investment’s financial report? Here’s how to watch your back.

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Editorial Rating

9

Qualities

  • Applicable

Recommendation

Author Howard Schilit writes in surprisingly plain English, and provides the reader with a toolkit to determine what’s so rotten in Denmark - or on Wall Street. You don’t have to be an experienced reader of financial reports to learn a lot from this book. Schilit offers more than theory; he provides specific examples and case studies. Learn about the manager who reduced future expenses by purchasing $12 million worth of advance postage metering at the end of the year. Find out how "Chainsaw Al" Dunlop drove up the price of Sunbeam stock by creating a $35 million reserve, all while laying off 11,000 employees. Learn the inside story of how Enron became the poster child for corporate wrongdoing. getAbstract highly recommends this book to independent investors, and anyone else who needs to understand how unethical execs cook the books. It may not save you from losing a bundle, but at least you won’t feel like you’re in a battle of wits and devoid of weaponry.

Summary

Telling Tall Tales

You don’t usually think of gray-suited economists or accountants as story-tellers, but they have told some pretty big whoppers on Wall Street lately and it cost investors billions. The Center for Financial Research and Analysis (CFRA) has defined 30 techniques, grouped into seven categories, that represent the ways that unethical companies dupe investors.

All accounting trickery shares a common perspective. Accounting’s two fraudulent strategies are to either inflate or deflate earnings. The first can be accomplished by reporting an unduly large current period revenue, or by underestimating current period expenses. Manipulating either side of the ledger will work. The second, less intuitive strategy involves deflating or underestimating earnings. Why would anyone want to do that? Well, if you underestimate your financial performance, you can shift earnings to a later timeframe when you need them to cover shortfalls. Essentially you minimize current profits in order to inflate future profits, thereby making the company appear to perform better than it actually does. Companies manipulate financial statements for three reasons:

  1. It is easy...

About the Author

Howard M. Schilit is a PhD, with a CPA. He is president of the Center for Financial Research and Analysis (CFRA), an independent research organization, and an authority on detecting accounting gimmicks. A former professor at American University, Schilit has been featured in numerous articles and network appearances, and co-authored Blue Chips and Hot Tips. The first edition of Financial Shenanigans was published in 1993.

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