The subtitle is How to Detect
Accounting Gimmicks & Fraud in Financial Reports and the author is
Howard M. Schilit (2010, Third Edition).
You may have noticed that I have been a more active reader lately,
after some time off. In fact, I have a
new and longer commute to work, and the obvious way to pass the time has been
to revisit an old friend.
The latest choice in literature is also a manifestation of re-engaging
a formerly strong interest. I have been
a bit disconnected from thinking about stocks and the economy and how to interpret
those topics in tandem. The most recent
book is an effort to reawaken that part of the brain and to think about public companies
and accounting, and how those forces work together.
Accordingly, as the title should suggest, this read is largely an exercise
in understanding the tricks that companies will play to hit the quarterly
number and goose revenues and profits.
And the tricks, they are a plenty.
They include…
-Recording core business purchases as capex, so as to include the
expense on the investing section of the Cash Flow statement, thereby lowering
operational expenses and juicing revenues and cash flow from operations.
-Speeding up the recognition of revenue on long-term contracts, well
in advance of the scheduled installments.
-Recognizing revenue before a customer’s right of return has expired.
-Improperly allocating proceeds from a sale (which are one-time in nature)
from product sales (which are above-the-line and correlate to revenues earned).
-With unconsolidated joint ventures, playing games with whether requisite
control exists (usually 20%) such that results should show up as revenue on the
income statement or as fair value on the balance sheet.
-Depreciating assets too slowly.
-Playing around with reserves and allowances, so as to have a goody
bag to smooth out earnings from quarter to quarter.
-Messing around with the interest rate on pensions so as to reduce the
associated pension expense.
-Increasing the residual value on depreciable assets to lower the
expense.
-Showing restructuring events every quarter, even though it is an
event that should not be recurring.
-Improperly treating certain events as sales of receivables rather
than as borrowings.
-Using acquisitions to boost cash flow from operations without any
outflows (albeit the purchase itself is an outflow, but can be excluded from
the operations ledger).
As they say, use it or lose it.
I’m trying to get my brain to think and go in many different directions,
as the next phase of my life proceeds.
