Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Third Edition

This book was updated on the heels of the WCOM and ENE scandals. There are many interesting techniques available for the researcher here. It requires a meticulous person to properly apply these techniques. However, the average person with a limited number of holdings might do very well with applying these techniques to their portfolio. See the table of contents for a listing of the 7 "financial shenanigans".Some of the items on Schilit's governance wish list are dealt with by the Sarbanes-Oxley legislation. This will do away with much of management's self-dealing and sleight of hand when presenting pro forma earnings. Some of the "shenanigans" have been dealt with FASB promulgations so there are less of an issue.Schilit is too harsh on the FASB over the failure to expense stock based compensation the first time it was considered. The forces that oppose the FASB n that issue generated a considerable political threat to FASB's existence in Washington. FASB backed down was preserved and we are all the better for it. FASB is addressing this issue in an exposure draft and it appears likely that it will move forward this time despite the same forces trotting out the same vacuous arguments a second time. Schilit should have given better context with his critique of the FASB.I remember seeing a piece in Grant's interest rate observer (a newsletter) about a presentation by Trevor Harris (an accounting expert employed by a bulge bracket firm). The article stated that hedge fund managers treated Harris like a rock star, because they needed to learn how to analyze the names in their portfolios better. Harris was simply presenting topics much like are found in this book.In this book you will learn about many of the manipulations that have been used in the past by companies. Schilit uses the "case" method of teaching. The examples almost all have a real life demonstration of how the trick manifested itself.At times, the book reads like an advertisement for Schilit's CFRA subscription service. There are 13 such references in the index. I guess this is to be expected, but is still a distraction in an otherwise fine book.

FINANCIAL SHENNANIGANS How to Detect Accounting Gimmicks & Fraud in Financial Reports 2nd Edition - Howard SchilitFormer SEC Chairman Arthur Levitt once noted that the investment markets exist through the "grace" of investors. That grace is a fragile trust easily undermined by intentional distortions of the financial performance of publicly reporting companies. Those distortions that erode investor confidence are author Howard Schilit's 'Shenanigans'. The infractions described range from benign to aggressive to outright fraudulent and Schilit is always ready with the specifics of companies who have demonstrated an excess of creativity in their arithmetic. It should be said that the information in this book is very accessible to the non-accountant. This is an illuminating read. A brief accounting tutorial in the Appendix is almost worth the price of admission. Serious investors should read this book. The "seven financial shenanigans" Schilit discusses at length are painfully familiar to portfolio owners. They are clearly explained and amply exampled. Reading this book may or may not provide an investor with the expertise to prevent a future mistake, but it will certainly add to an appreciation of the seriousness of issues as they surface in the financial media.

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.

"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 pic