OPPapers.com

Financial Sheninagians

Financial Shenanigans

Financial Shenanigans was written by Howard Schilit. The main objective of the book is to show ways companies can alter their financial accounting reports to reflect a much attractive appearance of their company’s health and growth when indeed that company is running into severe trouble. There are different ways the company can accomplish this and the author gives us “Seven Shenanigans” that companies can change the investor’s point of view towards the performance of the company. Basically, he breaks up each chapter to the particular shenanigan and discusses different techniques for achieving each shenanigan. For example, the author used Priceline.com, Cendant/CUC, AOL, and Xerox to illustrate each shenanigan. Chapter 11 and 12 of the book discusses the analyzing of financial reports and how to use financial databases to discover warning signs. Then there is another chapter on finding shenanigans in the company’s annual 10K report and how to find hints for financial shenanigans.
Financial shenanigan could be defined as actions that purposely distort a company’s financial condition and performance. The Seven Shenanigans are:
1. Recording revenue too soon.
2. Recording bogus revenue.
3. Boosting Income with one time gains.
4. Shifting current expenses to a later or earlier period.
5. Failing to disclose liabilities.
6. Shifting current income to a later period.
7. Shifting future expenses into the current period.
I think the most common shenanigans would be Revenue Recognition as we have discussed in class. This seems to be a combination of two shenanigans: Recording revenue to soon and Failing to disclose liabilities. For example, if a company received advanced payments for services to be performed in the future and if they record this payment as revenue then it has used both shenanigans because they should have showed it as a liability under unearned revenue. There are two basic strategies that Schilit...