Summary of Howard M. Schilit, Jeremy Perler & Yoni Engelhart's Financial Shenanigans, Fourth Edition

By IRB Media

Please note: This is a companion version & not the original book.

#1 The lure of accounting gimmickry is particularly strong at struggling companies that are trying to keep up with their investors’ expectations or competitors’ performance. While investors have become more savvy to these gimmicks over the years, dishonest companies continue to innovate to find new tricks to fool shareholders.

#2 The trash hauler Waste Management Inc. inflated its pretax earnings by $1. 7 billion over a six-year period starting in 1992. The company was notorious for finding ways to inflate profits by deferring expenses to a later period.

#3 The practice of creating merger-related reserves continued in late 1997, when CUC was about to merge with HFS to form Cendant. In 1996 and 1997, investigators found more than $500 million of bogus operating income.

#4 Enron was a natural gas company that, within a few years, morphed into an enormous commodities trading company. Its revenues grew meteoricly, but its net income grew much more slowly. The company’s revenue was reported as if it were growth that was unprecedented, when in reality, it was just the company changing its business model.

• Language: English
• Publisher: IRB Media
• Release date: Apr 13, 2022
• ISBN: 9781669385448

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Insights on Howard M. Schilit and Jeremy Perler & Yoni Engelhart's Financial, Shenanigans Fourth Edition

Contents

Insights from Chapter 1

Insights from Chapter 2

Insights from Chapter 3

Insights from Chapter 4

Insights from Chapter 5

Insights from Chapter 6

Insights from Chapter 1

#1

The lure of accounting gimmickry is particularly strong at struggling companies that are trying to keep up with their investors’ expectations or competitors’ performance. While investors have become more savvy to these gimmicks over the years, dishonest companies continue to innovate to find new tricks to fool shareholders.

#2

The trash hauler Waste Management Inc. inflated its pretax earnings by $1. 7 billion over a six-year period starting in 1992. The company was notorious for finding ways to inflate profits by deferring expenses to a later period.

#3

The practice of creating merger-related reserves continued in late 1997, when CUC was about to merge with HFS to form Cendant. In 1996 and 1997, investigators found more than $500 million of bogus operating income.

#4

Enron was a natural gas company that, within a few years, morphed into an enormous commodities trading company. Its revenues grew meteoricly, but its net income grew much more slowly. The company’s revenue was reported as if it were growth that was unprecedented, when in reality, it was just the company changing its business model.

#5

WorldCom’s growth came from making acquisitions. However, the company used aggressive accounting practices to inflate its earnings and operating cash flows. In order to please Wall Street, WorldCom began moving ordinary business expenses from its Income Statement to its Balance Sheet.

#6

WorldCom's days were numbered. On July 21, 2002, the company filed for Chapter 11 bankruptcy protection. The company emerged from bankruptcy in 2004. Previous bondholders were paid 36 cents on the dollar in bonds and stock in the new company, while the previous stockholders were wiped out completely.

#7

The 2008 financial markets carnage has left a painful memory for all homeowners and investors. For example, Lehman Brothers had a worse outcome than the 1929 stock market collapse, as its share price collapsed in September 2008 and will be remembered as the biggest bankruptcy in U. S. corporate history.

#8

The Valeant scandal is a less blatant example of corporate fraud, but it is still a case of corporate management using misleading metrics to dupe some of the most successful institutional investors.

#9

Financial shenanigans are actions taken by management to mislead investors about a company’s financial performance or economic health. They can be detected in the numbers presented by carefully reading a company’s Balance Sheet, Income Statement, and Statement of Cash Flows.

#10

Investors judge corporate executives harshly when they fail to meet Wall Street’s earnings expectations. To steer the share price higher, some companies engage in Earnings Manipulation to manipulate earnings.

#11

The Statement of Cash Flows is not immune to accounting gimmicks, and in many ways, manipulating cash flow is just as easy as manipulating earnings.

#12

There is a growing number of company-specific and industry-specific metrics that are presented outside of the traditional financial statements format. This creates an opportunity for shenanigans.

#13

The American system of checks and balances is crucial for preventing and punishing improper behavior. Similarly, deciphering certain changes on the Income Statement and the Balance Sheet can help investors detect Cash Flow Shenanigans.

#14

Investors should probe a company's governance and oversight by asking these basic questions: do appropriate checks and balances exist among senior executives to snuff out corporate misdeeds. do outside members of the board play a meaningful role in protecting investors from greedy, misguided, or incompetent