Andrew Allentuck

Monday, April 8, 2002

Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports
by Howard Schilit
McGraw-Hill, 2002
296 pages
ISBN 0-07-138626-2

The Enron bankruptcy is only the most egregious insolvency to have come along lately. Accounting expert Howard Schilit, who heads an independent financial research organization, makes it clear that tricks of his trade have boosted the prices of Americal Online, Cendant, Cisco Systems, and Cineplex Odeon, to name only a few.

In immensely readable style, with horror stories and insights on how investors could have seen problems coming, Mr. Schilit explains the seven main ways that companies screw their backers.

  • Premature recognition of revenue
  • Recording of bogus revenue
  • Boosting income with one-time gains.
  • Shifting expenses to a later or earlier period
  • Failing to record to improperly reducing liabilities
  • Shifting revenue to a later period by manipulating reserves.
  • Shifting future expenses to the current period as a special charge

The first edition of Financial Shenanigans, published in 1993, was an accounting bestseller. The second edition adds the accounting sleights of hand developed in the 1990s by such firms as Waste Management Inc., Oxford Health,and, of course, the immensely corrupt Bank of Commerce and Credit International. There are stories of how Boston Chicken turned the mundane idea of yet another chicken chain into a brief empire by inflating cash sales with investment income that was really franchisees paying back money Boston Chicken had loaned them.

Financial Shenanigans is destined to be a classic of accounting. It's accessible to any interested reader. An appendix on the fundamentals of financial reporting and a concluding chapter on Enron called "As bad as it gets" make the book relevant to what is happening today. This book is a must read and perhaps the best $45 an investor can spend this year.