Andrew Allentuck

Monday, February 11, 2002

The Financial Numbers Game: Detecting Creative Accounting Practices
by Charles W. Mulford and Eugene E. Comiskey
John Wiley & Sons, 2002
395 pages
ISBN 0-471-37008-8

With an almost eerie sense of timing, The Financial Numbers Game has come out in the midst of the Enron scandal of hidden losses and accountants apparently collaborating in their concealment. This book, which in a year of smaller scandals might just be a hit with people who think corporate audit is fun, is now a major, must- read expose of fraud. But be warned - the writing is technical and often best done with a pencil to follow calculations.

The essence of the book is the case against liberal accounting rules. Both authors have doctorates in accounting and are Certified Public Accountants too. They polled other accountants to come up with a list of abuses of truth in financial reporting. The results confirm what is widely suspected but seldom admitted - that cooking the books is too easily done.

The list of sins is a long one from outright fraud - that's making things up out of thin air - to aggressive recognition of premature or fictitious revenue, to aggressive capitalization of expenses to misreporting of assets and liabilities. The authors discuss the widespread use of pro-forma earnings and reporting of cash flow.

In the survey of classification of earnings momentum management methods, the authors list 20 techniques that result in deceptive financial statements. At the top of the list is recognition of sales before they are final. There's recording of revenue from shipment of goods to a customer who has not yet placed an order but probably will.

In addition to the charges of deceit, the authors list numerous methods to check financial statements. There are lists of companies caught red handed with accounting frauds and excellent indexes of companies and subjects. This is a reference book for all accountants, yet it remains readable enough to be a financial page turner for the serious reader.