Financial Shenanigans, Fourth Edition: How to

Transcript:Financial Shenanigans, Fourth Edition: How to:
Financial Shenanigans, Fourth Edition: How to Detect Accounting Gimmicks and Fraud in Financial Reports- Howard M. Schilit Book Summary by Anandh Sundar Value Investors Mumbai Meetup 10 May 2018 Takeaways Dishonest company executives may find ways to improperly capitalize any normal operating cost; however, the most common ones are generally those related to long-term arrangements, such as research and development, labor and overhead related to a long-term project, (Construction?) software development, and (Intellect Design?) costs to win contracts or customers (Marketing? Sometimes a company will acquire a competitor in order to wind down a competing product and move the target’s customers onto the acquirer’s platform. This may be a good business strategy, but it could wreak havoc with organic growth metrics New examples-Income Statement In 2010, Diamond Foods agreed to compensate walnut growers for price increases over earlier agreed rates viz to make them whole for the 2009 crop, but they called the payment an “advance” on the next year’s crop In 2013 Salesforce.com, for example, began the unusual practice of accounting for a large multiyear software license as a “capital lease In June 2014, Hertz announced an initial prelimnary earnings restatement of $28M which increased to $349M(Pre tax) when finally concluded in July 2015, mainly due to revenue preponement/wrong recognition In 2015, Toshiba announced restatements in profits $1.9 billion which covered all years from 2008 to 2014, which spanned the reign of three separate CEOs. ..the most substantial amounts related to (1) inflating revenue by improperly applying percentage-of-completion accounting, (2) stuffing inventory channels on transactions in the PC business, and (3) failing to take charges for impairment and depreciation. In the last decade, Autonomy reportedly boosted its revenue by booking sales on software deals still under negotiation with end users (but had not yet closed) and transfer the associated product to resellers New examples-Cash Flow In 2015 alone, T-Mobile repaid $564 million in short-term debt that was used for purchases of handset inventory and network equipment. Conveniently, this cash outflow was buried on T-Mobile’s Statement of Cash Flows as a financing activity In 2016, Tesla’s operating cash outflows appeared to have improved, amounting to net outflows of $124 million, down from outflows of $524 million in 2015. ..orders and refundable customer deposits for its Model 3 sedan, which had been introduced only in concept..these deposits accounted for $350 million of additional inflows, or 88 percent of the reported improvement