Enron is kaput. Federal charges are flying. Andersen may not survive the debacle; other companies, like Global Crossing, are watching their executives traipse the halls of Congress, testifying about various aspects of their financial health (and lack thereof).
You have clients to protect. You look for investments on their behalf, and you’d like to make sure that the information you’re looking at in order to make your selections isn’t a cooked set of books. What do you look for?
The Financial Numbers Game: Detecting Creative Accounting Practices by Charles W. Mulford and Eugene E. Comiskey (Wiley, 2002) can help. Explanations of the entries on a financial report–and how those entries can be “adjusted”–abound in this clear and eminently readable book that doesn’t hesitate to call attention to crooked practices.
Using real-life examples of accounting practices gone astray (Cendant Corporation, for instance, was cited in 2000 for, among other things, failure to record membership charge-backs and cancellations, improperly charged asset writeoffs against acquisition reserves, and overstating acquisition-related reserves and then reversing portions into earnings), the authors have assembled a truly enlightening book that will help you ferret out overenthusiastic accounting methods that have gone beyond the law.
Chapters include such subjects as “Recognizing Premature or Fictitious Revenue,” “Aggressive Capitalization and Amortization Policies,” “Misreported Assets and Liabilities,” “Getting Creative with the Income Statement,” and “Problems with Cash Flow Reporting.” Each chapter offers explanations of various tactics, what is considered reasonable, and illustrations of actual companies using tactics that are not considered reasonable. There is also a chapter on the concept of earnings management (the concept of “smoothing out” earnings to avoid drops in share price and encourage steady returns in the market through investor confidence) and the results of an “earnings management” survey in which financial professionals were asked whether earnings management is harmful to investors, and whether it can be detected.
For a truly enlightening and fascinating look at how companies get creative with accounting, check this one out. You and your clients will be glad you did.