Tips for spotting "shenanigans"

Detecting accounting gimmicks is not a job for amateurs, but accounting professor Howard M. Schlilit has tried to make it easier to recognize devious tricks. His book, “Financial Shenanigans” was first published in 1993 and most recently updated in 2010 (see Sources at the end of this chapter).

The following charts, used with permission, show where to look for gimmicks and fraud in financial reports.

Financial Shenanigans

Earnings Manipulation

  • Recording revenue too soon
  • Recording bogus revenue
  • Boosting income using one-time or unsustainable activities
  • Shifting current expenses to a later period
  • Employing other techniques to hide expenses
  • Shifting current income to a later period
  • Shifting future expenses to an earlier period
    • Cash Flow Shenanigans
  • Shifting financing cash inflows to the operating section
  • Shifting normal operating cash outflows to the investing section
  • Inflating operating cash flow using acquisitions or disposals
  • Boosting operating cash flow using unsustainable activities
    • Key Metrics Shenanigans
  • Showcasing misleading metrics that overstate performance
  • Distorting balance sheet metrics to avoid showing deterioration

Warning Signs:

Breeding Ground for Shenanigans

  • Absence of checks and balances among senior management
  • An extended streak of meeting or beating Wall Street expectations
  • A single family dominating management, ownership or the board of directors
  • Presence of related party transactions
  • An inappropriate compensation structure that encourages aggressive financial reporting
  • Inappropriate members placed on the board of directors
  • Inappropriate business relationships between the company and board members
  • An unqualified auditing firm
  • An auditor lacking objectivity and the appearance of independence
  • Attempts by management to avoid regulatory or legal scrutiny