I recently interviewed Howard Schilit, author of Financial Shenanigans. The full interview is posted on GuruFocus.com. I will post the first part of the interview here followed by a link to the full inveterview on Guru Focus.
I recently finished reading the third edition of Financial Shenanigans. I loved the book asked the author of the book Howard Schilit for an interview to discuss his book. Mr. Schilit was kind enough to grant me the time to ask him several questions about the book. I am not the only one who loved the book. As I mentioned in this article, Dan Loeb said Financial Shenanigans is a book “you got to read”.
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Here is a bio of Dr. Schilit.
I. Entrepreneur – founder of two investment research companies and book author
Financial Shenanigans Detection Group, LLC – 2010
Center for Financial Research & Analysis, LLC – 1994-2005 – sold to TA Associates
Dr. Schilit is an international leader in forensic accounting and corporate governance and author (with Jeremy Perler) of Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports (McGraw-Hill) 3rd Edition, April 2010. He has been a leading spokesman before Congress, the SEC, and media outlets about causes and early warning signs of accounting tricks in public filings. Dr. Schilit recently founded the Financial Shenanigans Detection Group, LLC. In 1994, he founded and ran a global forensic accounting research organization, Center for Financial Research & Analysis (CFRA) until 2005.
He frequently lectures on the subject of financial shenanigans to university students, investors, bankers, lawyers, and insurers. Business Week referred to Dr. Schilit as the “Sherlock Holmes of Accounting,” and Smart Moneymagazine twice selected him as one of the “Power 30” of investing. A former professor of accounting at American University, Dr. Schilit holds a doctorate in accounting from the University of Maryland.
2. Academician—full-time accounting department faculty member
American University – 1978-1996 Associate and Assistant Professor
University of Maryland – 1974-1978 Lecturer
University of Maryland – 1974-1981 Doctor of Business Administration (1981)
Masters of Business Administration (1976)
SUNY Binghamton – 1973-1974 Masters of Science in Accounting (1974)
Queens College – 1970-1973 Bachelor of Art in Accounting (1973)
3. Certification: Certified Public Accountant in Maryland
Can you tell us about your previous experience in Forensic accounting?
For over a decade while still a professor, I studied several hundred SEC Enforcement actions against companies charged with fraudulent financial reporting.
Then in 1993 published first edition of Financial Shenanigans which described how companies manipulate earnings.
In 1994, founded Center for Financial Research & Analysis (CFRA) and published exposes for institutional investors on companies using aggressive or unusual accounting practices to hide operating problems.
For people who already read the 1st and 2nd editions of the book, what have you updated in the latest edition?
The 2010 Third edition expands on the earlier editions in several key areas:
a. described some new earnings manipulation tricks used by such companies as Enron, WorldCom and Freddie Mac;
b. introduced topic of Operating Cash Flow Manipulations and identified four broad categories of such tricks
c. introduced new topic called Key Metrics Shenanigans that illustrates numerous non-GAAP metrics companies have been using to put positive spin on a deteriorating business
In your book you detail a lot of blue chip companies that have engaged in “cooking the books”, on the other hand there are a lot of pump and dump schemes in small cap stocks. Where do you think shenanigans are more common?
Shenanigans of all sort are found in companies of all sizes, across all industries and know no geographical boundaries. That said, investors in very small companies, lacking solid internal controls, professional internal and external auditors and a competent and fully engaged board should be on the highest alert.
The two main sections of the book are cash flow shenanigans and earnings shenanigans, what about balance sheet shenanigans?
You are certainly correct in observing that there are actually three financial statements and my book focused on shenanigans on only two of them — the statement of income and the statement of cash flows. The omission of the balance sheet as a category of shenanigans, however, was not an omission. Remember that every accounting transaction has two parts of the entry — one part typically affecting the balance sheet and the other affecting the statement of income or statement of cash flow.
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