Today is a very special episode with Dr. Howard Schilit. Dr. Schilit is the Sherlock Holmes of Accounting and helped pioneer the field of forensic accounting. The original “Financial Shenanigans” was written in 1993 and today it is in its 4th edition which includes a new section on Mergers and Acquisitions. Dr. Schilit was the founder of CFRA which he sold later to a private equity company and is currently the CEO and the founder of Schilit Forensics. In this episode, we discuss his book, “Financial Shenanigans”, and some of the companies using these tricks.
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Howard Schilit: “The message is that what we are assessing is human behavior. It is not an accounting exercise and not a finance exercise. Here is a company that has to report to its constituents every quarter. There is a lot of excitement and trepidation over the earnings season and management who has to present, obviously has a strong incentive to put as positive on the results as they could. Because they want the investors to feel that the company is doing well and the stock price is going up. All of that should be intuitive. It is up to the investors to look at this with a healthy skepticism. So if you look at these things for as long as I have, not just for the past 25 years but with the first edition of the book while I was a professor. I went back in time in the early 1990s. I went back to the earliest days of the SEC which was back in the 1930s and read all the lawsuits that the SEC brought against companies for misleading accounting practices. When I use that quote what has been done will be done again, you see certain pattern of tricks. The nature of the industry changes. There are different things in internet companies that are not seen in railroads but at its most basic level, it is studying people. How they squirm when they are about to miss the numbers.
What Volkswagen decided to do when their business had a little speed bump in that quarter and they felt compelled to cover it up. There are a lot of interesting tricks and that is why I am sort of the historian who has chronicle all of these over the last many years. People tell me you told this story in 93 and you told this story three times before, why do you keep writing books. I am saying because when you study the fascinating behavior of people when things are going a little bit not in the direction that they like, how do they behave.”
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Previous issue of ValueTalsk with Anne Stevenson-Yang here
1:29 – Tell me about your background and how you got started in this profession?
4:55 – How would you define financial shenanigan? How is fraud and manipulation different?
20:35 – Can you walk me through Valeant?
31:00 – Talk about behavior of companies
44:00 – The forensic mindset
50:15 – Tell me about the time with the Enron CFO
Enjoy and thanks for the listen and check out the book here.
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