Analisis laporan keuangan, kinerja, dan kepatuhan atas
entitas komersial, nirlaba, dan ETAP dengan focus pada
accounting gimmick and fraud
What has been will be again, what has been done will be
done again;There is nothing new under
the sunEcclesiastes 1:9
SHENANIGANS
Shenanigans:Secret or dishonest activity or
manoeuvring (Oxford Dictionary)
Financial shenanigans:Actions taken by management that mislead investors about a
company’s financial performance or economic
health (Schilit and Perler, 2010)
FINANCIAL SHENANIGANS
Awards for Most Outrageous Financial Shenanigans
Category CompanyMost Imaginative Fabrication of Revenue EnronMost Brazen Creation of Fictitious Profit and Cash Flow
WorldCom
Most Shameless Heist by Senior Manager TycoMost Ardent and Prolific Use of Numerous Shenanigans
Symbol Technologies
FINANCIAL SHENANIGANS
1. Earnings Manipulation Shenanigans
2. Cash Flow Shenanigans
3. Key Metrics Shenanigans
FINANCIAL SHENANIGANS
Companies with structural weakness or inadequate oversight.Ask these basic questions:1. Do appropriate check and balances exist among
senior executives to snuff out corporate misdeeds?2. Do outside members of the board play a
meaningful role in protecting investors?3. Do the auditors possess the independence,
knowledge, and determination to protect investors?
4. Has the company improperly taken circuitous steps to avoid regulatory scrutiny?
FINANCIAL SHENANIGANS
Warnings signs – ground for shenanigans:1. Absence of checks and balances among senior
management.2. An extended streak of meeting or beating Wall
Street expectations.3. A single family dominating management,
ownership, or the BOD.4. Presence of related-party transactions.5. Inappropriate members placed on the BOD.6. Inappropriate business relationship between
company and board members.
FINANCIAL SHENANIGANS
Warnings signs – ground for shenanigans (continues):7. An unqualified auditing firm.8. An auditor lacking objectivity and the
appearance of independence.9. Attempts by management to avoid regulatory
or legal scrutiny.
EARNINGS MANIPULATION
Investor judge corporate executives harshly when they fail to meet Wall Street’s earnings expectations when reporting each quarter.• Inflating current-period earnings.• Inflating future-period earnings.
EARNINGS MANIPULATION
1. Recording revenue too soon.2. Recording bogus revenue.3. Boosting income using one-time or
unsustainable activities.4. Shifting current expenses to a later period.5. Employing other techniques to hide expenses
or losses.6. Shifting current income to a later period.7. Shifting future expenses to an earlier period.
EARNINGS MANIPULATION
1. Recording revenue too soon.
Techniques:1. Recording revenue before completing any
obligations under the contract.2. Recording revenue far in excess of work
completed on the contract.3. Recording revenue before the buyer’s final
acceptance of the product.4. Recording revenue when the buyer’s payment
remains uncertain or unnecessary.
EARNINGS MANIPULATION
1. Recording revenue too soon.
Warning signs (p. 73):1. Up-front revenue recognition on long-term
contracts.2. Cash flow from operation lagging behind net
income.3. Accelerating sales by changing the revenue
recognition policy.4. Seller offering extremely generous extended
payment terms.
EARNINGS MANIPULATION
2. Recording bogus revenue.
Techniques:1. Recording revenue from transaction that lack
economic substance2. Recording revenue from transaction that lack a
reasonable arm’s length process.3. Recording revenue on receipt from non-
revenue-producing transactions.
EARNINGS MANIPULATION
2. Recording bogus revenue.
Warnings (p. 91):1. Recording revenue from transaction that lack a
reasonable arm’s length process.2. Recording cash received from a lender,
business partner, or vendor as revenue.3. Revenue growing much faster than account
receivables.4. Unusual increases or decreases in liability
reserves account.
EARNINGS MANIPULATION
3. Boosting income using one-time or unsustainable activities.
Techniques:1. Boosting income using one-time events.2. Boosting income through misleading
classifications.
EARNINGS MANIPULATION
3. Boosting income using one-time or unsustainable activities.
Warnings signs (p. 108):1. Shifting normal operating expenses below the
line.2. Routinely recording restructuring charges.3. Including proceeds received from selling a
subsidiary as revenue.4. Operating income growing much faster than
sales.
EARNINGS MANIPULATION
4. Shifting current expenses to a later period.
Techniques (p. 111):1. Improperly capitalizing normal operating
expenses.2. Amortizing cost too slowly.3. Failing to write down assets with impaired
value.4. Failing to record expenses for uncollectible
receivables and devalued investments.
EARNINGS MANIPULATION
4. Shifting current expenses to a later period.
Warnings signs (p. 134):1. Improperly capitalizing normal operating
expenses.2. Changes in capitalization policy or accelerated
capitalization of costs.3. New or unusual assets accounts.4. Jump in soft assets relative to sale5. Stretching out depreciable asset life.6. Improper amortization of cost associated with
loans.
EARNINGS MANIPULATION5. Employing other techniques to hide expenses or losses
Technique (p. 137):1. Failing to record an expense from a current
transaction.2. Failing to record an expense for a necessary
accrual or revising a past expense3. Failing to record or reducing expense by using
aggressive account assumptions.4. Reducing expenses by realising bogus reserves
from previous charges.
EARNINGS MANIPULATION5. Employing other techniques to hide expenses or losses
Warning signs (p. 155):1. Unusually large vendor credits or rebates.2. Unusual transactions in which vendors send
out cash.3. Failing to record an expense for a necessary
accrual or revising a past expense.4. Unusual declines in reserves for warranty or
warranty expense.
EARNINGS MANIPULATION
6. Shifting current income to a later period.
Techniques (p. 159-160):1. Creating reserves and realising them into
income in a later period.2. Improperly accounting for derivatives in order
to smooth income.3. Creating reserves in conjunction with an
acquisition and realising them into income in a later period.
4. Recording current-period sales in a later period.
EARNINGS MANIPULATION
6. Shifting current income to a later period.
Warning signs (p. 171-172):1. Creating reserves and releasing them into
income in a later period.2. Stretching out windfall gains over several years.3. Improperly accounting for derivatives in order
to smooth income.4. Holding back revenue just before an
acquisition closes.
EARNINGS MANIPULATION
7. Shifting future expenses to an earlier period.
Techniques (p. 175):1. Improperly writing off assets in the current
period to avoid expenses in a future period.2. Improperly recording charges to establish
reserves used to reduce future expenses.
EARNINGS MANIPULATION
7. Shifting future expenses to an earlier period.
Warnings signs (p. 187-188):1. Improperly writing off assets in the current
period to avoid expenses in a future period.2. Improperly recording charges to establish,
reserves used to reduce future expenses.3. Large write-offs accompanying the arrival of a
new CEO.
CASH FLOW SHENANIGANS
Increasingly, investors have expanded their focus to include the Statement of Cash Flows and, more specifically, the section that highlights cash flow from operation (CFFO).• Accrual versus cash-based accounting.
CASH FLOW SHENANIGANS
1. Shifting financing cash inflows to the operating section.
2. Shifting normal operating cash outflows to investing section.
3. Inflating operating cash flow using acquisitions or disposal.
4. Boosting operating cash flow using unsustainable activities.
CASH FLOW SHENANIGANS
1. Shifting financing cash inflows to the operating section
Techniques (p. 197):1. Reporting bogus CFFO from a normal bank
borrowing.2. Boosting CFFO by selling receivables before
collection date.3. Inflating CFFO by faking the sale of receivables.
CASH FLOW SHENANIGANS
1. Shifting financing cash inflows to the operating section
Warning signs (p. 211):1. Recording bogus CFFO from a normal bank
borrowing.2. Boosting CFFO by selling receivables before the
collection date.3. Providing less disclosure than in the prior
period.
CASH FLOW SHENANIGANS
2. Shifting normal operating cash outflows to investing section
Techniques (p. 213-214):1. Inflating CFFO with boomerang transactions.2. Improperly capitalizing normal operating cost.3. Recording the purchase of inventory as an
investing outflow.
CASH FLOW SHENANIGANS
2. Shifting normal operating cash outflows to investing section
Warning signs (p. 226):1. Inflating operating cash flow with boomerang
transactions.2. Improperly capitalizing normal operating costs.3. New or unusual assets accounts.4. Jump in soft assets relative to sales.5. Unexpected increase in capital expenditures.
CASH FLOW SHENANIGANS
3. Inflating operating cash flow using acquisitions or disposal
Techniques (p. 228):1. Inheriting operating inflows in a normal
business acquisition.2. Acquiring contracts or customers rather than
developing them internally.3. Boosting CFFO by creating structuring the sale
of a business.
CASH FLOW SHENANIGANS
3. Inflating operating cash flow using acquisitions or disposalWarning signs (p. 240):1. Declining free cash flow while CFFO appears to
be strong.2. Acquiring contracts or customers rather than
developing them internally.3. Boosting CFFO by creatively structuring the sale
of a business.4. Selling a business, but keeping the related
receivables.
CASH FLOW SHENANIGANS
4. Boosting operating cash flow using unsustainable activities.
Techniques (p. 241):1. Boosting CFFO by paying vendors more slowly.2. Boosting CFFO by collecting from customers
more quickly.3. Boosting CFFO by purchasing less inventory.4. Boosting CFFO with one-time benefit.
CASH FLOW SHENANIGANS
4. Boosting operating cash flow using unsustainable activities.
Example of boosting CFFO with one-time benefit:Microsoft Corp doled out billions of dollars –
settle antitrust litigation.Sun Microsystem (one of the recipient) – received
$2 billion from Microsoft in 2004 ($1.6 billion recognized as income), presented as “settlement income” – non recurring and unrelated to its normal operation.
CASH FLOW SHENANIGANS
4. Boosting operating cash flow using unsustainable activities.
Warning signs (p. 251):1. Boosting CFFO by paying vendors more slowly.2. Account payable increasing faster than cost of
goods sold.3. Increase in other payables accounts.4. New disclosure about prepayments.5. Offering customers incentives to pay invoices
early.
KEY METRICS SHENANIGANS
Management, naturally, faces some restriction under accounting rules – GAAP.To by pass many such restrictions and put on a positive spin, management has become more active and deceptive in creating and manipulating key non-GAAP metrics to impress investors.The use of other “key metric” to evaluate a company’s performance and economic health.
KEY MATRICS SHANANIGANS
1. Showcasing misleading metrics that overstate performance.
2. Distorting balance sheet metrics to avoid showing deterioration.
KEY MATRICS SHANANIGANS
1. Surrogates for revenue: same-store sales, backlog and bookings, subscriber count, average revenue per customer, and organic revenue growth.
2. Surrogates for earnings: pro forma earnings, EBITDA), non-GAAP earnings, constant-currency earnings, and organic earnings growth.
3. Surrogates for cash flow: a retail chain may present cash flow excluding a substantial one-time cash payment for a legal settlement.
KEY METRICS SHENANIGANS
Showcasing misleading metrics that overstate performance.
Techniques (p. 262):1. Highlighting a misleading metric as a surrogate
for revenue.2. Highlighting a misleading metric as a surrogate
for earnings.3. Highlighting a misleading metric as a surrogate
for cash flow.
KEY METRICS SHENANIGANS
Showcasing misleading metrics that overstate performance.
Examples (p. 272):General Motors (GM) recorded $259 million after tax gain on the sale of an equity interest in a regional homebuilder in June 2006.The gain from the homebuilder investment would not be excluded from ‘adjusted income’ (20% more than the adjusted income).
KEY METRICS SHENANIGANS
Showcasing misleading metrics that overstate performance.
Warning signs (p. 277):1. Highlighting a misleading metric as a surrogate
for revenue.2. Divergence in trend between same-store sales
and revenue per store.3. Pretending that recurring charges are
nonrecurring in nature.
KEY METRICS SHENANIGANS
Distorting balance sheet metrics to avoid showing deterioration.Techniques (p. 281):1. Distorting account receivable metric to hide
revenue problems.2. Distorting inventory metrics to hide profitability
problems.3. Distorting financial assets metrics to hide
impairment problems.4. Distorting debt metrics to hide liquidity problems
KEY METRICS SHENANIGANS
Distorting balance sheet metrics to avoid showing deterioration.
Example – selling accounts receivable (p. 282):• Lowers the days’ sales outstanding reported to
investors.• It appears that customers have been paying
more quickly.
KEY METRICS SHENANIGANS
Distorting balance sheet metrics to avoid showing deterioration.
Warning signs (p. 295-296):1. Failing to prominently disclose the sale of
accounts receivable.2. A huge decline in DSO following several
quarters of growing receivables.3. Moving inventory to another part of the
balance sheet.4. Stopping the reporting of certain key metrics.
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