Business Fairy Tales
Grim Realities of Fictitious Financial Reporting
Number of pages: 281
Publisher: South-Western Educational Pub
BBB Library: Corporate Success
ISBN: 9780324305395
Editorial Review
On the heels of the Enron trial, there are many lessons to be learned from the barrage of fraud hammering corporate America -- including how to spot signs of future impropriety. In a gripping and intriguing read, BUSINESS FAIRY TALES uses real-world scandals to illustrate the top twenty most common methods used by companies to fraudulently overstate their earnings and hide their debt. Based on an analysis of the frequency of Securities and Exchange Commission (SEC) enforcement actions, it identifies the twenty most prevalent accounting schemes. The book explains each accounting trick with a detailed, engaging story of a company and the officials who committed a spectacular version of that method of fictitious financial reporting. It goes behind the scenes to describe the organization's acts of deception, and to examine the character failures of the leaders. In addition to the specific cases, the book presents a compelling argument for the kind of reform that is needed, as well as the ethical frameworks that must support authentic reform. Ultimately, BUSINESS FAIRY TALES equips and empowers readers with the skills to spot signs of potential accounting fraud so that investors and employees can be forewarned of future financial shocks. It provides analysts and students with the specific, tell-tale signals of the top twenty financial-reporting frauds and schemes -- signals that are inevitably left behind in financial statements that have been manipulated.
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Wisdom to Share
Whenever goodwill increases dramatically over time as a percentage of earnings, it should be taken as a sign to be very skeptical about a company’s financial statements.
As it is often the case, cash flow from operations lagging behind operating income or net income is always a useful signal that profits may be misreported.
Sudden and significant decreases in gross margin as a percentage of sales are indications of possible overstatements of inventory and understatement of COGS.
Restructuring changes in a current period can indicate that the company failed to recognize impairments of assets in previous periods.
When a company’s asset-turnover ratio (Net Sales/Total Assets) declines, either for a category of assets or for total assets, it is an indication that the assets may be impaired.
When there are material intangible assets and a company is making a loss overall, it is an indication that the intangible assets are impaired.
A reserve is an expense that is recognized in the current period. A legitimate reserve is usually created in recognition of a future liability or loss.
In the future, when the expense actually occurs and is offset against the reserve instead of being recognized as an expense, the earnings are inflated because the expense was moved to an earlier period.
Perceived opportunity: a situation where someone believes they have a favorable or promising combination of circumstances to commit an undetectable fraud
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