Date: May 3rd, 2011
Cate: Finance, Risk & Stability, Systems
Tags:

Judging aggression levels of accountants, CEO’s & CFO’s

Howard Schilit’s book, Accounting Shenanigans is a classic in terms of clear simple explanation of games CFO’s play.

In buying into a company as a shareholder, you are purchasing a piece of a value creation process.  The sustainability, duration and effectiveness of that process are the businesses realities.  Those realities are converted into Cash Flow, Balance Sheet and Income statements.  The assumptions used are management’s numeric story of the value creation process.  It is important to consider how the prism of accounting policy ranging from conservative to agressive is being used to present that value creating or destroying systems reality.

For fun I built a widget to naively weight the accounting policies of a company.  See screenshot above.  The excel file shown above and checklist is available just send me an e-mail.

I am put together a few simple checklists based on Schilit’s classic book Accounting Shenanigans.  Accounting won’t tell one why value shows up, but it will tell one what form it appears to be taking and a bit about how your management tells its tale.

Here are some of the tools you should use according to Schilit.

Documents used to find shenanigans & what to look for:

Auditors report

  • Absence of opinion
  • Qualified report
  • Reputation of the auditor

Proxy statement

  • Litigation
  • Executive compensation
  • Related party transactions

Footnotes from 10-k and 10-Q’s

  • Accounting policies / changes
  • Related party transactions
  • Contingencies or commitments

President’s letter and transcripts

  • Forthrightness and history of honesty

MD&A (part of the 10-K)

  • Specific concise disclosures
  • Consistent with Footnote disclosure

Form 8-K

  • Disagreements over accounting policies

Registration statement (for IPO’s)

  • Past performance
  • Quality of management and directors

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