Shenanigans, Forensic Analysis and Short-selling
A wonderful list of accounting shenannigans and gimmicks
Introduction (via Professor Paul Johnson @ Cap at Columbia)
Management has many options under GAAP from which to choose to record certain economic events. These options are called accounting rules and, when used, are referred to as accounting events. Because the various choices will have differing effects on reported earnings, management may have the opportunity to manipulate their financial results—although they may not exercise that option. Because most management incentive plans have unintended consequences, managements sometimes have the economic inclination to cheat. These transgressions, when the option is exercised, allow companies to enjoy short-term gain, often at the expense of dramatic long-term pain. Not withstanding the recent barrage of news reports on this topic, the majority of all companies do not “cook-the-books;” these transgressions are the exception to the rule. However, the impact from these misstatements (potentially even fraudulent behavior) can be quite painful to shareholders; therefore, it is critical to understand these shenanigans so that when they do appear the analyst can identify them quickly.