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12 Ways to Spot a Lying CFO
collaboration w/ @goodalexander Stocks move on earnings, so execs will manipulate earnings. How can u spot their accounting gimmicks ahead of time?
Here’s a rundown of top shenanigans execs use(d) to cook their books. Case studies included.
1/ Using SPVs to hide bad debts
case: Enron created multiple SPVs, then gave them $ENRN stock while the SPVs gave back case. The SPVs then used Enron stock to hedge assets on Enron's balance sheet.
Enron got to reduce write-offs & report “improved” debt-to-equity.
case: Enron created multiple SPVs, then gave them $ENRN stock while the SPVs gave back case. The SPVs then used Enron stock to hedge assets on Enron's balance sheet.
Enron got to reduce write-offs & report “improved” debt-to-equity.
2/ Reporting bogus revenue
case: In 2008 Lehman Bros “sold” $50B of
garbage loans to Cayman Island banks under the promise to buy them back after the fiscal/quarter ends.
This created the impression to wall street that Lehman had $50B more cash than it actually did.
case: In 2008 Lehman Bros “sold” $50B of
garbage loans to Cayman Island banks under the promise to buy them back after the fiscal/quarter ends. This created the impression to wall street that Lehman had $50B more cash than it actually did.
3/ Round-tripping
(when 2 companies buy/sell repeatedly to inflate sales)
case i: Valeant sold Philidor (which it had the option to buy) inflated shipments of a toenail fungus drug
case ii: Dynegy's energy trading biz pre-arranging many buy-sells w/ an ally at designated price
(when 2 companies buy/sell repeatedly to inflate sales)
case i: Valeant sold Philidor (which it had the option to buy) inflated shipments of a toenail fungus drug
case ii: Dynegy's energy trading biz pre-arranging many buy-sells w/ an ally at designated price
4/ Recording revenues too soon
GAAP says revenue is recognized when a good/service is delivered, not on cash payment/upfront.
case: Xerox "accelerated" $3B in service fees, boosting EBIT by $1.5B.
Top execs rewarded themselves $35M in RSUs for hitting earnings targets.
GAAP says revenue is recognized when a good/service is delivered, not on cash payment/upfront.
case: Xerox "accelerated" $3B in service fees, boosting EBIT by $1.5B.
Top execs rewarded themselves $35M in RSUs for hitting earnings targets.
5/ “Mucking” w/ depreciation to understate expenses
case: literal muck-handlerWaste Management Inc. avoided depreciation expenses by inflating salvage value & extending the useful lives of its garbage trucks.
case: literal muck-handler
Waste Management Inc. avoided depreciation expenses by inflating salvage value & extending the useful lives of its garbage trucks.
6/ Recording expenses too late
GAAP says expenses are recognized when incurred, not when paid in cash.
case: Nut-seller Diamond wanted to acq Pringles from P&G w/ stock. DMND had to boost its share price.
Screws walnut growers by delaying payments to offset other FY'11 costs.
GAAP says expenses are recognized when incurred, not when paid in cash.
case: Nut-seller Diamond wanted to acq Pringles from P&G w/ stock. DMND had to boost its share price.
Screws walnut growers by delaying payments to offset other FY'11 costs.
7/ Booking opex as capex
case: WorldCom used its cash flows statement to hide expenses by marking operating costs, which should have been opex, as capex.
WorldCom inflated cash flow by $3.8 billion and posted quarters of positive performance when it really lost money.
case: WorldCom used its cash flows statement to hide expenses by marking operating costs, which should have been opex, as capex.
WorldCom inflated cash flow by $3.8 billion and posted quarters of positive performance when it really lost money.
8/ Channel stuffing
when a company ships customers excess goods that were not ordered to temporarily inflate accounts receivable
case: Krispy Kreme allegedly sent franchises 2x usual shipments at the end of financial quarters so the company could meet Wall Street forecasts
when a company ships customers excess goods that were not ordered to temporarily inflate accounts receivable
case: Krispy Kreme allegedly sent franchises 2x usual shipments at the end of financial quarters so the company could meet Wall Street forecasts
9/ Boosting income with 1-time gains
This one not illegal.
case: At quarter ends, Lehman Bros sometimes used “repo 105” an accounting trick that defines a short term loan as a sale.
Cash from sales gave the appearance of lowered reported liabilities.
This one not illegal.
case: At quarter ends, Lehman Bros sometimes used “repo 105” an accounting trick that defines a short term loan as a sale.
Cash from sales gave the appearance of lowered reported liabilities.
10/ "Big baths"
Also not illegal.
When a new exec steps in, s/he may write off all losses possible to blame previous management. This makes the company look worse than it is, giving the new exec a low starting bar on which to build future cred
Also not illegal.
When a new exec steps in, s/he may write off all losses possible to blame previous management. This makes the company look worse than it is, giving the new exec a low starting bar on which to build future cred
11/ Hiding losses in acquisitions:
I-bankers charge stupidly high fees… how can CEOs use that to their advantage?
"those 
for my wife last quarter… advisory expense!"
ex: Tech giant Olympus hid losses on securities investments for years under the cover of acquisitions.
I-bankers charge stupidly high fees… how can CEOs use that to their advantage?
"those for my wife last quarter… advisory expense!"ex: Tech giant Olympus hid losses on securities investments for years under the cover of acquisitions.
12/ Cookie jar reserves
When execs hide income in order to report them in a future quarter when performance needs a boost
case: Pre-2002 Dell hid undisclosed payments from Intel... between 2002-2006 it dipped into the jar every quarter to cover shortfalls in operating results.
When execs hide income in order to report them in a future quarter when performance needs a boost
case: Pre-2002 Dell hid undisclosed payments from Intel... between 2002-2006 it dipped into the jar every quarter to cover shortfalls in operating results.
