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Financial Shenanigans - How to Detect Accounting Gimmicks and Fraud in Financial Reports.

This book may be perceived as the author's follow-up to a book on a similar subject. |See the review of Blue Chips and Hot Tips by Howard M. Schilit with W. Keith Schilit National Public Accountant, March, 1993.~ The difference, however, is that Financial Shenanigans describes the accounting mechanisms that enable management to manipulate net income--that is, boost current year profits or shift current year profits to a future accounting period. Such mechanisms are known to accountants, many of whom accommodate their clients--i.e., management--by permitting the shenanigans to take place through misapplication of accounting principles.

Accountants have been exposed to shenanigans by columns of the Wall Street Journal, Business Week, Forbes or the business section of local metropolitan dailies. Such shenanigans are nothing more than accounting gimmicks, many of which constitute fraudulent behavior, such as recording of fictitious revenue to overstate real financial performance. Not all shenanigans are illegal, but all shenanigans are impermissible because they hide or distort the entity's true financial performance.

In some respects you can draw a similarity to tax evasion and tax avoidance. Tax evasion is criminal; tax avoidance is legally permissible. Some shenanigans are purely illegal and fraudulent, e.g., the inventory frauds or recording fictitious revenue. However, your reviewer would submit that accounting gimmicks that are free of criminal fraud may be classified as permissible gimmicks, just as tax avoidance is classified as permissible tax conduct.

While accountants who are the perpetrators of permissible accounting shenanigans may not go to the slammer since their behavior is not illegal or fraudulent, they may still be answerable in civil litigation to the party or parties that have been allegedly injured by shady accounting practices.

In the final analysis, it is the accountant who is responsible for the perpetration of accounting shenanigans, albeit at the insistence and demand of management. Let it be clearly understood that accounting shenanigans do not evolve from the brilliant minds of the MBAs who manage the firms. In truth, shenanigans emerge from the fertile minds of the accountants who want to satisfy the client's whims and thus retain the client.

The author attributes some of accounting gimmickry and shenanigans to the flexibility of GAAP. As long as GAAP remains flexible and as long as rising generations of accountants exercise new and innovative skills in their profession, financial statements will continue to be distorted by accounting gimmickry.

There is a tutorial concluding the book on "Understand the Basics of Financial Reporting" that is an excellent summary and refresher (for both accountants and management) for reading and interpreting financial statements.

Readers may order copies of Financial Shenanigans by calling McGraw Hill at 1-800-2-MCGRAW.
COPYRIGHT 1993 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Publication:The National Public Accountant
Article Type:Book Review
Date:Aug 1, 1993
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