Financial Metrics Shenanigans

by Howard Schilit

Financial Metrics Shenanigans Splash image

Newly minted doctors are required to take the Hippocratic oath and pledge their commitment to practice medicine ethically.

Perhaps corporate managers should be made to study the Hippocratic oath and apply it in earnest when they communicate with investors. In so doing, they would pledge to never knowingly harm investors and always refrain from showcasing metrics that misrepresent performance. That day seems way off in the horizon. Until it arrives, however, investors must be alert to the following three techniques that management can use to obfuscate:

  1. Highlighting a misleading metric as a surrogate for revenue;
  2. Highlighting a misleading metric as a surrogate for earnings; and
  3. Highlighting a misleading metric as a surrogate for cash flow.

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Howard Schilit is founder and chief executive officer of the Financial Shenanigans Detection Group, LLC, which alerts its clients to accounting chicanery.


Discussion

Ric from Missouri posted over 3 years ago:

I loved this article, it could also be titled "Another way to cook the books". As I see a big push in companies to become more "metric"/"performance" based, these same issues identified in this article will also crop up in internal management metrics


Walter from Texas posted over 3 years ago:

A great article filled with examples why one should always "ask the second question." Unfortunately one learns the hard way that all is not as it seems.


Edna from Virginia posted over 2 years ago:

It is very hard to monitor these various companies and try to "interpert" their various devious ways to mask problems. Articles like this really help to keep us alert to various shananigans and not be fooled so easily.


David from North Carolina posted over 2 years ago:

Even GAAP data can be suspicious. I have noticed that the cash flow devoted to working capital changes in many annual reports does not match the data shown on balance sheets. This often shows up as changes of inventories and receivables. As these numbers affect the operating cash flow, I wonder which is correct: the cash flow statement or the balance sheet? The apparent discrepancy casts doubt on the entire report, GAAP and Sarbox not withstanding.


Jerry from Arizona posted over 2 years ago:

A wonderful article, very useful information with good examples, thank you


F from Ohio posted over 2 years ago:

Clearly, it is useful to monitor deviations from accepted standards as a means of detecting impending problems. However, it appears unlikely that the average person, however knowledgable, would be able to detect such deviations unless willing to expend substantial time/effort.

One simple alternate approach: any change should be considered suspect!

One unfortunate implication: financial reporting has returned to wild-west ethics, inspite of all the alledged standards in place. I have to wonder why such deviations from standards are permitted at all. Either you have rules, or you don't!


Kenny G from California posted about 1 year ago:

This makes me wonder about the financials being reported by Salesforce.com and Concur Technologies. Very cryptic revenue recognition and adjustments.


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