👺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.
👇
🤝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-handler 💩💩Waste 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.
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