Financial Releases And Schilit’s Seven Shenanigans

This article is going to be short and not so sweet, but every word is critical. Keeping investors happy with your stock involves not only what you do, but also what you don’t do. To keep your business and your integrity on solid ground, steer clear of the seven classic “shenanigans” described by Howard Mark Schilit, Ph.D., in his widely read book, Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports (© 1993, Reproduced with permission of the McGraw-Hill Companies).

Schilit's Seven Shenanigans

Shenanigan No. 1: Recording Revenue Too Soon

• Shipping goods before a sale is finalized
• Recording revenue when important uncertainties exist
• Recording revenue when future services are still due

Shenanigan No. 2: Recording Bogus Revenues

• Recording income on an exchange of similar assets
• Recording refunds from suppliers as revenue
• Using bogus estimates on interim financial reports

Shenanigan No. 3: Boosting Income with One-Time Gains

• Boosting profits by selling undervalued assets
• Boosting profits by retiring debt
• Failing to segregate nonrecurring activities from recurring ones
• Burying losses under non-continuing operations

Shenanigan No. 4: Shifting Current Expenses to a Later Period

• Improperly capitalized costs
• Depreciating or amortizing costs too slowly
• Failing to write off worthless assets

Shenanigan No. 5: Failing to Record or Disclose All Liabilities

• Reporting revenue when cash is received in advance of providing services
• Failing to accrue expected or contingent liabilities
• Failing to disclose all material commitment and contingencies
• Engaging in transactions to keep debt off the books

Shenanigan No. 6: Shifting Current Income to a Later Period

• Creating reserves and releasing them into income in a later period

Shenanigan No. 7: Shifting Future Expense to the Current Period

• Accelerating discretionary expenses into the current period
• Writing off future years' depreciation and amortization during the current year

Any of these are credibility killers!