Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports – Reviewed
June 19th, 2006 by DanIf a financial report is a corporation’s report card, this book’s goal is to try to find out early if a business is heading towards flunking out.
It’s a good thing I read “Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports” first because without it, I doubt I would have understood more than a small fraction of this book which is clearly written more for accountants than amateurs like myself. As it was, I found myself easily able to understand the concepts in this book, but found it challenging to figure out some of the details of the specific examples (of which there are many).
The real question is – did the book teach me enough to be able to detect problem areas in financial statements? The truth is, I don’t know. It did give me enough information so I’m ready to give it a shot. While I doubt that I will spot everything that a trained accountant would see, I do believe it will give me an edge over the average investor (especially those who don’t even bother to read financial reports in the first place).
At the times the book seemed a bit like an ad for CFRA (Center for Financial Research and Analysis) a company founded by the author of this book. There are numerous graphs that illustrate CFRA’s acumen at predicting upcoming disaster. The interesting thing about the graphs is that most follow an interesting pattern where CFRA’s first warning occurs before a significant run-up in price, followed by a level period or flat downturn, followed by a further CFRA warning shortly before the stock crashes. Ironically, the graphs alone suggest that one should use the first CFRA warning as an indication to buy a stock because a run-up caused by fraud or accounting irregularities is about to occur. I don’t think this conclusion was the author’s intent, nor do I expect to follow it. Not only is it likely the conclusion is false due to a limited sample size, but don’t see myself signing up for CFRA’s services in the first place.
This book is not a light read, but I do recommend it for anyone who is planning on becoming a serious investor (defined in this case as someone who plans to think for themselves and do their own research as compared to relying on the judgment of others). I may not have understood everything in this book at first read, but I expect to read it again after a few months have passed to see what else I can learn from it.
