Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 3rd Edition Read Online Free Page A

Such practices included undervaluing acquired assets, overvaluing acquired liabilities, and misusing accounting rules concerning the establishment and utilization of reserves. If that were not enough, the lawsuit charged that Tyco had improperly established and used various reserves to enhance and smooth publicly reported results and meet Wall Street expectations.
     
    The Tyco Piggy Bank
     
    Unfortunately for Tyco and its investors, the problems were far from over. During this period, senior executives (mainly CEO Dennis Kozlowski and CFO Mark Swartz) had been using the company’s cash account as their own piggy bank. The government charged that these executives had been stealing hundreds of millions of dollars from Tyco by failing to properly disclose to shareholders the existence of back-door executive compensation arrangements and related-party transactions. With the board unaware or asleep at the wheel, senior executives granted themselves loans for personal expenses, many of which were secretly forgiven, effectively producing a large unreported compensation expense.
     
    Enormous Penalty and Jail Time
     
    The larcenous executives at Tyco paid an enormous price. On top of a $50 million SEC penalty, the company agreed to pay a record-breaking $3 billion in restitution to settle shareholder lawsuits. Moreover, Kozlowski and Swartz were convicted of looting the company and inflating its stock price, and both were sentenced to up to 25 years in prison.
     
    Warning for Tyco Investors—Negative Free Cash Flow, Net of Acquisitions
     
    Detailed cash flow analysis would have helped investors notice problems at Tyco. For acquisitive companies, however, we suggest computing an adjusted free cash flow that removes total cash outflows for acquisitions. By adjusting the free cash flow calculation for acquisitions, investors would have a clearer picture of a company’s performance. As a theme discussed throughout the book, acquisitions present numerous opportunities for companies to inflate earnings and both operating and free cash flow. In the case of Tyco, we spotted big drops in adjusted free cash flow. As shown in Table 1-8, between 2000 and 2002, Tyco generated a cumulative negative free cash flow (net of acquisitions), although it reported very large operating cash inflows for those years.
     

     
    TYCO: FINANCIAL SHENANIGANS IDENTIFIED
     
    Earnings Manipulation Shenanigans
    • Recording Bogus Revenue
    • Shifting Current Expenses to a Later Period
    • Employing Other Techniques to Hide Expenses or Losses
    • Shifting Current Income to a Later Period
    • Shifting Future Expenses to an Earlier Period
     
    Cash Flow Shenanigans
    • Shifting Financing Cash Inflows to the Operating Section
    • Shifting Normal Operating Cash Outflows to the Investing Section
    • Inflating Operating Cash Flow Using Acquisitions or Disposals
    • Boosting Operating Cash Flow Using Unsustainable Activities
     
    Key Metrics Shenanigans
    • Showcasing Misleading Metrics That Overstate Performance
    • Distorting Balance Sheet Metrics to Avoid Showing Deterioration
     
    Symbol Technologies: Most Ardent and Prolific Use of Numerous Shenanigans
     
    Although much smaller in size, Long Island–based Symbol Technologies Inc., a maker of bar code scanners, earned its rightful place as a winner of our As Bad as It Gets Award in creative accounting for its audacious use of all seven Earnings Manipulation Shenanigans, all four Cash Flow Shenanigans, and both Key Metrics Shenanigans—an impressive and rare distinction. Even Enron, WorldCom, and Tyco could not match the breadth of Symbol’s feat. (Of course, these three companies distinguished and disgraced themselves by “specializing” in a few gigantic shenanigans.)
     
    Some Tricks Used
     
    Symbol seemed to be obsessed with never disappointing Wall Street. For more than eight consecutive years, it either met or exceeded Wall Street’s estimated earnings—32 straight quarters of sustained