Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, 3rd Edition Read Online Free Page B
Author: Howard Schilit, Jeremy Perler
Tags: nonfiction, Reference, Business & Economics, Mathematics, Management, Accounting & Finance
success. In hindsight, though, such steady and predictable performance (particularly during the technology collapse of 2000–2002) should have alerted investors to take a closer look.
Symbol never wanted its earnings to get too high or too low, so it would record bogus adjustments to the company’s financial statements at the end of each quarter in order to align its results with Wall Street expectations. In very strong periods, for example, the company would take charges to create “cookie jar” reserves that could be used to boost earnings during weaker periods. That occurred in the late 1990s when Symbol won a large contract from the U.S. Postal Service that accounted for 11 percent of the company’s 1998 revenue. Symbol cleverly used restructuring charges to dampen its reported growth, and in so doing, both lowered the bar to meet future-period Wall Street expectations and created reserves that could be released when needed.
If, instead, Symbol’s business slowed and Wall Street targets went unmet, the company would “stuff the channel,” or ship products to customers too early in order to record additional revenue. Symbol also allegedly inflated revenue by shipping products that its customers did not want. The company even sold products to customers in order to record revenue, then repurchased the goods at a higher price (a bizarre arrangement in which Symbol actually lost money in order to create revenue growth).
Moreover, if Symbol’s operating expenses got out of control and needed some trimming, there was a ready solution. In one case, when paying bonuses in early 2001, Symbol conveniently (and improperly) deferred the related Federal Insurance Contributions Act (FICA) insurance costs, thereby inflating operating income. The company also tidied up messy issues that surfaced on the Balance Sheet, like accounts receivable that were not getting collected. In 2001, Symbol was concerned that Wall Street would react unfavorably to surging receivables, so it simply moved them to another section of the Balance Sheet where they would be hidden from investors’ view. (More on this in Part 4, “Key Metrics Shenanigans.”)
And Justice for All—But One
The regulators finally caught up with Symbol after all those years of duping investors. The SEC accused Symbol of perpetrating a massive fraud from 1998 until 2003. Unlike the scoundrels running Enron, WorldCom, and Tyco, however, Symbol’s senior executive followed a different (and somewhat bizarre) course. After being indicted on securities fraud charges, CEO Tomo Razmilovic fled the country and was declared a fugitive. He even made the U.S. Postal Inspection Service’s “most-wanted” list, with a $100,000 reward offered for his arrest and conviction. (At that time, he was the only white-collar crime suspect on the agency’s most-wanted Web site, which included rewards for the anthrax mailer, certain bombing suspects, and post office robbers.) He is still on the lam, apparently living comfortably in Sweden.
Warnings for Symbol Technologies Investors
In addition to Symbol’s unusually steady and predictable performance, there were many warning signs for investors about the company’s struggles. Our forensic research firm, the Center for Financial Research and Analysis (CFRA, and now part of RiskMetrics Group), issued six separate reports between 1999 and 2001, warning investors about Symbol’s aggressive accounting practices. Specific issues raised in our reports include the following:
Unusually large one-time charges seemed to be designed to create bogus reserves that could be used in future periods to benefit earnings. For example, when acquiring Telxon in 2000, Symbol wrote off 68 percent of the purchase price. Symbol also wrote off inventory that may have subsequently been sold, providing a boost to margins.
Symbol showed signs of aggressive cost capitalization, including a doubling of capitalized software and a
Symbol never wanted its earnings to get too high or too low, so it would record bogus adjustments to the company’s financial statements at the end of each quarter in order to align its results with Wall Street expectations. In very strong periods, for example, the company would take charges to create “cookie jar” reserves that could be used to boost earnings during weaker periods. That occurred in the late 1990s when Symbol won a large contract from the U.S. Postal Service that accounted for 11 percent of the company’s 1998 revenue. Symbol cleverly used restructuring charges to dampen its reported growth, and in so doing, both lowered the bar to meet future-period Wall Street expectations and created reserves that could be released when needed.
If, instead, Symbol’s business slowed and Wall Street targets went unmet, the company would “stuff the channel,” or ship products to customers too early in order to record additional revenue. Symbol also allegedly inflated revenue by shipping products that its customers did not want. The company even sold products to customers in order to record revenue, then repurchased the goods at a higher price (a bizarre arrangement in which Symbol actually lost money in order to create revenue growth).
Moreover, if Symbol’s operating expenses got out of control and needed some trimming, there was a ready solution. In one case, when paying bonuses in early 2001, Symbol conveniently (and improperly) deferred the related Federal Insurance Contributions Act (FICA) insurance costs, thereby inflating operating income. The company also tidied up messy issues that surfaced on the Balance Sheet, like accounts receivable that were not getting collected. In 2001, Symbol was concerned that Wall Street would react unfavorably to surging receivables, so it simply moved them to another section of the Balance Sheet where they would be hidden from investors’ view. (More on this in Part 4, “Key Metrics Shenanigans.”)
And Justice for All—But One
The regulators finally caught up with Symbol after all those years of duping investors. The SEC accused Symbol of perpetrating a massive fraud from 1998 until 2003. Unlike the scoundrels running Enron, WorldCom, and Tyco, however, Symbol’s senior executive followed a different (and somewhat bizarre) course. After being indicted on securities fraud charges, CEO Tomo Razmilovic fled the country and was declared a fugitive. He even made the U.S. Postal Inspection Service’s “most-wanted” list, with a $100,000 reward offered for his arrest and conviction. (At that time, he was the only white-collar crime suspect on the agency’s most-wanted Web site, which included rewards for the anthrax mailer, certain bombing suspects, and post office robbers.) He is still on the lam, apparently living comfortably in Sweden.
Warnings for Symbol Technologies Investors
In addition to Symbol’s unusually steady and predictable performance, there were many warning signs for investors about the company’s struggles. Our forensic research firm, the Center for Financial Research and Analysis (CFRA, and now part of RiskMetrics Group), issued six separate reports between 1999 and 2001, warning investors about Symbol’s aggressive accounting practices. Specific issues raised in our reports include the following:
Unusually large one-time charges seemed to be designed to create bogus reserves that could be used in future periods to benefit earnings. For example, when acquiring Telxon in 2000, Symbol wrote off 68 percent of the purchase price. Symbol also wrote off inventory that may have subsequently been sold, providing a boost to margins.
Symbol showed signs of aggressive cost capitalization, including a doubling of capitalized software and a
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