Ming Zhao

Ming Zhao

01-05-2021

16:18

👺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. 👇

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.

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.

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

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.

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.

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.

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.

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

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.

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

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.

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.



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