Seven signs of fraud

Monday 12 July 2004

Investors need to be aware of likely possible accounting tricks which, while perfectly legal, are still highly misleading, according to visiting expert Howard Schilit.

By The Landlord

Speaking to a Wellington meeting of the Society of Investment Professionals, Professor Schilit – the US-based author of Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reporting says there are only seven ways firms can pull the wool over investors’ eyes.

Danger periods include just after a merger or just after a new chief executive takes over.

Mergers allow firms to get up to all sorts of quite legal tricks in the process of aligned the two firms’ reporting dates, he says. One example form the US was when 3Com took over US Robotics in 1997 – there was a two month “stub period” when the two companies’ reporting dates were aligned

“No one was going to care about that, right?” says Schilit. The two firms boosted reported expenses in that two-month period, and cut back reported revenue. The first batch of figures for the newly merged firm looked very good, he says.

Schilit says one big warning sign is sudden changes in a trend.

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