1/8/2020 Financial Shenanigans 101 - Safal Niveshak

ARTICLES NEWSLETTERS COURSES BOOKS LOGIN CONNECT 

You are here: Home / Investing / Financial Shenanigans 101

Financial Shenanigans 101

August 29, 2017 | Reading Time: 4 minutes | 3 Comments |

De nition
“Financial shenanigans are acts or actions designed to mask or misrepresent the true nancial
performance or actual nancial position of a company or entity.

Financial shenanigans can range from relatively minor infractions involving creative
interpretation of accounting rules to outright fraud over many years. In almost every instance,
the revelation that a company’s stellar nancial performance has been due to nancial
shenanigans rather than management prowess will have a calamitous e ect on its stock price
and future prospects.
Depending on the scale and scope of the shenanigans, the repercussions can range from a
steep sell-o in the stock to the company’s bankruptcy and dissolution.” (Source –
Investopedia)

Best Books on the Subject

Howard Schilit’s Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud
in Financial Reports, Charles Mulford’s Creative Cash Flow Reporting: Uncovering
Sustainable Financial Performance and The Financial Numbers Game: Detecting
Creative Accounting Practices.

Why Firms/Managers Indulge In It

Firms need to raise capital at cheap rates and thus need to look better to credit
rating agencies and lenders
Shenanigans can have huge paybacks (higher pro ts, performance linked bonuses
etc.)
Companies omitUncopyrighted
things to prevent negative
& Handcrafted outcomes
with  in India | Subscribe | Courses
1.3k
Shares

https://www.safalniveshak.com/financial-shenanigans-101/ 1/5
1/8/2020 Financial Shenanigans 101 - Safal Niveshak

Omissions are made to dispel negative market perceptions (especially during bull
markets)
ARTICLES NEWSLETTERS COURSES BOOKS LOGIN CONNECT 
These are easy to do
It’s unlikely the wrongdoers will get caught

Hotbeds

Firms under pressure to maintain high growth rate in earnings or revenues

Firms that trumpet earnings projections and growth expectations
Firms that need constant capital infusion to sustain growth or survive
Managers with large part of compensation tied to stock options whose value depend
largely on earnings growth than quality of those earnings
Companies raising money through IPOs so that they look best before they make
their public appearance
Businesses with a lot of regulations
Firms making a lot of acquisitions (most are done for bad reasons anyways)
Real estate and construction companies (politicians, banks…all are involved in most
cases)
Banks and nancial institutions (don’t get me started here!)

A Struggling Artist’s Impression

Uncopyrighted & Handcrafted with  in India | Subscribe | Courses

1.3k
Shares

https://www.safalniveshak.com/financial-shenanigans-101/ 2/5
1/8/2020 Financial Shenanigans 101 - Safal Niveshak

ARTICLES NEWSLETTERS COURSES BOOKS LOGIN CONNECT 

[Click on the images to download their larger versions]

Easy to Spot Shenanigans?

No. It’s di cult. Perpetrators of accounting frauds and shenanigans are reading the
same books that you are, and some may also be reading this post.

Safety Measures
Be suspicious of rms in which you are considering an investment. Your investment
in any stock could be subject to a major loss as a result of unethical or incompetent
management.
Recognize your limitations…because you cannot necessarily detect rms that use
deceptive accounting or that waste cash because of the unethical or incompetent
behavior of their managers.
Diversify…so that you are not excessively exposed to any single investment whose
value may ultimately be a ected by misleading accounting or other unethical
behavior on the part of the rm’s executives.
Uncopyrighted & Handcrafted with  in India | Subscribe | Courses
1.3k
Shares

https://www.safalniveshak.com/financial-shenanigans-101/ 3/5
1/8/2020 Financial Shenanigans 101 - Safal Niveshak

1.3k 1.1k 12
Shares
ARTICLES NEWSLETTERS COURSES BOOKS LOGIN CONNECT 

JOIN 60000+ SMART INVESTORS

Subscribe to our best stu on investing, stock analysis, and human

behaviour. Plus get access to Seven E-Books on Investing + Two
Special Reports + One Stock Analysis Template. All for FREE!

E-Mail Address

SUBSCRIBE

No charge. Unsubscribe anytime.

Comments

Venkatesh says
August 31, 2017 at 12:01 pm

Hi Vishal, The article is very nice. Incidentally i have read all the three recommended book.
But need to re-read them again as it is years since i read them. I put forth a suggestions that
you consider sharing a few blogs in this “Financial Shenanigans” as a Series similar to your
Annual report series/Mental model series. Just the core and easily identi able ones, may be
with a few examples in Indian context. Many must be aware of reading nancial statements
by ease, but not identifying shenanigans and the creating account practices.

Thanks Venkatesh.

Reply

A Das says
September 5, 2017 at 11:41 am

It is a great post. Will be helpful if you can go deep in the matter of Financial Shenanigans and
do a series on it.

Reply

Uncopyrighted & Handcrafted with  in India | Subscribe | Courses

1.3k
Shares Trackbacks
https://www.safalniveshak.com/financial-shenanigans-101/ 4/5
1/8/2020 Financial Shenanigans 101 - Safal Niveshak

This Week's Best Investing Reads - Curated Links | Stock Screener - The Acquirer's
Multiple® says: ARTICLES NEWSLETTERS COURSES BOOKS LOGIN CONNECT 
September 1, 2017 at 8:35 pm
[…] Financial Shenanigans 101 (Safal Niveshak) […]

Leave a Reply
Your email address will not be published. Required elds are marked *

Comment

Notify me of followup comments via e-mail

Name *

Email *

POST COMMENT

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Uncopyrighted & Handcrafted with  in India | Subscribe | Courses

1.3k
Shares

https://www.safalniveshak.com/financial-shenanigans-101/ 5/5