financial-accounting

Messrs. DiPiazza and Eccles present a compelling blueprint for wholesale restructuring of corporate reporting and the concomitant rebuilding of public trust in the capital markets. The foundation for their model is built on the values of transparency, accountability and integrity. Their model -- development of a global GAAP, development and application of industry-specific standards, and establishment of guidelines for disclosure of company specific information -- makes sense given the expansion of capital markets across country-specific boundaries, but also is timely given the wide-availability of enabling technology (i.e., the Internet and XBRL).

Meaningful reform cannot be had solely through governmental reform, the lobbying of special interest groups, self-regulation or lawsuits by regulators and disgruntled investors. The end results will likely be half-baked attempts to address the symptoms of the breakdown in corporate reporting and the capital markets, rather than development of a cure. Accordingly, DiPiazza and Eccles stress that meaningful reform through development of their three-tiered model must be had through open dialogue and lines of communication with all members of what they term as the "Corporate Reporting Supply Chain" which, in a nutshell, includes all stakeholders in the capital markets.

"Building Public Trust: The Future of Corporate Reporting" provides, in plain English, a detailed description of the problems plaguing corporate reporting and roadmap to a meaningful solution. The road to reform, however, is long and, as DiPiazza and Eccles suggest, requires that the journey (read: participation) be undertaken by ALL members of the Corporate Reporting Supply Chain. The book is a must read for corporate directors and officers, regulators, lawyers, accountants, analysts, the investing public and all other persons who (or whose clients) have a stake in the smooth functioning of the capital markets.

The time for open debate on reform is now. It is up to members of the "Corporate Reporting Supply Chain" whether they want such reform to take the form of a lecture leading to mandates by the few, or an open dialogue leading to a consensus by the majority. This book provides its readers with a grounding for developing the tools to accomplish the latter...

Most individual investors have no game plan or written investment goals. They may have a lofty goal of obtaining 10 - 20% annual returns over the long-term. Now that we've experienced a significant bear market-which may get worse - the investor needs to sit down and realistically assess his/her financial needs and use a time-tested investing approach.

Armstrong's book offers a systematic approach to understanding the investment scene. He covers long-term trends and returns in the various investment categories from 1926 - 2000 and shows that stocks were the way to go - especially small company stocks. He then provides a 32-page informative discussion on assessing the risk of investing - a subject that many investors don't know too much about. Unfortunately, most investors pay little attention to this vital subject and end up losing their shirts because they don't understand the elements of risk.

Armstrong then covers modern portfolio theory, the efficient frontier, and the overwhelming importance of proper asset allocation (e.g., stocks, bonds, and cash) compared to individual stock selection or market timing. Other topics covered include: whether managers add value (not really), benchmarks, controlling costs and taxes, and some investing horror stories.

Armstrong provides interesting statistics on building a portfolio first with an allocation of 60% in the S&P 500 and 40% in long-term bonds from 1975- 2000. This portfolio provided and annual return of 14.43% with a standard deviation of 11.42%. He then provides different portfolio mixes and ends with a portfolio of investment vehicles that provide an annual return of 14.71% with a standard deviation of 9.09% -- a significant improvement in lowering its riskiness. Armstrong provides guidelines in investing for retirement using a global equity exposure and bonds.

Once the allocation is determined the next step is to actually select the investment vehicles. Here, Armstrong focuses on selecting mutual funds, closed end funds unit investment trusts, REITs, variable annuities, ETFs, and index funds. He points out the differences of using investment advisors or doing it yourself.

There is an appendix with a sample investment policy statement for individuals that can serve as a model for most individuals with appropriate adjustments, as necessary.

In conclusion, Armstrong provides a practical, easy-to-implement asset allocation approach using no-load mutual funds and other vehicles. For individuals that need an advisor, he provides helpful hints in selecting one. The new and average investor will greatly benefit from the wisdom provided in this book.

He explores many topics, such as being able to buy a car or house; as well as is it wrong to borrow large amounts of cash. He also explores credit cards and life insurance, as well as the standards, such as budgets, teaching your children about financial principles, and seeing ahead towards economic trends and dangers.

For a good and practical read which can be applied to any situation, a great resource!!!

Schilit writes: "Financial shenanigans are actions or omissions intended to hide or distort the real financial performance or financial condition of an entity. They range from minor deceptions (such as failing to clearly segregate operating from nonoperating gains and losses) to more serious misapplications of accounting principles (such as failing to write off worthless assets; they also include fraudulent behavior, such as the recording of fictitious revenue to overstate the real financial performance). Since management is clever about hiding its tricks, investors and others must be alert for signs of shenanigans."

Schilit goes on to discuss a wide range of financial shenanigans which devalue the investment worth of a company. The shenanigans range from "recording revenue when important uncertainties exist" to "failing to accrue expected or contingent liabilities."

Each financial shenanigan is discussed in detail, and a real-world example of a public company affected by the shenanigan is given. Stock-versus-price charts are also given to show the stock-price behavior of the company's stock following the disclosure of the shenanigan (usually the stock price drops like a rock after accounting trickery is discovered).

For example, Tie Communications stock fell from a high of $40.38 per share in 1983 (five years after going IPO) to a low of $0.31 per share by 1990. The 1983 stated profits of the company were "given a shot in the arm by the sale of some investments at a substantial gain...." Schilit goes on to explain that some companies use the sale of appreciated assets to hide losses from normal business operations and make the company appear more profitable than it really is.

"Financial Shenanigans: How To Detect Accounting Gimmicks & Fraud In Financial Reports" is very easy to read, unlike many books which deal with the topic of accounting. Investors will read through this book rather quickly and that is a tribute to Schilit's writing. Yet, most investors will learn a great deal about financial reporting. Most importantly, readers will learn how to protect themselves as investors.

In addition to shenanigan busting, Schilit gives an excellent tutorial to help readers understand the basics of financial reporting and accounting. Plus, he does an excellent job of pointing out the logic of sound financial reporting.

For example, Schilit writes various "guiding principles" throughout the book to help the reader, such as "Guiding Principle: An enterprise should capitalize costs incurred that produce a future benefit and expense those that produce no such benefit."

Schilit explains that capitalizing costs which have no future benefit is one way to enhance current earnings at the expense of future earnings. Shilit discusses De Laurentiis Entertainment, a producer and distributor of motion pictures, as an example. In 1987, the SEC charged Laurentiis Entertainment with improperly capitalizing expenses which should have been charged against current earnings. Schilit's stock chart shows that shares of DEG fell from a high of $19.25 in 1986 to a low of $0.06 in 1989.

Serious, long-term investors don't want to hold stock in companies such as De Laurentiis Entertainment in 1987 and Tie Communications in 1983. Schilit gives a list of fifty-two techniques to help the investor spot financial shenanigans in advance when evaluating a company for investment.

These techniques range from looking for management incentives which encourage false reporting, to not being fooled by profits enhanced by retiring debt, to watching for worthless investments the company is making. Examining these factors together should help the investor evaluate the overall honesty and viability of the company long-term. The investor will gain insight as to whether the company is being conservative in its accounting or being too aggressive in its accounting.

I highly recommend "Financial Shenanigans" to all investors who buy individual stocks and who focus upon buying solid businesses. The book will help weed out the businesses which are only reporting "accounting" profits for the temporary benefit of management.

Peter Hupalo, Author of "Becoming An Investor"

Former SEC Chairman Arthur Levitt once noted that the investment markets exist through the "grace" of investors. That grace is a fragile trust easily undermined by intentional distortions of the financial performance of publicly reporting companies. Those distortions that erode investor confidence are author Howard Schilit's 'Shenanigans'. The infractions described range from benign to aggressive to outright fraudulent and Schilit is always ready with the specifics of companies who have demonstrated an excess of creativity in their arithmetic. It should be said that the information in this book is very accessible to the non-accountant. This is an illuminating read. A brief accounting tutorial in the Appendix is almost worth the price of admission. Serious investors should read this book. The "seven financial shenanigans" Schilit discusses at length are painfully familiar to portfolio owners. They are clearly explained and amply exampled. Reading this book may or may not provide an investor with the expertise to prevent a future mistake, but it will certainly add to an appreciation of the seriousness of issues as they surface in the financial media.

The book does a solid job introducing record-keeping. It discusses the:

General Journal
General Ledger
Petty Cash Record
Inventory Records
Fixed Asset Log
Accounts Receivable
Accounts Payable
Independent Contractor Record
Payroll Records (though the authors recommend you hire a payroll firm to handle your payroll due to the government's extreme demands for payroll records)
Mileage Log
Travel Expense Records
Entertainment Records

Sample forms of all of the above are given and explained, as well as blank forms the authors state you can copy and use for your business. Today most of us would put such records on a computer, but we should still understand the process, the authors point out.

"Keeping The Books" is especially good, as it discusses, not only single-entry accounting, but also gives a decent introduction to double-entry accounting. The brief explanation, though very good, is not as good as taking an introductory class in double-entry bookkeeping. Taking a basic bookkeeping class is one of the best things a new business owner can do.

For example, "Keeping The Books" casually mentions there are two sides to any business transaction and the two sides are recorded as debits and credits. Then it lists the rules for how revenue, expense, asset, liability, and equity accounts are affected by debits and credits. (Debit increases the value in an asset account; a debit decreases the value of an equity or liability account, etc.)

Debits are entered on the left-hand side of the column and credits are entered on the right hand side. But, it is never explicitly stated that the one giving in the transaction is the credit(or) and the one receiving in the transaction is the debit(or). A simple rule like that makes understanding double-entry accounting much easier.

For example, if you sell one hour of your service, Service Revenue is the giver (so it's credited) and cash is the receiver (so cash is debited) and increased. Many people new to accounting benefit from having that point *explicitly* mentioned, though some might say it is obvious.

But, overall, the introduction to double-entry accounting is solid, extremely readable and not overly long. Adjusting the entries at the end of an accounting period is also discussed.

"Keeping The Books" goes into basic financial statements--balance sheet, income statement (or profit and loss statement), projected cash flow statement. These topics are very well-explained and will benefit the small business owner.

Pinson and Jinnett show how to put all the statements on a comparative basis to examine percentage value changes. For example, on the income statement, let sales' revenue be 100% and, then, examine all costs and expenses (and hopefully profit!) as a percentage of sales. This helps you understand your business better and make better business decisions.

Especially good is the discussion about projecting cash flow on a month-by-month basis. This is something too few business owners do. Break-even analysis is also briefly mentioned.

A excellent chapter written by Marilyn Bartlett, C.P.A., discusses basic financial statement analysis and how it helps you understand and improve your business. Incidentally, this chapter would be good reading for someone new to investing who wants a good introductory explanation of why and how analysts break down financial statements.

Finally, "Keeping The Books" mentions the basic tax forms your business will need. Though there is no discussion about actually filling out the forms. Useful tax calendars tell you when to send in what form to which agency. But, you can get that directly from the IRS.

Overall, this is a great book for new business owners to learn basic record-keeping and accounting. The book is extremely readable and covers extremely important topics for the new business owner to understand. Review by Peter Hupalo, author of "Thinking Like An Entrepreneur"