Accounting 101: Detecting Accounting Fraud For Businesses and Corporations | Chris B. | Skillshare

Accounting 101: Detecting Accounting Fraud For Businesses and Corporations

Chris B., Instructor, MBA and CFO

Accounting 101: Detecting Accounting Fraud For Businesses and Corporations

Chris B., Instructor, MBA and CFO

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21 Lessons (1h 44m)
    • 1. Course Introduction

    • 2. Instructor Introduction

    • 3. Enron

    • 4. WorldCom

    • 5. Tyco

    • 6. Symbol Technologies

    • 7. Red Flags

    • 8. Recording Revenue Too Soon

    • 9. Recording Fake Revenues

    • 10. Recording Revenue Using One Time Activities

    • 11. Shifting Current Expenses Forward

    • 12. Other Techniques

    • 13. Shifting Current Income Forward

    • 14. Shifting Future Expenses Back

    • 15. Shifting Financing Cash Flows

    • 16. Shifting Operating Cash Outflows

    • 17. Inflating Operating Cash Using Acquisitions

    • 18. Inflating Operating Cash Using Unusual Activities

    • 19. Showcasing or Manipulating Metrics

    • 20. Distorting or Omitting Key Metrics

    • 21. Course Conclusion

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About This Class

Are You An Accountant, Accounting Manager, Controller or CFO?

Are You An Investor In A Company And Are Suspicious Of Their Financial Statements?

Do You Feel Your The Internal Controls For A Company Are Lacking?

Do You Suspect Fraud But Aren't Sure How To Find Items To Specifically Point To?

Do Stories Such As WorldCom, Enron, Tyco and More Make You Worried About What Could Happen In Your Company?

If You Answered "Yes" To Any Of The Above, Look No Further.  This Is The Course For You!

Enroll today and join the 100,000+ successful students I have taught as a Top Rated instructor!

Three reasons to TAKE THIS COURSE right now:

  1. You get lifetime access to lectures, including all new lectures, assignments, quizzes and downloads

  2. You can ask me questions and see me respond to every single one of them thoroughly! 

  3. You will are being taught by a professional with a proven track record of success!

  4. Bonus reason: Udemy has a 30 day 100% money back guarantee if for some reason you don't enjoy the course!

Recent Review:

Sam W says: "Fantastic course.  Really outlines all the ways accounting fraud can happen, whether it's in a small company all the way up to multinational corporations.  Amazing the things that people will do, and the possibilities.  After this course I feel empowered to spot fraud in financial statements, very useful skill to have as an investor."

Why You Should Take This Course:

Unfortunately fraud exists in our society.  Companies look to manipulate their financials in order to meet investor expectations, boost share price, attract investors, and for multiple and many other reasons.  Don't be a victim and fooled by false financial statements any more!  Whether you are a CEO who wants to verify your CFO and accounting teams work, an investor who wants to double check, an auditor whose job it is to find issues, or anyone else, this course will enlighten you to the many ways financial statements can be manipulated. 

Become a financial statement pro and be able to spot fraud and manipulation with ease with this course!! 

What We Do In The Course:  

  • Learn the reasons why companies manipulate their financials

  • Review 4 prominent case studies: Enron, Tyco, WorldCom, Symbol Technologies

  • Discuss 7 earnings manipulations methods

  • Discuss 4 cash flow manipulations methods

  • Discuss 2 performance metrics manipulations methods

  • Put it all together - what does it all add up to

  • And Much More!!!

At any point if you have a question, please feel free to ask through the course forum, I'd be happy to answer any and all questions.  


About The Instructor

Chris Benjamin, MBA & CFO is a seasoned professional with over 20 years experience in accounting, finance, financial reporting, and small business, accounting fraud.  Having spent the first 10 years of my career in corporate settings with both large and small companies, I learned a lot about the accounting process, managing accounting departments, financial reporting, external reporting to board of directors and the Securities and Exchange Commission, and working with external auditors.  

The following 10+ years I decided to go into CFO Consulting, working with growing companies and bringing CFO level experience to companies.  I help implement proper best business practices in accounting and finance, consult on implementation of accounting systems, implementing accounting procedures, while also still fulfilling the CFO roll for many of my clients which includes financial reporting, auditing, working with investors, financial analysis and much more.  

Thank you for signing up for this course. I look forward to being your instructor for this course and many more!

Chris Benjamin, Instructor, CFO & MBA

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Chris B.

Instructor, MBA and CFO


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1. Course Introduction : Hello, everyone. Welcome to the course. My name is Chris Benjamin, and I'll be your instructor in this video. I just want to mainly first of all, welcome into the course and also provide you serve a road map as to what we're gonna be covering in the next video give you a little bit more of an introduction to myself in my background in accounting and finance. But we'll get that to that in a little bit. So essentially, this course, we're gonna be examining first of all, four different companies what they did. And now these were large companies, and certainly you've probably heard of them. Companies like Enron and WorldCom, Tyco, they, in the face of everybody were able to manipulate their accounting for years in order to present better results in order to appease their board of directors and their shareholders . So and obviously ultimately it all blew up in their face. So we're going to be going over exactly what they did. Sort of case studies, if you will. And then after that, we're gonna look at specific techniques that people use and companies use in order to manipulate their financial reports. Their earnings metrics or just their bottom lines. In general, there's lots of different ways everybody, and we're here to learn as many of them as we possibly can. So the benefit will for you will be depending on what your role is, whether you are an auditor, whether you work in a company or you're an outside investor and you want to have, you want to understand how to better evaluate a company and things to look for because you don't know exactly what's going on. We're gonna be learning all those things that you should keep a careful eye on to determine if there's any sort of monkey business happening at these companies. So that said, Let's go ahead and get started. If you have any questions during the course, definitely send me a message through the course website. Happy to answer any questions. Just let me know which video you're watching. And you know what? Your what your question is, and I'll get back to you. Definitely. That said, Let's go ahead. We'll get my introduction and that will dive into the material 2. Instructor Introduction: Hello, everyone, Welcome back. So again, my name is Chris Benjamin. I want to give you a little bit of an introduction to myself. So, as I said in the introductory video, I have over 20 years and Accounting of Finance, I got my undergraduate degree from the University of Fraser Valley in British Columbia, Canada. I then several years later went on to get my master's in business from the University of Washington in Seattle area. Eso the 1st 10 11 years of my career I spent in the corporate world. I kind of worked my way up the ranks. Toe level, CFO. I worked with both public companies, private companies, different roles, obviously accounting manager, controller, CFO, I've managed staff. I've worked on reports like the 10-K and 10-Q that you filed with the Securities Exchange Commission. If you are a public company and I've worked directly with auditors almost every quarter, basically that would always be a big part of my position. So, uh, providing information, giving them financial reports. So, uh, through all of that experience, definitely have insight into how to corporations work and how the whole financial process works. Now on top of that the last 10 years or more recent 10 years, I went out on my own. I became basically a CFO consultant, So I worked with growing companies that are typically smaller and growing with the goal of becoming public. And I have worked with companies that did just that where we took them from being a small private company all the way to be publicly traded on working a lot with auditors and the Securities and Exchange Commission and the management and the board of directors. So I've seen companies from a financial perspective, from lots of different angles, so definitely have been around the block, so to say, with companies and financial reporting, that said, I also have just sort of vested interest. I find this stuff interesting, and I think it's important to empower people with knowledge about how you could go about finding. You know, if there's something wrong going on at a company, maybe work for or you're considering investing in, whatever your position is with the company or relative to the company, it's gonna be important to know. So that's that Enough about me. We're going to get into the course material up next 3. Enron: All right, everybody. So our first case study is Enron. And if you haven't heard about it, you know, we're not going to get into all the details just because it was such a high profile case that I realized this was a long time ago. Relatively. I mean, it was almost 17 years ago at this point, but it really sort of blew things open and sort of led the way to some of the other case studies as well. We'll talk about. So if you're not familiar with Enron Unit US Company, Uh, what happened was essentially nobody really ask questions on why, over a five year period, their sales went from 10 billion to 100 billion. I think obviously, in this day and age, everybody would, you know, that would raise a red flag. But for whatever reason, people were just happy. They're excited with the growth. It became one of the biggest companies in the United States, so that should have been first red flag. So essentially, what Enron was doing is to sort of manipulate the earnings whatnot is they were using multiple sort of non US partnership agreements, and they call them off balance sheet agreements and arrangements. So they were basically unloading losses and creating generating sales through started creating transactions with these sort of don't say they're dummy companies, but essentially, they were all created for the purpose of sort of bolstering Enron. At some point, they're auditors kind of got notice. So after you know, the five years that said, you know what's going on, you know what? All these offshore, um, you know, agreements all these partnership agreements and, you know, subsidiary companies that are creative, you know what's the real purpose of those and start looking. And then they determine that you really should have been rolling in the financial status of those companies into the parent companies, you know, main financial reports. And they weren't doing that. They're basically trying to shove off many losses to those sort of other entities. So that was problem. One problem to was when all this started to come about, some of the main shareholders in the company in Enron started selling their stock because they knew kind of the jig was up and the price of the stock was gonna plummet. So then you started to have key executives selling off large parts portions of their shares . Red flag number two, of course, Some. In the end, a lot of those people were convicted of felonies, wire fraud, securities fraud, etcetera. A lot of people lost their jobs. And I mean, we are Enron basically went on business. Um, a few notes, just about the different things that they did. So excuse me. As I look down, I didn't want to miss any of these. So they manipulate their earnings by recording revenue to CERN. They recorded bogus revenue. Uh, they used, um, one time and unsustainable activities as booking them, though, is revenue when you're not supposed to do any of this stuff. Um, and then they had other techniques as well, Like using the subsidiary companies, etcetera. They also then. So I mean, Enron's the large company. I mean, we're talking billions of dollars in revenue, right s, so it's not easy to just easily manipulate earnings, So they had employed multiple ways to sort of hide everything. So they also took underway ways to manipulate their cash flow situation. So shifting cash flows around their cash flow statement. If you're familiar with the statement of cash flows, there's an operating financing in an investing section. So they were moving. Cash flows to the different sections toe look better for presentation purposes. Um, so basically, between the investing and operating sections, they were also using sort of not the proper techniques for accounting for acquisitions and disposals. So again, trying to mitigate any losses that would have came from those, uh, and then as well, they were boosting their cash flow through the use of those unsustainable activities. So then it's well, that'll lead to then key metrics being manipulated. So you know investors typically will run their search standard financial metrics. You run on financial reports, things like even earnings per share or, you know, your profit and loss or your profit, your earnings ratio. All these types of things there are manipulating the numbers. So those metrics came out ultimately well, So the financials themselves look good and the metrics turned out well. So when it comes to Enron, eventually they were caught. And you can imagine the magnitude of you know that the errors in the mess that was created by doing all of this. So just one example and then the next we're talking about another very high profile, one which was WorldCom telephone company 4. WorldCom: So our next problem child, if you will, is world come so very large telecommunications company again, This is early two thousands when this call came about. Essentially, WorldCom's business model, if you will, was to be fairly aggressive and acquire other smaller telecommunications companies. And that's how they were growing. And that's also how they've been justified. Oh, this is how we're growing so much. The problem was, they weren't accounting for these acquisitions. Properly from there would acquire other companies. They would use tricky accounting to get rid of the expense side of the acquisitions and their books. They would the book the revenues of their acquisitions and just continue to grow in that manner. Then they would continue. They would basically just repeat that over and over again. Um, as well, Then what they were doing is they were the biggest thing they were doing with shifting expense items from their own just parent company or world commas, the whole from their income statement to their balance sheets. So things that should have been booked as an expense would have reduced their overall profit would have reduced their earnings per share. Um, we're but instead being put on the balance sheet so you can imagine credits that were If you think of traditional accounting and debits and credits, your expenses would actually be debit. Sorry, s O debits that would normally be in expense were instead being pushed off to the balance sheet and debits on a balance sheet. Er, actually, technically and assets. So they were taking expenses and booking them of assets. Kind of a double whammy there, bolstering their balance sheet while certain mitigating many losses on their income statement. So what happened with WorldCom? After several years and again of them just growing rapidly, internal auditors and larger corporations will typically are always have an interlock department really start to grow weary of what was happening. Um, there's other factors. Is while he had to see a CEO at a lavish lifestyle, always sort of, Ah, I mean, I mean, that's one thing, but sort of out of, um, you know, proportion to what it maybe should have been, but their internal auditors lands launched investigation found billions of dollars accounted for incorrectly. They rose questions with the board of directors, who then also went to the Securities Exchange Commission. And that was basically the beginning of the end for WorldCom. So again, no good thing can last forever when it comes to, you know, medical in your financial reports world Come was a little bit more blatant about it, I would say, than than Enron. Although, you know, they're both doing pretty tricky stuff, different avenues to get to the same result, if you will. So just a few points with WorldCom again. Excuse me as I look down, I hate to miss anything. What were they doing? Sort of in a nutshell. They were also recording fake revenues, shifting expenses to future periods. And so all these things were actually talk about later in the course, all the different methods and more specifically about what companies do to do these. Just so you have a heads up so shifting expenses to future periods, that kind of, um, you know, put the bat off into the future. Um, and then as well, if they had, I say a really good period. They would actually shift future expenses back to an earlier period because they would rather absorb those expenses. Now, when things were really good, uh, they were also doing kind of what Enron did, moving their cash flow statement around between investing and operating, um, and financing activities. So whatever presented best from metrics, you know, they're definitely overstating their performance by presenting a income statement which would definitely have higher earnings and hence higher earnings per share, their balance sheet metrics completely out of whack. They're showing heavy assets that aren't even assets. They're supposed to be expensive. So, uh, that's WorldCom in a nutshell. Again, billions of dollars company collapses. Everybody goes down with the ship. So, um, fairly brazen. But nonetheless, that said, we'll go onto the next one. So now we're going to add two more little bit. Lesser known you might be familiar with might not. The next will be Tyco. 5. Tyco: So our next example is Tyco and Tyco was basically sort of, ah, Home Security Fire Protection company company out of Ireland. But they had a US operation. So in New Jersey, I believe so. What Tyco was doing was they, like WorldCom, had a heavy acquisition sort of business model where they would just acquire other companies. So somewhere along the line they realized that in the accounting for these acquisitions they could get a little creative and they basically were doing similar to world common and run. They were looking sort of the good, but not the bad. So they would book things like the revenues from their acquisitions and the assets. But they would kind of forget to book the expenses or they would creatively hide them. So they're essentially bolstering their top line, all the sales while leaving away all the expenses. And, I mean, they couldn't obviously just can't make them disappear. But basically what they did is came up with accounting policies. The the actual county policies were maybe somewhat vague at that time, not as detailed, so they tried to justify what they were doing is kind of a way of complying with the current accounting policies, but obviously being to see this about it, Well, so this went on and on the NAM. So when the Securities Exchange Commission ultimately, you know, looked into it, they basically said, No, you're not allowed to do that. And as a result of this, you've been hiding hundreds of millions of dollars in expenses and you know, your bottom line should be far less than it actually has been for the last several years. So again now, the other problem with tight go was a case where the executives were absolutely I mean, they weren't just sort of having a lavish lifestyle, maybe overpaid. They were directly just sort of taking funds out of Tyco for their own use. And we're talking millions of millions of dollars. So the executive team knew full well what, exactly what they were doing. I'm not even being careful about it. So when it all comes together and you have someone like Securities Exchange Commission investigates you, they see all the accounting being mistreated. They see the executive stealing cash, uh, to big red flags. Right. So, uh, they were Those executives obviously went to jail as well, and um, the company is no longer good, so I just some points on them. Similar things. Shifting expenses around, using creative accounting to handle those acquisitions. They would shift. They would move their income back and forth, just depending on when they needed it. Basically, self. It was a good month or a good quarter. And they had excess revenue, that they would just push it off to the next quarter and say, Well, that'll help offset some expenses next quarter. Or likewise, if they needed more revenue, that would pull it back from the future quarter. Same thing with expenses. Basically, to juggle them toe where they worked out best for the financial reports. Same things with the cash flow statement, how they moved expenses between, um in inflows and outflows and financing, investing and operating expenses. Um And then, of course, all their key metrics were distorted because they were essentially the key metrics kind of fall out of the financial statements and everything that's being done to present higher earnings and a more solid balance sheet just ultimately sort of naturally lead to more stronger financial metrics. So that said, in the next video, we'll have our last case study symbol Technology is probably not one that's definitely not as well known, but another interesting example. Then, after symbol will get into some of these very specific methods that companies are using. 6. Symbol Technologies : So our next on last example is symbol Technologies. Now this one's interesting. They all kind of fall in the same lines. Eso Symbol technologies makes hand held scanners that are used in lots of variety of places and actually, back when this happened, one of the contracts that reward it was with the United States Postal Service, which can imagine this fairly large. It's a government contract, so essentially what they did was nothing too tricky. And it's fairly out there and obvious. Essentially, they did kind of what other companies did. If they had a good quarter, they would, you know, shift some of that revenue to a future quarter. If they had a bad quarter, they would pull back revenue from Future Quarter. Same thing with expenses, kind of move them around from for five straight years. They basically performed well enough where they didn't raise any red flags. But they also perform consistently almost perfectly, obviously for a reason, because they were based on making up their own numbers. They always met the expectations, or they would come in just slightly below, or just slightly above what Wall Street expected earnings to be, Um, so that you know, there was no huge disruptions in the company and its earning. So at some point again scares exchange commission, takes a look at them, doesn't investigation and says, uh, no, you're obviously using very aggressive kind of liberal accounting policies. If you will. You're creating huge reserves that you can drawn in the future if you need them. And that's essentially in a nutshell. What's happening? So you're allowed to do that? And you know, because of that, I think it was like half a $1,000,000. Sorry. Not half a 1,000,005 100 million eso half a $1,000,000,000 in profits that were sort of not correctly accounted for which I should say they booked profits which were not actually profits of 500 million. So the interesting spin on this one is that when all this came about the CEO, um, his name is Rome Owe their story. Let me look here. Interesting fellow, if you ever want to look him up. Tomoe Ah Raz Melo Melo Vic Just Google CEO of Symbol Technologies Tomoe tm tomo uh, he fled the country, left the United States, he went to Switzerland and he's still there now, so this all happened back in the early two thousands on. He's never come back. Now, of course, he has been declared a fugitive by the United States. There's huge rewards out for his capture and what not. The United States government has tried to go over his bank, go for his bank accounts in other countries, but unfortunately, Switzerland is one of those countries that, you know they don't necessarily have as much jurisdiction as they might want to the United States. So Tomoe I looked it up. Tomoe is still basically living his life. As far as anyone knows, he went on so far as to not too too long ago. I mean, several years ago actually demand an apology, saying that he was being treated unfairly, so fairly aggressive, just like his accounting policies. Let's say, um and that's where that stands. Simple Technologies is still in existence, though it didn't put them out of business. So they recovered from that and now certainly follow proper accounting standards. So that's it, guys. So that's four just kind of examples of you will and these are obviously large scale big, you know, right out there publicly traded companies. You can kind of see a similar theme, just basically using accounting trickery and sort of accounting rules and regulations and putting their own interpretation on them. And, I mean, obviously, accounting could get very tricky at times. And you have very specific transactions that, you know, maybe there's not a specific guidance on them. You do have to fall back on sort of accounting principles, though, of being conservative and matching principal etcetera, which neither of those any of these companies adhere to. So, uh, that all set in the rest of the course, we're gonna be going mainly through now, very specific techniques that these companies use, and then that will also help you identify any areas and maybe a company. You're looking for a company work with and see if anything is going on. 7. Red Flags: All right. So, guys first off before we get into specific methods, I just want to give you sort of an overview of red flags, essentially things that you know, if you see these, they should just stick out. So you might not know specifically what's going on, but you'd be able to tell that Hey, there might be something happening that warrants investigation. So, um, several signs that you know there's something afoot. Basically. So, um and this will depend on your association with the company. Some of these you might not be able to check on if you don't actually work for the company , etcetera. So So first on absence of check and balances among senior management. So in this day and age, we have things like Sarbanes Oxley so familiar surveys. Obviously, it was basically born out of all these accounting scandals. It's, uh, very briefly. It's a set of rules and regulations that companies now have to follow. It basically involves companies doing a documentation of all the processes being cross checks of that auditors being more diligent, auditing company financials, and then also senior financial management having to sign and basically say yes. I'm accountable for the financial statements, namely a CEO and CFO. They're accountable of the financial statements so say something did come out even if they were not involved in it. They've signed off on these financial statements, so it puts more of a burden on the executives, which hopefully in turn also encourages them to make sure that everybody is doing things correctly. So that is surveys, obviously so. But an absence of checks and balances among senior management. Now I don't know where everybody's background lives, but if you work in a large corporation, I mean, sometimes I mean, every corporation is different. I've worked in a lot of different companies. Some were very regimented, lots of rules, regulations, others you know, things were a little bit more once a loose, you know, are just they had their own policies. Are there sort of self regulated, etcetera. So I definitely see different types of ways of operating companies. So ah, extended streaks of meeting or beating Wall Street's expectations. So Wall Street's expectations. Those air smart guys, they're coming up with their expectations based on sales volume and past history, etcetera. So thinking of something like our Symbol technologies, example where they constantly met are you know, we're basically right on target with Wall Street's expectations. I mean, every probably just thought that's great. Nobody for obviously five years start to think, Well, that's kind of weird, you know? Why is that? They always hit it. Exactly. It's because they were just basically making the numbers fit so that they didn't meet the expectations. Um, situations. And you don't? I wouldn't say this is common, but you do see it. We're like a family runs a company. So you know, we've talked a lot about publicly traded companies, but certainly then when you go to the private sector now you don't have things like this carries Exchange Commission, regulating them. So uh huh. Now there's less rules and regulations imposed on a company, so you could still have a multimillion, multibillion dollar company and have it be private. So say you're an investor and that's what you do. You invest in private companies definitely an area for concern in terms of making sure those checks and balances air there as well. Family run businesses and there's definitely multi, multiple sort of large, multi 1,000,000 multi 1,000,000,000 family run companies out there. It's just sort of a breeding ground, if you will, for people to start started dipping into the piggy bank a little bit too much, if you will. Same thing goes for board of directors. So if the board directors is sort of built of, you know, a lot of the same people from the same family, Ah, lot of the management team, etcetera, could be cause for concern. Um, let's see here a lot of related party transactions. So if you're familiar with accounting, so related party transactions air something that public companies actually have to disclose . Private company, though obviously there's no burden on the do that, so related party transactions are what they sound like. You have trained like maybe the company lend the CEO a $1,000,000 but somehow it didn't make it to the books, you know? So basically they just gave him Millie dollars, things like that, uh, inappropriate compensation structures. So you know, you have CEO CFO, basically the sea level management getting paid disproportionately from the rest of the staff, and I think that would be obvious when you look at it. Also looking at, um, rewards and bonus programs, you know, so the compensation might be fair. But you know, there's extreme bonuses rewards built in their contracts, and they somehow always seem to meet the need to get those, um, again, the board of directors sort of heavy on employees, not so much employees, but management team our family members remember the entire point of a board of directors is to sort of be sort of provide guidance for the company and its It's actually important. It's very valuable toe. Have a lot of outsiders on your board of directors. When you don't have that, you have just the family who's running it or the insiders. So, um, unqualified auditing firms. A lot of times, companies will hire audit firms that either just don't have the proper, you know, authorization to perform on its or their regulated. But they're, you know, smaller firm maybe, you know, susceptible to being corrupted, etcetera. So, you know, you have, ah, multimillion, multibillion company that has auditors. That is just 11 man C p. A. That works in a strip mall. That's a bit of a red flag, right? So, um, and then if you see just management, you know, trying to avoid any type of regulatory or legal scrutiny. So you know, somebody in management says, Hey, you know what? We should get our financials audited. It allowed a lot of credibility to our company. And if you have all the other managers go, I don't know if I like that idea. You know, there might be a reason for that. You know, they don't want somebody poking around. So, um, all in all those air, several red flags. Obviously, these are things that should just be some of these things that just sort of maybe aren't complete, blatant red flags. But they should cause you to feel something. You know, maybe in your gut. When you see them and you go, there's something could badly happening. It's not necessarily, but at the same time, it's worthwhile. That would be your first sort of sign that maybe it's worthwhile to dig in a little bit more 8. Recording Revenue Too Soon: Okay, so let's start talking about the various ways that companies air sort of mishandling their accounting, if you will, which is basically essentially what most of these end up being. The 1st 1 is recording revenue too soon. So under accounting rules and regulations, just in general, 10,000 foot level you record revenue when it's been earned. So you know you provided a service. You sold goods to somebody that's when it's actually recorded on your books. Um, if you're, say shipping, say use, sell something that you have to ship. There will be an agreement in place that determines when the buyer takes possession, and that's when the revenue gets recognized. So whether it's typically there at the moment, it leaves your doc. You know your location becomes their property, which means you can record the revenue. Or if it's when it arrives at their place, that's when it becomes, legally their property. Then that's when you get to record it Sounds simple, but obviously, if you ship something across the country and it takes three days and those three days happen to be merch 31st through April 2nd, you know you company could you know maybe take the revenue that should have been recorded April 2nd and put it back in March 31st. Especially when it's something like 1/4 in or imagine even worse. That's a year. And you know December 31st you're a little bit shy and your revenue you just sent out a bunch of shipments. Maybe we can pull some of that revenue back to the current period, just saying that's the mindset sometimes. So, um, nonetheless. So let's talk about some of the other techniques a recording revenue too early, so you're not allowed to record it until since everything's happened. So one thing is under contract. So before completing any of the obligations, so say we sign a contract, you say it services contract. It's a little bit easier, and it's kind of more applicable. Um, I agree to provide you services and say, It's even me. I'm gonna do CFO services for $10,000. It's merch. 31st. We signed the contract, and I book all the revenue $10,000. But you don't pay me till April 15th. Well, really. And I didn't so you don't pay me till April 15th and I actually do the work from April 15th April 30th. Well, you're not actually able to record that revenue till the services have been performed. If you're paid up front, it's called deferred revenue, basically revenue you've collected up front for something that you haven't actually done. Yep, it's actually technically a liability. So in that example that I just gave that March 31st. Nothing should have been recorded because all you've done a sign that contract, but no, you haven't received money and they haven't done any work. At April 15th Win Person receives the money. That's when they record a deferred revenue entry. They have an obligation now to do work but haven't done anything. And then, through that April 15th forget what I said April 30th period. When they do the work, once it's complete, now they can record the revenue. They take it out of deferred driver knew and book in Israel revenue. That's the normal transaction slow so but you could see where companies can easily go. Well, we already received the money, and we're going to do the work. So let's booking now, um, recording revenue far in excess of work completed. So say that same contract I just talked about signed on March 30 1st received payment on April 15th. Actually, do the work over, you know, April, May June. Technically, you're only allowed to record the revenue that's been completed. So say I completed 20% of the work in April. I would technically only be allowed to record 20% of the revenue on the same thing for May . Whatever percentage I complete, that's what you're allowed to record again. It's a situation where company might just say, Well, let's just record it all now and we will be doing the work, not proper accounting. Um, some companies were record revenue before the actual acceptance of, like before contracts even sign Essentially. So say somebody sends out a quote on March 31st and then you know they receive, you know, maybe April 5th. They say, OK, the buyer says, Okay, Yes, that's appropriate. Were willing to sign that contract, and the company just books the revenue in March. I mean, at that point, there hadn't even been a contract. It was just a quote for services. So that's even a very more aggressive stance on how to book revenues early. Um, you know when there's a promise of potential revenue, but nothing's actually legally binding them, Um, as well. You're not allowed to record revenue when the future payments air. Sort of, um, uncertain if you will. So let's say somebody is going to pay me over a period of time. They have a bad history of actually making payments. Let's say I do the work human. So let's say it's a different example. Were actually do a bunch of work, and then they're gonna pay me at the end and it's looking, or I have good reason to believe they're not gonna pay me or say they pay me half up front so they pay me half up front. I do a lot of work, but then in my work, I see that well, they don't have any money left in their bank account and they're filing for bankruptcy. I can't, uh, you know, under accounting rules, book that final completion revenue peace because I know that in my heart that they can't on so pay me. So if I'm not going to be paid for it, I can't recognize the revenue, so there's lots of situations where you can tell. A company can then take revenues which are unearned or going to be earned in the future period and sort of booked, um, anyways and then sort of make a justification. Unfortunately, Or fortunately, I should say, under accounting rules, it's barely cutting dry. There's very strict sort of criteria that have to be met in order to book revenues. 9. Recording Fake Revenues: Alright, guys. So the next one, we're gonna be looking at situations where companies book revenues where there really wasn't an event that revenue should have been booked for. So in the previous lecture, we talked about where you know there's a legitimate case to be made for revenue. It's just the timing is often they're moving the period. They're moving it back as early as they can. In these situations, there's really not the proper classifications or warrant to actually book revenue in general. So we'll talk about some of those. So, um, in order to book revenue, transaction has toe have economic substance. So again, there has to be something provided So we can't sign a contract where you pay a company $10,000 for services and they promised to do nothing. There's no give and take there. There has to be something that the buyer is receiving as well. So obviously contract like that, it doesn't sort of lack the economic substance test, so you wouldn't be able to book a contract written that way on DSO you might think, Well, why would you ever even enter a contract like that? So I think it may be in terms of a situation where you had a company like Enron who had lots of different agreements and subsidiary companies. They might create an agreement between the parent company and a subsidiary company where, oh, you know, the subsidiary company will pay the parent company a $1,000,000 since example, but there's no actual riel services that they have to provide to do that. That would be an example of this where there's no economic substance, there's no valid reason for that to happen. Um, transactions have toe happen an arm's length process. So you know, I, you know between two parties is essentially a good way of thinking of at arm's length process. So if there's lots of like, well, you pay this other party and then they'll do something for us and we'll pay you. Let's when it becomes a little convoluted, that's usually sort of a red flag that something is going on there. There's no good reason why there should be multiple parties involved in the transaction when it could be directly between two parties, the buyer and the seller. Very seldomly see contracts or you purchase agreements where there's lots of different parties involved. So I mean, I could think things like a drop chicken shop drop shipping agreement there. Maybe there's three parties, you know. The buyer pays view and you pay the drop shipper and drop shipper delivers the goods. That's fairly common. That's fair. But, you know, unless it's sort of a common example like that, there's no really good reason any time there's a risk of transfer from the seller to the buyer. So again, um, you know a company you know, agrees to buy goods from a company. They may be paid him up front. The company, the seller books, the revenues. But the company maybe doesn't have the product yet. Maybe it's in development, you know, it's questionable if they're even gonna be able to make it. Maybe they don't have supplier agreements. There's lots of reasons why it would be skeptical if the selling company could actually follow through on their agreement. And a lot of times it is in a May be a startup environment or development stage companies. So again imagine, you know, and we're just talking, you know, we've been talking $10,000 but say it was a $1,000,000 agreement. Uh, buyer pays the seller upfront a $1,000,000 to deliver their new contraption that they're building and they have a patent for it. It's gonna be great, but they haven't actually built it yet. They're working on building it and that its if he if it's gonna all come together and they're running into maybe production issues, revenue shouldn't be booked by the seller in that situation. But obviously that's something we need to look for. So revenues that have been, and even if it is booked, it should really be booked in deferred revenue, not actual revenue. Its revenue. That's been unearned. Yet you haven't delivered the product. So, um, transactions affiliated parties is always, I want to say, a red flag. I mean, it's not necessarily means something bad is happening Any time you have affiliated parties involved, you know, management's getting involved somehow. Now they're involved in the contract personally, not just on the company level, family members, etcetera or maybe agreements between, uh, different companies, but that are sort of run by the same family. Things like that you want to look at definitely so if you catch wind or see anything related with affiliated parties, definitely worth while to take a second look. Um, they're called boomerang transactions. So transaction between two companies where basically they just trade revenues. Now that's fairly blatant, isn't it? And you could easily see this being done between, um, parent company of subsidiaries. So the subsidiary buys a $1,000,000 worth of the parent company's goods on then so they give them to them or whether they do or not. But then the parent company buys them back. But the thing is, is that in that situation there's something called consolidating your subsidiaries, and this is exactly one thing that and run did that they will that they didn't do when you consolidate subsidiaries. Right now, you have a sale of a $1,000,000 on the parent company's books, a sale of a $1,000,000 on the subsidiaries books but really was for the same transaction, right? So those should actually technically wash when they're combined together. But instead, people who maybe don't handle the accounting correctly would show the revenue $1 million seared $1 million there. So they effectively took a transaction which had no net effect, um, and made it into a transaction that resulted in $2 million in sales. So, uh, you know, a few accounting entries can go a long way to doing something like that. So something to be very wary of when it comes to intercompany transactions, Um, recording revenue for non revenue producing transactions. So you might So actually, that's similar to the example we just talked about. I mean, no revenue was actually generated in that transaction. Uh, really, You just sort of traded goods back and forth in order. I mean, there's really no good reason for that other than to create the look that there was an accounting transaction than sales happening, Um, recording cash received from a lender but treating it as revenue. So obviously, if somebody lend you money, that's alone, that the liability it's an obligation of your company seems fairly straightforward, right? Well, some companies might take that as sort of an opportunity to record money coming in as revenue and do whatever they need to do, whether that's create documents that there actually was a revenue transaction or just improperly account for it and hope that it flies under the radar. So, um, instead of recording, you know the cash coming in a loan obligation recording in his revenues. Obviously fairly blatant and incorrect. But it happens. Um, let's see what else Here, guys, Um, another red flag is when your receivables growing much faster than sales. So So this isn't so much in the inappropriate accounting while something inappropriate is happening. But this would be more than actual red flags. So you know if sales are a $1,000,000 for the quarter, But somehow your receivables or the company's receivables grew by 1.3 million. How does that happen? Technically, really Can't. So that would be an area where you need to look into. It's kind of a very blatant red flag there. Um, let's see. So the last area to look for would be big changes in liability accounts. So you have drastic swings and accounts payable or loan obligations. Uh, they could be used as sort of buckets, if you will. We talk about buckets and sort of the counting worlds, basically places to park debits and credits to be parking debits and credits that technically should have maybe been expenses or to offset. So a revenue transactions book that should've been booked and they need an offsetting. You know, Devon a credit, and they book it as a liability. So any sort of big swings in receivables or liabilities that don't sort of jive with the transactions of the business definitely worth looking into as well. 10. Recording Revenue Using One Time Activities: All right. So next we're gonna look at one time, um, events that air somehow used to manipulate earnings. So, um, typically, one time events are things where you know the company might have a boost in income and cash flow on example is, you know, they sell off a division of the company or another example that's often uses and insurance claims to say the company eyes head coordinate area that has lots of tornadoes. Tornado roll through creates a bunch of damage to the building. Insurance claim is filed, and they received money back several months later. And maybe it's probably a lot of money if a building was damaged. Well, those air one time transaction and they, more importantly, are unrelated to the actual ongoing business, right. But it unfortunately leads to areas where companies can now treat the accounting of those inappropriately. So let's talk about some of those. So, um, so the 1st 1 we already mentioned so boosting the sales of the company. But through the sale of a business or a division or whatever, it might be a subsidiary. So that is supposed to be treated as so mostly transaction. We're gonna talk about should be below the line that's referred to as. Basically, you don't report those of sales. They're not part of your actual ongoing business sales. Certainly they did. They do boost your casual position. They boost your incoming money for the period. But I would stay away from using the term sales or revenue because that's not really what they are. They're just a one time sale of a business. It's hard to avoid using that terminology. But eso se company sells off. A division sells off a subsidiary. It goes below the line. So after they report their normal sales cost of goods, sold expenses, they show their net profit. Then they would have sort of unusual activities that you know are one time or one time activities that also help. And then they can show a second, you know, profit line. But at least it's easy for investors and management team distorted, decipher and break those out. And you don't have those one time sales or events clouding up the actual true sales. Um, sometimes companies will coming also say they are buying a business. They might get basic, it creative. They'll pick and choose how they handle the counting. So maybe the book future sales and with current sales of that book sales from the period during the acquisition into their current sales, even though they aren't maybe technically, um, going to receive those sales once they're paid Maybe, you know, depending on how the contractors that so any time a businesses Bader sold. So the first thing we talk more about when you sell a division or business uh, this examples warm. If you're acquiring a business, you can't starts sort of incorporating their business into yours until it's technically your business as well. Another example is, so I mentioned I gave you the example of, you know, we sell a business, and we report that what's called below the line while some companies will use the below the line to further enhance their bottom lines. So what they would do is say, have your normal business expenses, like payroll and rent, whatever else you know, marketing expense, you know, um, salaries, etcetera. They take those out of operating expenses, and they put those below the line. Now it z somewhat hard to do that in today's day and age and sort of disguise that But it's certainly something that companies can do and they could disguise. It is other miscellaneous expenses. Whatever the case might be in it, it doesn't even less. They have to be a lot everybody it has. You know, it could be where the company really wants toe reach, you know, $1 earnings per share and they're at 98 cents. So they just need to move a few of those expenses below the line and all of a sudden reaching a dollar per shares, they're gonna look for the proper classifications of all expenses. Both, you know, not moving the revenues up that shouldn't be up there and also not taking expenses and moving them down below the lives that shouldn't be done. That another sort of one time event that can happen is called restructuring. Charges of the company restructures lots of different reasons they might restructure. We're gonna talk about those aware reason the company restructures, and then they reallocate how they're sort of financial statements are presented. If there and that's fine, if they do, you know you wouldn't see restructuring happen often. That's the red flag, though. If you start to see restructuring every year. Certainly a recorder big red flag there, basically restructuring their business to make it appear better each time and absolutely not allowed to do that. Um, another big area is something called discontinued operations. So business going along has several divisions. You know of subsidiaries, ones not doing very well. Let's just say it's a division. They decided to discontinue it. They're no longer to make products. See, they're going only focus on products A and B, and that's fine. Um, so they might. What they do is called treated as a discontinued operation. Now they have to continue to show the results from that discontinued operation on their financial statements. But technically, they then break those out so that, um, an investor and get a board member user. Their financial statements is able to see what that discontinued operation had contributed in the past to the financial statements. So but where companies get a little bit tricky is they take expenses related to the other divisions and sort of attribute them to the discontinued operation so they can shift those essentially below the line as well through a different methodology. So any time there's a discontinued operation, you want to be able to share, to look into that and make sure that it's strictly the actual operation that's been discontinued and not a bunch of other things as well included in them. Um, proceeds received from selling a subsidiary. I think we kind of touched on that in other ways that basically you sell off subsidiary. He treated his revenue instead of treating it as, um a Z a one time event below the line, if you will, um, other red flags if you just see, um, massive growth. And it just doesn't seem to ring true with the company. You know, they haven't introduced any new product lines. They haven't changed their marketing strategy. They haven't, you know, gone out to new markets. But all of a sudden, there revenues. They're just growing growing. And some of our four examples from the past that was a big red flag, you know, they were just, you know, booking revenues that they shouldn't have had. There was no good reason why they're having You should have grown that much. That's definitely a red flag. Um, anytime you have a lot of joint ventures, um, it's something I keep saying subsidiaries subsidiaries not so much but joint ventures between companies. Similar opens to being able to create transactions between different companies with the joint ventures. Maybe we're booking revenue and their booking revenue when really it's just one transaction and, you know, there was really just offsetting revenue. Um, and then as well, when it comes to your balance sheet, Um, just looking for big kind of like in our previous lecture, we talked about big changes that don't ring true. You know, when your accounts receivable jumps 1.3 million, but you only had one million in sales. There's no like that just doesn't ring true from the start. And that's definitely something that's worth while looking at. Or, you know, the company pays down a $1,000,000 in debt, but only had cash flow of 200,000 and they didn't have a $1,000,000 in the bank to start with. So things like that stone that up obviously in those areas that you wouldn't want to look into surfer sort of one time transactions that happened in the normal course of business, and they use that as an opportunity to create some accounting wizardry. Teoh make things look better 11. Shifting Current Expenses Forward: Alright, guys. So now we're gonna focus more on some expenses. I'm in some warning signs, essentially that expenses and the current period. So whether that's the current year, the current month are being shifted to a future period. So we're making our bottom line look a bit better by sort of making, you know, the future deal with our current expenses. And again, I apologize for looking down. I just, uh, hard to remember all these off top of my head. Um, first thing capitalizing operating expenses. So the act of capitalizing is when you take something that you spend and you book it as an asset, so think of something like a good example is fixed assets Usually companies have a fixed asset policy. So, um, since depreciation has to be tracked for all fixed assets, they might have a policy like everything under $5000 gets expense in the period. We just write it, write it off, essentially expensive instead of treating it as an asset. Uh, but maybe this company, you know, they need a few extra dollars. They decide to start capitalizing or treating his assets. I anything they buy that are over $1000 so it doesn't quite align with their fixed asset policy, but they're shifting more things that would have been expenses to the balance sheet. And they might have. They might be able to death, Faisal say they by 10 $3000 computers, they say, Well, really, it's $30,000 in assets, even though it's 10 distinct $3000 assets that should have been expensed according to the policy, but they treat as a $30,000 asset in and of its own. So in property, said the counting there, um, changes in, uh, the, um the raid in which things are depreciated essentially so appreciation is an expense which flows through to your income statement. So if all of a sudden there's changes in the policy, Sayer depreciating some asset over a three year period, and all of a sudden the policy changes made that it's not gonna be appreciated over 10 years. Pretty drastic change probably not warranted and probably doesn't fall under any good regulations. So things like that cause you're essentially just trying to reduce the amount of depreciation expense that you recognize, um, new and unusual asset accounts. So, um, you know, all of a sudden on the balance sheet, there's just a category that doesn't make sense. Are there's this new assets. I can't think of a great example just because it could be anything on her son. If you're a manufacturing company, maybe they have a new asset class for this new machinery that they're buying, Um, you know, or their delivery company. And they have some special trucks that they now have, Or just weird things that stand out essentially mean these air again, these things that you look at them and you go, Well, it doesn't really make sense. Like, what is that good? You know, use your gut instinct and take a look at those types of things. Um, what's the unexpected increases in capital expenditures? So again, all of a sudden, your asset base just starts growing and maybe not yours, the company you're looking at or you work for, So you know, you've been going along. The company has an asset base of a 1,000,000. Every quarter kind of goes up, maybe one million. You are sorry. It was a 1,000,000. It goes up, you know, $10,000. That recorder roughly replacing assets adding new ones, then all the sudden it goes from, you know, 1.1 million to 2.1 million. Well, unless there was really a great cause for that, you know, the company really expanded about a lot of assets, Something to look at again. It might be that capitalisation issue or they're capitalizing, lost things that should have been expense. So, um, we talked a little bit about depreciation and changing that appreciation period. That's no bueno, um, impaired assets. So when it comes to things like a good example for these air intangible assets so familiar with intangible assets, these are essentially the three categories I like to think of our patents, trademarks and copyrights. So these air assets that you can't touch them, right? That's why they're intangible. It's just a thing that you won't. So having a patent, you know, it has some value. That is an asset. I'm not gonna argue that a patent is not an asset, but it's also an area where companies get a little liberal and they're counting because they because it's not something, can physically see a patent. You know, what's a patent worth? I mean, there's a whole Knaus way of create valuations for patents, but that as well you have to determine each period or say each year is that patent Still wear this So say you get a patent on your X Y Z product. You higher valuation experts on the patents worth a $1,000,000. You book it as a $1,000,000 on your books. What needs to be done, though, is each year you tested for impairment, basically, is it still worth a $1,000,000? Or has it been impaired? Is the value of that asset less now? This is something that's awfully hisley, very subjective. I mean, you're relying on other people's opinions or the company themselves, and that's where they could get in trouble. It's just coming up with their own valuation, and they might say, No, it's still worth a $1,000,000 but you hire somebody and they say, Nope. It's worth half a $1,000,000. Big difference there, and it's something again. It's the intangible asset where it's hard to put pin down an actual value for it. And obviously, evaluation experts have methods to do that so intangible assets impairment area that you definitely want to look into um another area want to look into is if you see changes in inventory relative to cost of goods sold that are disproportional. Essentially, your inventory should flow through cost of goods sold through the natural selling progress , right? So if you have a $1,000,000 in inventory and you know you have sales off whatever they are , but then typically you also have a $1,000,000 in cost of goods sold and then almost sudden , the next period or the next year. Um, your inventory still a 1,000,000 but your cost of goods sold is only half a 1,000,000 but your sales went up even more than there's a big disconnect. You know, your cost of goods sold drop of your sales increase, but your inventory didn't change so bit of a disconnect. So you have to think about the sort of natural progressions of transactions and what those are. And then when they don't match up with the financial reports. Definitely red flag there. Um, let's see, uh, decreases in loan losses reserved so we could talk about reserves in general. So, uh, one reserved. I think most people be familiar with this sort of reserve for doubtful accounts. So if you have accounts receivable on your financial statements, you know, companies that I owe you money through the natural course of sales, and that's fine. But you know that, you know, some of them are not gonna come through, and you kind of get a bit of a history over time. So one of the estimates we have to book as accountants is are reserved for bad debts, people that are gonna pay us. And then we adjust that every quarter based on how much receivables we have and are if there's any changes in our experience with the bad debts. So if all of a sudden the company had say they typically had 5%. So whatever their accounts receivable balances, they had 5% of that offsetting as a reserve for bad debts. But then in the next period, the reserve drops to 1%. Well, that might be a bit of an issue, you know? Why was you know, why is that, um, again areas to look into, um and then as well. So another area is it comes with inventory, some manufacturing, or even just wholesaling top of companies. Typically, you might have reserved for obsolete inventory, especially when it comes to things like, say, a technology company. They sell computers, they sell devices, they sell technology. In general, technology goes obsolete very quickly. So companies need to have reserves for that to essentially say, Hey, you know, a chunk of our inventory is just not gonna get sold and will need to be written off at some point and knowing that now we need to book a reserve for that. So when it gets written off, there's not a future financial impact. We're taking the impact right now, obviously again. Another area. It's kind of like our accounts receivable reserve, if you will. Um, if you're sort of mitigate or sort of lowering your inventory obsolescence reserve to bolster your financials, but you're still gonna have the same write offs. That's no good. So lots of ways that expenses can be kind of shifted around or just minimize, just based on the fact that they are a little bit more subjective, like our patents and all of our reserves, etcetera. So things to look for, though just having reserve or having a patent isn't that sort of red flag. It's those big changes, uh, that you really want to look for. Those should be the red flags 12. Other Techniques: All right, So next let's talk about just some other ways of hiding expenses, basically, so it's not necessarily shifting them around. It might just be blatantly hiding expenses. Again. I apologize for looking down, um, so large vendor credits and rebates. So, you know, people owe you money, are you are So I should say, Are you other companies money? And all the sudden there's big credits toe that, um, what's the reason why? Especially if it's like a one time thing. Okay, you know, that might be realistic, but if it seems toe happen often, uh, might be an issue. So those areas where you want to look at and again, this might not be something as an outside, um, you know, viewer financial statements, you might not have the insight to actually see these types of things. But if you work for a company that you work in the accounting department or you're in a position where you get a little bit more detail, you see a lot of vendor credits, it doesn't quite add up. That might be one red flag. Um, any time that cash transactions, I mean, not going to see this much, especially in a large company. But realistically, how maney vendors people get paid in cash unless you're running a small retail store. Mum, Pop, You know those types of situations? Sure, but I'm thinking more like a corporation. Ah, you're probably not getting paid in cash. So cash payments, Definitely big red flag. Something might be going on there, um, situations where expenses just aren't booked. You know, maybe, uh, for whatever reason transactions happen on, say, somebody in the corporations that though, just don't worry about that, or let me take care of that later. I'll do it might be red flag there as well, so just purposely not even booking specific expenses that could also tie into the cash thing. So if you have companies that are spending cash, um, you know, they books so much of it out, or they will get the petty cash, etcetera, and then they're spending it, but not properly classifying it. That could be an issue. Um, anything to do with reserves. Um, specifically will talk about reserves for warranties. So it's another area where we have a reserve. So if you're familiar with warranty counting, basically what happens is when if you have a warranty on your product. So say you sell some type of widget and it has a one year warranty. So if it breaks down, person is like it. What? Whatever refund slash warranty policy you have. And so what you need to do is book of reserve. For that, you should be able to estimate while 5% of people will send their good back, we have to refund them. So similar to accounts receivable saying similar to obsolete inventory, you have this reserve booked if all of a sudden the reserve disappears or it suddenly drops drastically. What's the reason for that? You know, realistically, you know, if sales have been the same, there's been no change in your warranty policy. The warranty, you no expense should be fairly consistent. Um, anything else? So Krul's is one area, So in accounting, we made a lot of estimates. So all these sort of reserves, we talked about our estimates, but as well we do things like a Krul's we crew for expenses, you know that we've incurred, but we haven't actually been billed for, so there might be an estimation feature in there. So if there say legal Eagles, always a popular one. I remember accruing for legal quite a bit because you would have legal services that you had hired lawyers for. They haven't build you yet, so you need to just book a nest, emit, if you will, of what that legal expense is gonna be. So if companies are avoiding booking their Krul's and they're just gonna take the hit in the future period, not proper accounting. But it's an easy way to, um, not book and expense. And there's there's no invoice. You can almost sort of play dumb, if you will and say, Well, we didn't have an invoice. We forgot. You know the book in a cruel whatever the case might be, um, looking at other eso three issuance of stock options. So accounting for stock options and warrants gets fairly tricky, especially these days. They have to be valued a certain way, you know? What are they being issued? Four. They being issued in lieu of compensation. Are they being issued as a bonus? Is it for something that's already been performed? Is it for future service? Lots of different things go into accounting for stock options and warrants. Um, that said. You need to look at sort of the timing. If all of a sudden you know, say, it's, um not the best year. Um, and all of a sudden, rather than say, you know, all of a sudden payroll expense kind of drops. And then on January 1st, a bunch of stock options are issued. You know, you might want to look at the timing just because it kind of raised the red flag. When you know big chunks of something that's going to be an expense that can kind of be justified moving it here, moving in earlier, moving at late and all of a sudden it happens. You know, after the fact, just things like that raise a red flag. So I'm not saying there's a specific thing you have to look for. I'm just saying When the timing's off, you get that gut feeling something to look into, um, off balance sheet obligations. So if you're aware of a company having them and you know not booking them again, it goes back to earlier lecture. We talked about companies where there's a lot of family involved. That's where you gonna tend to see even more off balance sheet arrangements, Um, other big areas. So these air going to be bigger companies would be things like pensions and leases and insurance. The counting for all these as well, gets a little tricky when it comes to pension. Companies need to test and make sure that you know the pension is adequately funded. So say they have X amount of people who retired or are going to be retiring. And they're all entitled to so much in pension over the rest of their life. Is the company's pension adequately funded? And has the expense been recognized properly? Those types of things leases different, completely different animal, if you will. But accounting for leases, you know, Is it being treated properly? So think of an example where ah company rents out a new property. They signed a one year lease, but they get six months around free eso the 1st 6 months of free in the last six months. They pay ramp well. What's the proper accounting for that? I can tell you it's not no rent. For six months, it's You spread the cost of the least over the actual lease so you would be booking so say the company was gonna pay $1000 a month. I mean, it's obviously a small property in that case, but they're only paying it for six months. That's $6000 really should be booking $500 a month at least expense, not zero for six months and then 1000 for the next six months. So keep that in mind if you haven't been exposed. These types of things there's so many different ways and creative agreements. And I mean that's created, but not in a bad way. That's just a standard like lease agreement. More likely. So a company science say, like a 10 year lease, and they get the 1st 6 months for your made to get the first year free. I've seen that, so you need to book some expense for that. So the proper way is to spread the entire cost. So it's all these types of transactions that get a little goofy, if you will, and you could see how somebody who either is playing dumb or just doesn't know saying well , we didn't pay than the least expensive rent this month. Why would I book anything? Well, it's not the proper accounting. Remember, we're trying to be conservative. We're trying to match our expenses with the period, so I kind of have to go back to fundamental accounting for a lot of this. So that's it for other types of expenses, so we'll move on to the next. 13. Shifting Current Income Forward: All right. So next sort of technique we're gonna talk about say, company has an exceptional period a year. Um, you know, they you know, whether they meet their earnings per share, whether they go over, say, their earnings per shares, whether it's $5 of $6 not gonna get much out of it. There's much more of a penalty for not meeting earnings per share than exceeding it versus meeting it. So a lot of times, this is where the incentive lives. If the company has excess revenues, if you will, they'll move them to a future period to hopefully offset. Maybe they already know that experience not gonna be is great. So, um, so this is taking current period revenues actually saying, No, we don't want them while we're gonna move them ahead to the next period. So some ways companies do that, uh, just straight up reserves. They just will create a reserve. They'll say help This sailed in Applied of this period will book it as a reserve almost like a deferred revenue, if you will. And the next period will just recognize the revenue. No real justification behind it. They just sort of do it. I mean, unless somebody actually checks, it's just another, you know, revenue source, if you will. Um, I'll done just through journal entries, you know, book one entry. Have it reversed the next period. And it would be done, um, stretching out sort of one time consciousness. They they did and revenues through some type of service contract, and it was performed all in the current period. It was completed, and maybe it got completed early. Um, but you don't want to recognize all that revenue right now. You would just spread out saying, Well, we weren't technically done. So we're only take half the revenue now Will take half the revenue in the future period. No proper, obviously. But one way that companies go about it, um, one area now, this gets really tricky. Is derivatives so driven accounting for derivatives? That's fairly complex. I would say it's up there on the complexity level when it comes to accounting. So derivatives are things again, Like stock options warrants, they derive their value from something else, which is the base stock. Um, accounting for these. There's different ways of putting a value on them. What's appropriate, You know. So again. Example. You know, somebody issued a lot of stock options, and it's in a zoo. Part of a bonus. Well, what are those stock options worth? Are they worth a 1,000,000? Or they were five million. You know, executives getting that's a maybe a very real question for a large company. So, um, how do you recognize that? And then also the timing of them. So say, you know, we typically we're giving you a bonus, which is related to the current year. But we just don't issue them till next year because, you know, we don't want them to impact our financial statements. I've seen it happen. So somebody to look at county for derivatives, definitely it tricky technical area. And the timing can easily be kind of manipulated. Um uh, just holding back revenue, purposely not shipping something, saying you know what? We have this huge shipment. Maybe it's worth $100,000 you know, we don't want that revenue in our 2017 numbers, and it's December 28th. Let's just not ship the goods. Let's just wait till January 1st. Uh, you know, and that doesn't maybe an agreement is that you know it becomes revenue once it shipped and leaves your door. I don't know if there's much you can do in that situation other than at least somebody actually says, Well, it's been sitting here like, ready to go. Why didn't it go? But technically, if it didn't ship, it didn't ship. But that's not necessarily something you can argue and say it was specifically done incorrectly. It's just more of, ah, shady type of move, if you will, to purposely push off revenues, um, anything related to acquisitions, you know, taking the company that you're acquiring, Um, looking at their expenses, their revenues and maybe, you know, pushing them ahead as well. If you don't need them in the current period or even just taking an acquisition, um, and maybe say they have a bunch of revenue that they earned that you're entitled to. So you don't book the acquisition till the next period because you don't want that revenue hitting your books until the next period? Um, lately, again, a blatant one. Just recording a current sale. So again, journal entry sort of manipulation. Just recording current sales, just taking a chunk of sales and saying, you know, maybe it's on March 31st. I need to just, uh, let's book those for, You know, April 1st and may be March 31st falls on a weekend, so it's easy to justify and say, Well, let's just make those April 1st Let's Monday, um, big changes in deferred revenue. So again, deferred revenue is revenue that you have collected. So somebody pays you up front and you haven't done anything for it yet. So the consultant to know they collect $10,000 up front they haven't done anything could be the software firm. Etcetera was paid a bunch of money up front, Um, for whatever. It could be a product based company as well. You know, you're paid a bunch money up front toe, help with your development costs, and then you'll eventually shipped the products. Well, that's deferred revenue. You haven't earned it yet, so it's technically a liability, and it gets recognized as you deliver the goods or services. Um, so say you did deliver the goods or services, but you don't really want to recognize that revenue yet. You want to keep it on your books. It could be another thing where you say I will. I didn't technically deliver it till etcetera and shifted forward. So again, the use of sort of reserves and, um estimates is a big one area where companies kind of move income and expenses back and forth. Um, and this one, actually, this last one directly applies to believable a symbol? Um, yes. Where their earnings per share just consistently meets, You know the targets. It's very consistent. They always seem to be like smooth sailing. Um, nothing wrong. Even though the company's acquiring lots of other companies, there's lots happening, you know, They should be a bit more of a rocky, rocky road when it comes to their earnings. But everything is smoothed out. That's pretty much a red flag that somehow companies air, shifting things around to sort of smooth those earnings out. So on area to look for that is all I have to say about those and moving revenues to future periods. 14. Shifting Future Expenses Back: so in a similar fashion, you know, a company that has a current period where they're good, you know, they've already metering for share. They don't want any excess revenues. They don't want to show or any, you know, less expense because they they're already good. Their bottom line is where they want it, so they start. So in the last lecture, we talked about shifting revenues to future period, so to sort of reduce their net income this period, another way of accomplishing the same effect on your bottom line is to shift future expenses to the current period. So you know it's end of 2017. Let's pull in some of those expenses that should be really 28 team would pull them into the current period. So talk about some of those and things to look for, um, big write offs at the end of a period. You know, maybe you decide. You know what? At the end of the year, it wouldn't be unreasonable to reevaluate, say, your inventory reserve at the end of the year, but if it seems excessive, you know, you should have been tracking that all year long. So say you have 1/2 $1,000,000 booked for inventory obsolescence. And then all of a sudden, the company decides, You know what? We need a $1,000,000 in inventory obsolescence. You know, just we re evaluate our situation. Uh, and it just happens to be right at your ran, But even doing so, we're still gonna meet our earnings per share bit of a red flag. So and again, that should be a big one that sticks out. So these air big ticket items that stick out, you know, it's kind of hard to hide half $1,000,000 in inventory right down. Um, so again, you're just taking the hit for that now, when maybe that inventory isn't even obsolete. It's not even the next year, period. It's just an expense that, um, you don't really need and your bolstering your reserve unnecessarily. And now, next year you probably won't have to touch it whatsoever. Um, large write offs. Any time there's big changes of management and there's again big large write offs. So new CEO new CFO, just new management team in general, new board of directors um, big investment firm comes in and takes over majority ownership. Whatever it might be big fluctuations there in the financial statements. Another red flag just creating big write offs at the end of a period. Um, so an example would be, you know, the CEO or CEO is just phasing out. I mean, it doesn't necessarily mean it's a bad thing. CEO is leaving the company at the end of 2017. Um, you know, their, um their legacy etcetera the company. So they agreed to just take a big hit at the end of 2017 so that the new CEO can kind of a fresh start when he starts. Obviously not the right thing to do, but it happens. So just, you know, like the current CEO is on his way out. Doesn't care that, you know they're gonna take a big hit loss on, um, under his watch, if you will, during 2017. So one thing to look out for Ah, big changes in gross emergence. So things have kind of been, you know, maybe going really well, really, really like a little bit too well all year. Then all of a sudden go just bad enough that the whole years the coal is right on par. But all of a sudden, you know, the quarter for somehow, they managed to not do as well bit of an indication that maybe something happened there. Restructuring charges, always something. Look at any time there's restructuring in general, you know, it's kind of those one time. It's OK. It's something you want to look into it. Certainly. It's an easy way to sort of dump expenses in if restructuring happens more than once. If it happens frequently, if you will, uh, definitely an area that you want to look into. 15. Shifting Financing Cash Flows: Alright, guys. So moving on now, we're gonna talk a little bit about the statement of cash flows, so there's probably a little bit less information on this one, but still wanted to make you aware of just things to look for. Certainly have seen it happen and it's happened to pass another big company. So we're gonna be talking about it familiar with a statement of cash flows. There essentially three sections, right. The cash flows from operations, which is your main sort of top section. They typically tend to be in the same order cash flows from financing activities and cash flows from investing activities. And through all the debits and credits, pluses and minuses. You reconcile your net income with the ending cash balance on your balance sheet, all the financial statements tied together, and that's terrific. That'll said statement of cash flows isn't created equal. Um, typically the operating section is the mawr looked upon area of the cash flow statement, if you will. So there's an incentive for management to put more good things in the operating section and sort of undesirable things. If they could shift them down to financing or investing, that's good as well. Typically as well, not always the case, but investing and financing are gonna be a little bit bigger. Numbers, if you will. The operating section has quite a few line items, and it's going to be all the INS announced changes accounts receivable, payable inventories, etcetera. Ah, but things like investing section, um might be, you know, big cash injections, etcetera. So, um, things can hide down there a little bit better if you will. So, um, first thing is just, um, basically, um, recording transactions in the cash flow operations which are really borrowing so essentially just blatantly taking something that is, you know, you have, ah, injection of cash from alone that you've taken out and you don't record it as cash flows from financing, you record it as cash flows from operations. Obviously, you would have to do something to that that would stand out fairly. Obviously, if you put you know, proceeds from loan in your operating section Ah, pretty blatant mistake, if you will. But if there's a way to sort categorize that a different way, that's how they move that up. And then that helps the operating section. I should also mention It's not just the individual line items. Each of those sections has its own totals. So, you know, someone looking at the company investors etcetera are gonna be looking at those totals. Um, another area is selling receivable, so if you're not familiar with that, so company has x amount of receivables on their books, you know, they've sold product people owe them or companies owe them. Um, there are ways to sell you receive. Also, say I have. Our company has a $1,000,000 in receivables from other people. So under a normal operating sort of situation, let's just say we were strapped for cash and we really needed cash. We could sell off our receivables, which is our right to receive money from our customers. We might sell them at a discount. So we sell our receivables for 700,000 to a company that specializes in receivables. Um, you would do that if you're strapped for cash and willing to take that discount, you know you're losing 30% But let's say your company that doesn't really need the cash, but you decide to sell off your receivables. It's gonna be a big cash injection, right? And also nice. Changed your accounts receivable line item. Uh, you know, it's not necessarily the best in the best interests of the business if you didn't need to do that. But it would certainly bolster your cash flow statements. So something to keep in mind. Um, then on the flip side of that, there are people who might claim that they sold their receivables to get that sort of appearance. But they actually didn't seller receivables yet. So maybe they just endure conversations with a company factoring company that will buy their receivables. They don't quite close a deal. They book transactions as if they're selling them. Uh, cashel statement looks terrific. And then maybe they have to reverse those the next period way of shifting things around again. So, uh, those air three examples of ways to kind of fiddle with your statement of cash flows make things look a lot better than they possibly are. Definitely. Look out for so anything involving the receivables. Big changes receivable selling receivables, um, and then and any obvious sort of blatant moves from within the different sections to the other sections. 16. Shifting Operating Cash Outflows: All right. So the next thing we're gonna talk about statement of cash flows is shifting line items and transactions that should be in the operating section down to, say, the financing sections of sort of taking those bad things and moving them out to one of the other areas that maybe doesn't get looked at as much, even though it's obviously right on the same financial report. Um, so inflating operating cash flows with boomerang transactions. So we talked a little bit about boomerang transactions where you have a transaction between the company and its subsidiary record revenue of both sides. You're essentially creating these false transactions. So they're doing double duty. They're impacting your income statement and the transactions also flowing over to your statement of cash flows. Um, capitalizing normal operating costs. So again, expenses that should have been so with the example we had used in the past is you buy, you know, 10 $3000 computers and decide to capitalize. That versus expensing them, which would have been the proper treatment under your fixed asset policy, though, should have just been expensed. Instead, you treat them so rather than hitting your books, is an expense. Um, Bender. Net income. Instead, it stays off your income statement, goes to your balance sheet and now becomes an asset. So there you go. Um, again, any new or unusual accounts, we talked about those as well. So a lot of things that talked about the past is gonna flow through to your cash flow statement as well. Um, big changes in intangible. So again, those patents and trademarks copyrights something you don't see often these days is goodwill. It's obviously very carefully scrutinized. Definitely has changed the way it's been accounted for over last 10 years, if you will. It was very susceptible to manipulations. So, um, but still, there's companies that have goodwill on their books. Still, and, you know, testing for things like impairment. You know, the value of the asset is worth less. Need to really look at those types of areas. Um, inventory. So big purchase of inventory just blatantly not putting in the operating section. Instead of moving on down to the financing section, let's say maybe trying to hide it with a catchy name, something different. Maybe try to treat it as a capital asset when it's really just inventory, not the proper classifications of that, um and then, as well, the purchases of patents, contracts. You know, those types of things, um, intangible assets as a whole, if you will, purchasing those assets uhm and then treating the accounting and properly so that they don't flow through to the proper categories. So there's lots of way it's you're starting to see a trend. There's some definitely areas where the accounting rules are a little bit. I don't want stay loose, but they're a little bit more lighter. They're open to estimates there. Open up, Teoh. They're susceptible to improper accounting. So any time there's an estimate, you know there's not a hard cost. Things like impairment. Well, how do you like what's the right number? There's lots of tests you can do, but one person might come up with a different numbers. So any time you have those kind of soft numbers, definitely areas you want to treat and look for for improper classifications, you know, they might still be fairly represented as a whole. You know, they're still flowing through the transactions, but they're in the wrong area just for presentation purposes. 17. Inflating Operating Cash Using Acquisitions: All right, everybody. So another way of boosting your cash flow operating section through the use more specifically of acquisitions or a disposal. So, you know, you buy additional companies divisions or you get rid of those. So again there's a bit of accounting treatment. There's also timing effects on these, So let's talk about how they might, um, use those to their advantage. So, um, things like taking on the cash flows, um, through ah, business acquisition. So maybe booking something early, maybe cash flows that you're not entitled to. You know, you have to get into the very specific sort of in the weeds, if you will, with the acquisition contract. You know, if you're acquiring company, well, what happens with all their receivables? Currently, do you inherit those? Typically, would. But it might be stipulated that you don't Maybe the previous owners get those, but you are not saying you, but the company books those as you know, their own receivables, so they're not titled to them, but they could inflate their receivables that way. Um, anytime companies making numerous acquisitions. Honestly, bad thing Google basically has grown by acquiring companies, but that's an area where you need to really look at the transactions, especially if all the acquisitions always just seemed to work out terrific for the company . Um, free cash flow always appears to be strong. So regardless of what's happening with the business, you know, even if sales are down somehow the cash flow is just strong. You know, um, the two kind of can't go hand in hand indefinitely. So there, at some point things would normally catch up to each other. You know, if business is declining a some point your cash was going to suffer. So if that's not happening, it's definitely an area that you would want to look into and see what's happening there. Um, a lot of times yet just improper accounting for contracts. A lot of times, you might not acquire an entire company and all of its assets of receivables. Everything else. You might just buy contracts you might buy out. Another company's a piece of it. It's contracts that it currently has their specific accounting rules that go without as well. How do you account for those contracts? You know, contracts aren't always straightforward. It's not always This person will pay you a set amount each month. It might be a contract where they didn't pay anything upfront, and now they owe more on the back end. So maybe you have to pay part of that money to the original contract holder. But you don't book that just an example. So lots of ways again, where people could take an acquisition, whether it's entire company or say just a part of company, its contracts, Um, and I use that sort of face value, you know, on face value, acquired the contract. You get all the proceeds from it, you know, from the future going on. But maybe that's not completely true, depending on the nature of your actual agreement, um, structuring sales of businesses. So now talking, maybe something about disposal. But you structure it in a way that you, um you know, reduce the impact on your cash flow statements. So you try to work in a lot of equity, you know, maybe, instead of receiving as much cash you receive, uh, there's a trade of equity between the companies, and then now you get into valuation of that equity. Maybe you can value the equity a little bit higher if it's in your favour, maybe on the cash flow position again, if depending If you're acquiring or disposing, you obviously want to boost your cash flow. So whether that's, you know, taking on more cash than it actually technically did, or trying to show that you sold a business for more than you, technically did whatever that situation might be. Ah, then, of course, any time that, uh, there's new categories, especially if they're suspicious, there seem little bit unconventional. If you will definitely an area that you want to look into. Uh, and then lastly, if you're the one selling a business, you're disposing of it. So I said just a few minutes ago, typically, when you buy or sell a business, you get or sell the entire thing right. You sell off all of its assets, all of its receivables, all of its liabilities. One party takes over the entire business at that time. So if you see on the company's financial statements that they sold off a division but somehow kept the receivables might want to double check that that's in the contract, that that's actually how that would happen. Not saying it wouldn't. I mean, it could certainly be in the agreement, but it's a little bit nonstandard if you will, so something to consider 18. Inflating Operating Cash Using Unusual Activities: So next we're gonna talk about ways to boost your operating cash flow just through sort of doing things sort of slowly again. It's not necessarily where you're doing something improperly, but the way you run the business will, in the long run, have an adverse effect on the business. For now, though, it makes things look a little bit better. So first thing would be just slow playing. Slow paying your vendors. Obviously, if you don't pay your vendors to say you have $100,000 in payables. If you pay all of those, you're going to see a drop in your cash $100,000. On the flip side, if you just don't pay anyone, uh, it's a boost in your cash. Now this is something you see. I mean, it's fairly common for companies to do this quite honestly, though it'll be the end of the period, typically would pay your bills that, say, the 15th and the 31st. Let's just say that's your common check run. Well, you might wait till the first or the second to do that year and check. Run, um, strictly out of you wanted to keep your cash flow balance high at the end of the year. So things like that auditors aren't stupid. They find these things, you know, they recognize that, um, nor our investors. But it is a technique that companies use. Um, if you see something like accounts payable are going up drastically relative to expenses and cost that you're seeing. So you know your cost to get sold isn't going up that much. You know, your expenses aren't that much. And I say I'm going to say you, but I'm talking about the company you're looking at, whether it's company work for a company you're looking at investing in whatever company you're working with or dealing with, their accounts payable aren't relatively changing. And we talked a lot about that previously. Courses well, where there's a natural flow of transactions. So you know you're spending a lot of money. You should either be, You know, that should be reflected on your accounts payable or your cash. You know so and most likely your accounts payable. So, um, any changes, big changes in accounts payable or as well change of any payables account? It's easy enough to set up on other payables, which is just kind of a vague name, right and sort of park. Something's there until the future point when you're willing to sort of take that hit, if you will on your cash flow. Um, any large changes in the statement of cash flows as a whole. So you know there should be a history for any given company. If you look at that history kind of tie together, all you know, the profit and loss, the balance sheet and income statement. I'm sorry. Sorry said profit loss on the cash flow statement, you should see that natural progression of transactions. So if all the sudden you're seeing cash flow statements looking really good the last several periods last few months corners, whatever might be, But the company's actually performing a little bit worse. Um, then it's time to start asking questions and see what's happening. Um, anytime there's financing events, money coming into the company wanted double check those. Make sure that one there being put in the right category, right? Not operating if its alone etcetera or fit somebody bought shares from the company is being categorized properly, um, pre payments and deferred revenues. So those air kind of the reverse of each other, if you will. So if you remember deferred revenues. When somebody pays us up front to do something, we just haven't done it yet. On the flip side is we pay somebody else somebody money to do something for us, and they haven't done it yet. So that's technically an asset on our books is a pre payment prepaid. Um, it might be something like insurance. For example, you might pay your entire insurance policy up front of beginning of the year, but you're gonna get the benefit of the insurance over a period of a year. So, um, their books, it's deferred revenue on yours. It's a prepaid asset in those balance out in the end. But it's an area where, you know, that's susceptible to a little bit of, you know, accounting. So, um, you know, big incentives for customers to pay invoices early. You know, its normal course of business, something like 2% if you pay us within 10 days. I'm not talking about that. I'm talking like a customers. If you pay us by year end, you only have to pay 50% big discounts. It's kind of similar vein as to selling off your receivables, factoring them for big discounts on Lee in order to just get the money in the door, even though it's not in your best interest is a company, especially if you know these are people that are gonna pay you especially true. If it's, say, the month of December, You know most these people are gonna pay in January. But for whatever reason, given a substantial discount just to get the money in before December, that's a little bit of manipulation there, um, again, areas having to do with inventory the cost of goods sold, uh, writing off of obsolescent inventory, those areas you want to look at, um, and then any sort of one time. So if there's just a one time thing that sticks out, maybe it's kind of buried in the middle of the cash flow statement. Whatever the case might be, really want examined those as well that they're kind of just non sustainable events. These are things that will eventually catch up to the company. You know the company has a one time, you know, reduction in their accounts receivable because they offer 50% off now that's completely drastic but say they did that. That's obviously gonna hurt the company from a cash flow perspective up right, so things like that. So there's a list of some sort of one time, very non sustainable ways so that companies can boost their cash flow position. 19. Showcasing or Manipulating Metrics: Alright, guys. So moving on from sort of the cash flow statement on ways of actually shifting revenues and expenses around or treating things is, you know, capital asset. Now we're gonna talk about metrics, so metrics are away that, you know, typically would analyze financial statements. You look at things, there's, you know, key metrics that are very standard across business. So we're talking about things like earnings metrics, earnings per share, you know, gross profit percentage, that income percentage, etcetera. Things like liquidity ratios and metrics. You know, how can the company afford to pay all of its current liabilities given his current assets? So just a few examples. So those metrics are often calculated by financial analysts, and that's how they come up with how healthy the business is doing. But then knowing that companies part of manipulating their numbers and again this will be fallouts of companies making their earnings look good just by default, they're going to make some of their metrics look good. But there's also ways they could go and sort of present their own metrics. And they might, um, do some things to make the metrics come out better. Aside from just manipulating the numbers, so we'll talk about those right now. So first thing that has changed the definition of a metric. You know, for the most part, most metrics have a standard definition, but say something like the liquidity ratio. It's your current assets compared to your current liabilities. So, you know, how are you able to pay all your current liabilities given your current assets? So say it cos current liabilities were a little bit on the high side. Maybe they decide they could do a few things. They could take some of the current liabilities and make them long term liabilities. Not appropriate, obviously. But that might be what they do, or they might just leave them as current liabilities. But they put a little star in a footnote, and they say we no longer consider, you know, notes payable as a liability current liability for ratio purposes. Whenever the wording might be basically just leave out parts that will make things look better for them. So changing the definitions of those ratios, um, sort of highlight. So calculate all the ratios and then just sort of picking out the highlights. The ones that came out really good basically just sort of showcasing and saying, Hey, these air the you know Hey, look at all these great ratios are earning for shares up our net income percentages up, but they leave out things like the inventory. Turnover is horrible and their collections that such are bad. Um, you know where they had a big write offs, etcetera. Their liquidity maybe isn't quite as good, so they they highlight the good and sort of don't highlight the bad things. Um, let's see. Inconsistencies. You want to look at those two so publicly traded company you know, has to put out their quarterly reports in their annual report. Corley is 10-Q annual 10-K They put out reports they have metrics in there, but they don't jive with maybe earnings releases or press releases, or what the company has on its website. And again, maybe it's a definition problem where they decided to define it differently for their own internal purposes. That, and that's what they put on their website, so really So if there's inconsistencies, Um, I mean one. It's either a blatant air that they'd actually didn't make a mistake or two pretty much tells you they're trying to hide something. I mean, they're trying to mislead. You know, some users of the financial statements by giving sort of false metrics, um, again, things to do with recurring charges versus non recurring charges. The way you account for those working those into than the metrics and what you're expecting in the future as well. So things like leases are recurring. Charge. How they counting was done for the least. So again, we're getting tied back into some of our previous discussions, right? So things that are done inappropriately in terms of the accounting that then flow through casual statement, income statement, balance sheet are just flowing right on through to the metrics as well. So if you find an issue with something on the cash flow statement or P NL, the balance sheet, whatever it might be, just know that that's also going to flow through an impact, are our metrics. So, um, watch out for those one time transactions. Those one time gains, you know, including those in sales, bolsters everything right, bolsters your earnings per share, bolsters your net income percentage, and again, I'm saying your but I'm talking about the company that you're referring to, um, sometimes to just blatantly sort of creating false attributes, if you will. So trying to say that you know, a certain metric increase and its related to x, y and z happening when? If you really think about it, uh, Excellency, don't actually impact that that ratio. Now, I've seen this happen many times. A lot of people just take things at face value, right? Somebody tells you something, you tend to believe it. You know, you're looking for an answer like, why did you know your current ratio go up? Oh, it's because we did this. That and the other thing. You okay, That sounds great. But if you really go and think about it, it's like but wait, those three things don't actually impact the current ratio. It also what's happening there. So don't don't sort of be misled into believing something happening, impacted ratio. So can you use your own judgment as well? Um, and that's about it. Guys, that's it for the ratios and in terms of just, uh, some of the ways those get manipulated a little bit 20. Distorting or Omitting Key Metrics: All right, So now we are gonna talk about balance sheet metrics. So a lot of metrics are done on the different financial statements. So there's obviously we kind of talked about, you know, profitability and liquidity, etcetera. So right now we're gonna focus specifically on balance sheet metrics and ways that, you know, they're easily manipulated. So and again, some of this is just fallout from things that we already talked about. But we'll just address how did he make the metric, um, distorting your accounts receivable? I mean, that's gonna impact again so immediately When I think it bouncy. I think of things like the current ratio or the quick ratio where you're seeing, like, how many times over could you pay your current liabilities with your current assets? Things like that. How many times you turning over your inventory or turning over your accounts receivable? So, um, you know, doing things your accounts receivable to hide issues with your sales obviously an issue, and obviously flows through to your various ratios that are impacted by accounts receivable . Um, not disclosing the sale of accounts receivable. So say you actually legitimately do factor your accounts receivable again. I'm saying you, I mean, the company you're looking at selling accounts receivable, that's a big reduction in your assets should be a bolster in your cash. But you might have You would have take some Tobin right off. Right again. If you have 100,000 receivables, which is an asset, you sell them for 70,000 so you're only getting 70,000 in cash. Well, that $30,000 difference that decrease in your assets has to go somewhere, and it's going to be an expense. It's gonna be written off. So, um so not recording the sale of accounts receivable and in order to keep your asset base a little bit higher, obviously another way that companies could try to bolster those metrics on the balance sheets. Um, converting accounts receivable into notes receivable on treating those differently. And maybe the Count's received was a current asset. It should be notes receivable might well be a long term asset. So maybe you have too much assets and you're willing to sort of shift some of those to the longer term assets. It's one way to do it now. That might be a legitimate business transaction, but if it was done in vain to, uh, change the makeup of your balance sheet and not in the best interests of the company. Then that's where the real problem lies. Um, let's see, um, changes in policies and ways things or calculated so again, changes in the way your depreciation policy. You know, something was depreciate over three years. Now it's over five or 10 years. Your accounts receivable. Reserve your inventory Reserve reserves are a big area guy, so definitely reserves the one area you want to watch for. It's easy to try and justify and say out way I don't need that bigger reserve or we needed a bigger reserve. Whatever works in their favor, right? So because they are estimates, and if you can kind of back it up, then, uh, it might be something they could get away with. So look out for reserves changing reserves to manipulate the makeup of a balance sheet. Um, inventory. It's obsolescence, its valuation as well. Just so not just the obsolete inventory, but it's the value of the inventory and making sure that one it's flowing through to cost to get sold properly and to that inventory. So say it is a technology company, and obsolescence is a big issue. Um, you know, inventory that was represented last year if it wasn't sold, Is it really still worth full value this year? Probably not. Um uh. Let's see if you see changes in, um in metrics being reported so say, last year, they reported they being the company, 10 different metrics. Regardless, whether their balance sheet profit loss, etcetera, andi have been over the last decade, they've been reporting the same time 10 metrics and all of a sudden they revamped their financial presentation because there's really no, um, requirements in terms of public companies on which metrics have to show. I think there's a feel like they have to show earnings per share diluted earnings per share . But aside from those few, you know these other ones air bonus, if you will. They're just the companies willing to provide that information. So if they were providing a lot of information to and all the sudden decide not to, um might be a sign now again, it might be their full right to do so. But on your front, it might be a sign that something is not looking so great on those financial metrics anymore, and it's something you want to look into. A swell, then just big changes. Last one, guys. Sort of 10,000 foot level. Big changes, big changes in assets, big changes in liabilities, equity, makeup. You want to know why? Like you really want to dig down, find out why. So if you're getting anything from this realize that it all kind of starts at the transactional level, it's gonna be numbers changing on the financial statements. It's gonna be transaction shifted back and forth between periods that then flows through to your various metrics. Now, we did talk about lots of ways, the metrics or then just manipulated within themselves or they don't present them or they change the definition of how they're calculated. But for the most part, your biggest area is gonna be looking at sort of the route transactions first and then also looking at the metrics. Um, and what's changed there 21. Course Conclusion: All right, everybody. So, congratulations, You made it all the way through the chorus. Now, I know it was a lot of information, and for the most part, it was just sort of very high level because, you know, it happens in so many different ways. It's hard to sort of, say, give you specific examples of, you know, here's this because I want you all to be able to apply to your own unique situation. So just having the knowledge of what to look for which I hopefully you feel like you have now it's going to set you well on your way to start taking. Careful, I Whether you work for a company, you're a potential investor and you're looking at a company, your lender. Maybe you're gonna loan company money, whatever the case might be. So now you have a lot of tools. There was a lot of different ways. So just to recap that we covered So we looked at those four examples and things that they did very blatant. Um, in this day and age, it's a little bit tougher. We talked a little bit about Sarbanes Oxley. So you're not gonna see those blatant examples so much anymore. But the thing is, guys there still lots of sort of trickery that goes out there. Um, one thing. We reference a lot of the courses that there is a lot of vagueness in accounting. I mean, some rules are very hard and fast, but things like estimates, impairment, etcetera, valuations, derivative stocks and options, etcetera. There's still lots of room where numbers can be, you know, determined. And then one person might have a different determination than another. So as long as you can justify it, it's a fair number. So need to be careful of all those sort of sort of gray area if you will accounting, um, topics. So gave you lots of different ways to look for things. Sort of big red flags, big changes in account balances, changes in accounting policy, anything involving sort of abnormal transactions, things like acquisitions, disposals, lots of transactions between, um, you know, intercompany transactions. If you will. Different divisions. Subsidiaries doing transactions, disposable transactions within the parties involved in the company. So is intercompany transactions. So lost the thing about their than lots of different areas to look for on the financial statements and then as well. Then you can dive down into the metrics and look for big changes in metrics. That'll kind of call it out. Or if there's metrics that are just being omitted or definitions of metrics are being changed Another red flag and areas to look at. So, uh, I really enjoy teaching this course. I'm glad you took at. I, uh I wish you the best of luck out there. Investigating. Now all these financial statements. Hopefully you find nothing. That's really the end goal, right? It's almost like insurance. You hope you never have to use it. But now you have the tools on how to use that if you need it to. Ah, few final points, guys. First of all, check out my other courses. I have over 60 courses by time. You watch this, it might be 70 or 80. Who knows? Of course, of all related to accounting, finance, Microsoft, Excel, entrepreneurship, small business, lots of different topics. So check those out. Second point, if you could do me the biggest favor. Leave me a review for the course. Once you're done, I love hearing your feedback. Anything you can do to get those five star reviews much. Appreciate it, and that's it for me. So again, I'm Chris Benjamin. Check out my other courses. Leave those reviews. Put that knowledge to work, and I look forward to being your instructor on another course.