Significant for Students of Finance & Accounting

1. Financial Shenanigans - I
Aditya P. Tripathi, Ph.D.
Department of Commerce
SLC-E, University of Delhi
Delhi, India

2. Agenda
• Defining Financial Shenanigans
• Why do they exist ? – Motivations and
opportunities
• Howard M.Schilits Seven Shenanigans
• Techniques of Financial Shenanigans

3. Introduction
• Scams/Financial Frauds is a topic of intense debate,
discussion and inference in emerging economies
like India.
• Over 50,000 frauds had hit banks in India during
FY09-FY19.
• RBI Report (2019) affirms that Bank frauds worth
₹2.05 trillion happened in last 11 years in our
country.
• The gravity of the fact is that, what we have created
in a time span of more than 70 years since
independence almost 75% of that we have lost in
Bank frauds only.

4. Contd…
• Most of our professional institutions, regulators
and even academia is busy in performing the
postmortem of such shenanigans.
• It include aggressive or creative accounting,
window dressing and accounting frauds.

5. Shenanigans..
• Despite the strong regulatory
framework and standards there have
been an increasing number of cases
of creative accounting and accounting
frauds
• leading to massive losses to the
investors and other stakeholders

6. What are Shenanigans?
Shenanigans are actions or
omissions designed to
• hide or distort the real financial
performance or
• financial condition of a company

7. Contd..
• They include aggressive or creative
accounting ,window dressing and
• Accounting frauds with an intent to
create a wrong impression about
the financial performance of the
enterprise.

8. Contd…
• The basic idea of window-dressing is
to
• Mislead shareholders and investors
by presenting a favorable picture of
the organization’s performance.

9. Why do Shenanigans Exist?
• It pays to do it (greed factor)
• It may boost performance-related bonuses
• It may prevent negative outcomes (fear
factor)
• It may help company obtain financing
• It may dispel negative market perceptions
• It may help company financing covenants

10. What Types of Companies are Most
Likely to Use Shenanigans?
• Companies with a weak control environment
• No independent members
• Lack of competent/independent auditor
• Inadequate internal audit function
• Management facing extreme competitive pressure or
known or suspected of having questionable
character
• Newly established public companies
• Privately held companies
• Basket-case companies

11. Motivations ….
• Performance based compensation
• Earning Expectations
• Tax Evasion
• Raising Funds
• Conceal company’s poor financial
health
• Diversion of Funds
11

12. Opportunities….
• Accounting Flexibilities
• Weak Internal Controls
• Lack of Auditor’s Independence
• Poor Governance Structure
12

13. Positive Aspects of Window Dressing
• Protect from takeovers
• Improve share valuations
• Gain shareholder’s approval

14. Contd….
• Financial Shenanigans: How to
Detect Accounting Gimmicks &
Fraud in Financial Reports
published in 2010 by Howard M.
Schilit talks about Seven
Shenanigans.

15. Schilits Seven Shenanigans
• Recording revenue too soon
• Recording bogus revenue
• Boosting income with one-time gains
• Shifting current expenses to a later or earlier
period
• Failing to disclose all liabilities
• Shifting current income to a later period
• Shifting future expenses into the current period

16. Shenanigan No. 1
Recording revenue too soon
• Shipping goods before sale is finalized
• Recording revenue when important
uncertainties exist
• Recording revenue when future
services are still due

17. Shenanigan No. 2
Recording bogus revenue
• Recording income in exchange for similar
assets
• Recording refunds from suppliers as
revenue
• Using bogus estimates on interim
financial reports

18. Shenanigan No. 3
Boosting Income with One-time gains
• Boosting profits by selling undervalued
assets
• Boosting profits by retiring debt
• Failing to segregate non-recurring
activities

19. Shenanigan No. 4
Shifting Current Expenses to Later Period
• Improperly capitalizing costs
• Depreciating or amortizing costs too slowly
• Failing to write off worthless assets

20. Shenanigan No. 5
Failing to disclose all liabilities
• Failing to accrue expected or contingent
liabilities
• Reporting revenue when cash is received in
advance of providing services
• Failing to disclose all material commitments
and
contingencies

21. Shenanigan No. 6
Shifting Current Income to Later Period
• Creating reserves and releasing them
into income in a later period

22. Shenanigan No. 7
Shifting Future Expenses to Current Period
• Accelerating discretionary into the current
period
• Writing off future years depreciation and
amortization during the current year

23. Financial Shenanigan Techniques
• Revenue Recognition- Both timing
& Quantum
• Round –Tripping
• Channel Stuffing
• Under-provisioning of Expenses,
Losses or Liabilities
23

24. Contd..
• Cookie Jar Accounting
• Big Bath Accounting
• Many other…………..

25. Thanks