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What Every Investor Needs to Know About Accounting Fraud

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What Every Investor Needs to Know About Accounting Fraud

McGraw-Hill,

15 min read
10 take-aways
Text available

What's inside?

Just because you are a paranoid investor doesn't mean corporate fraudsters aren't out to get you. Here's how to be safe.

Editorial Rating

8

Qualities

  • Applicable

Recommendation

Author Jeff Madura provides an excellent short guide through the perilous territory of financial statement analysis. Wasting no words, he presents all the average individual investor absolutely needs to know about corporate financial reports. He tells you why you shouldn’t trust them, and then shows you how to apply a skeptic’s perspective to figuring out what reported numbers really mean. The market for investment books is a crowded one, but this is a standout: a thoroughgoing and systematic combination of curiosity, knowledge and prudent suspicion. getAbstract.com highly recommends this book to all investors. Before you climb into the investors’ ring, carefully consider the advice that referees give boxers before a bout: Protect yourself at all times.

Summary

Scandal

The recent plague of corporate accounting and reporting scandals gave many investors the willies — and that's good. P.T. Barnum supposedly said a sucker is born every minute, but the pace of life was a lot slower in his day. The accounting system is so complex and investors are so gullible that companies have been able to fool people time after time. Mark Twain said that a cat, having sat on a hot stove, would never sit on a stove again, even a cold one. If so, cats are smarter than people; investors keep getting burned by the same old corporate tricks.

Only extreme diligence can protect you from fraud and aggressive accounting. The perpetrator may be a hot new growth firm or the bluest of blue chips. Not every accounting scandal makes headlines, but the unfortunate investors caught up in them find corporate shenanigans very costly indeed. Corporate accounting issues that made headlines include:

  • Bristol-Myers acknowledges that it restated earnings due to accounting violations.
  • Caterpillar's retirement fund had a $2.8 billion under-funding snag at the end of 2002.
  • Compaq had an aggressive write-off strategy. If the write-offs had ...

About the Author

Jeff Madura is the SunTrust Professor of Finance at Florida Atlantic University and author of the textbooks International Financial Management and Financial Markets and Institutions.

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