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Hidden Financial Risk

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Hidden Financial Risk

Understanding Off-Balance Sheet Accounting

Wiley,

15 min read
10 take-aways
Text available

What's inside?

Recent corporate scandals have faulty accounting practices in common. How is your firm managing the bean counter risk?

Editorial Rating

6

Qualities

  • Applicable

Recommendation

J. Edward Ketz has written a very curious sort of accounting book. About half of it consists of technical information about accounting and its misuse, and the other half is an impassioned polemic about the need for reform. He includes some anomalous editorial quirks; for instance, midway through the book is an appendix consisting of the entire text of an SEC report. Most appendices appear at the end of books. The author is clearly a professor on a soapbox, an academic-preacher hybrid with a flair for the eloquent purple phrase. He effectively identifies some of the accounting principles that managers who are bent on deception abuse most often. Although this looks like a textbook, getAbstract.com finds that it could serve quite adequately as an investor’s introduction to accounting fraud. The author’s rhetorical flourishes take a lot of the dreariness out of the subject of accounting, and will keep most readers alert long enough to finish the book - or at least to read as far as the appendix.

Summary

The Recent Scandals

Enron, WorldCom, Tyco, Global Crossing - the list goes on and on - and those are only the biggest, most widely publicized examples of corporate scandals during the first years of the new millennium.

The scandals of the early 2000s were the direct consequence of a financial reporting culture that began to spread in the early 1990s, the culture of "earnings management." Earnings management refers to the use of accounting tricks and techniques to burnish mediocre operating performance and make it look stellar. This culture grew strong because fiscal controls grew weak. Boards of directors, rife with conflicts of interest and practically under the control of corporate management, did not probe, investigate or bring managers to account. Securities analysts, who also had conflicts of interest, hyped stocks if the companies were attractive prospects for the investment banking side of the analysts’ firms.

Corporate lawyers and auditors understood that management signed their paychecks and decided that those who paid the piper could call whatever tune they pleased. The regulatory apparatus that might have halted runaway accounting manipulation did ...

About the Author

J. Edward Ketz, Ph.D., is M.B.A. faculty director and associate professor of accounting at Pennsylvania State’s Smeal College of Business. His column, Accounting Annotations, is published in Accounting Today and his column, Accounting Cycle: Wash, Rinse and Spin appears regularly at SmartPros.com. He is also the author of Bridge Accounting: Procedures, Systems and Controls.

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