Understanding Recent Accounting Fiascoes

You don't need to be a CPA to understand accounting fraud. Whenever you hear about some company "cooking the books" you should be able to understand very quickly what they did wrong if you know Howard Schilit's Seven Shenanigans:

1. Recording revenue too soon or of questionable quality
2. Recording bogus revenue
3. Boosting income with one-time gains
4. Shifting current expenses to a later or earlier period
5. Failing to disclose all liabilities
6. Shifting current revenue to a later period
7. Shifting future expenses into the current period

Let's look at two companies that have recently been accused of fraudulent accounting: Royal Ahold and HealthSouth. Royal Ahold is a huge Dutch food retailer. Several years ago they bought a food distributor in America called U.S. Foodservices. Royal Ahold revealed recently that their U.S. Foodservices unit had inflated earnings by $500 million over the last couple of years. How did they do this? Shenanigan #2: Recording bogus revenue. U.S. Foodservices apparently was booking rebates that they were expecting from suppliers at hugely inflated values.

The second company to look at is HealthSouth, the nation's largest operator of outpatient surgery clinics and rehabilitation hospitals. HealthSouth allegedly inflated earnings by $1.4 billion since 1999. There are all kinds of allegations surrounding this company, including cheating Medicare, but the fundamental problem appears to be that they falsified the revenue amounts involving payments from insurers. So again, it appears to be an issue of recording bogus revenue, Shenanigan #2.

Next time you hear about accounting fraud, don't be intimidated, just think about which of Schilit's Seven Shenanigans was being committed and you should understand the problem immediately.

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