Financial Shenanigans

Filed Under » , , ,
Dictionary Says

Definition of 'Financial Shenanigans'

Acts or actions designed to mask or misrepresent the true financial performance or actual financial position of a company or entity. Financial shenanigans can range from relatively minor infractions involving creative interpretation of accounting rules to outright fraud over many years. In almost every instance, the revelation that a company’s stellar financial performance has been due to financial shenanigans rather than management prowess will have a calamitous effect on its stock price and future prospects. Depending on the scale and scope of the shenanigans, the repercussions can range from a steep sell-off in the stock to the company’s bankruptcy and dissolution.
Investopedia Says

Investopedia explains 'Financial Shenanigans'



Financial shenanigans can be broadly classified into two types:
  1. Schemes that overstate revenues and profits – the benefits in this case are obvious. Artificially boosting earnings per share (EPS) and growth rates has a direct and positive impact on a company’s valuation, which generally rewards management through higher compensation and profits on stock options.
  2. Schemes that understate revenues and profits – this is typically done to smooth out net income over time periods and make it appear less volatile. These shenanigans, while undesirable, are less serious than those that overstate revenues and profits.
Companies have numerous avenues to engage in financial shenanigans if they so desire. These include recognizing revenues prematurely, recording sales made to an affiliate or recording sales of unshipped items, capitalizing rather than expensing research and development costs, reclassifying balance sheet items to create income, amortizing costs or depreciating assets at a slower pace, setting up special-purpose vehicles to hide debt or mask ownership, and so on. In most instances of far-reaching and complex fraud, financial shenanigans were not detected even by a company’s auditors and accountants.
 
In the United States, 2001-02 saw the unearthing of a significant number of financial shenanigans at companies such as Enron, WorldCom and Tyco. Enron and WorldCom’s senior-most executives pushed their companies into bankruptcy and paid the price by getting jail time. The spate of corporate skullduggery during this period led to the passage of the Sarbanes-Oxley Act in July 2002, which set new and enhanced standards for all U.S. public company boards, management and public accounting firms.

Articles Of Interest

  1.

    The Copper King: An Empire Built On Manipulation

    Find out how Yasuo Hamanaka's actions in the copper market forever changed the rules for commodity traders.

  2. The Pioneers Of Financial Fraud

    These fraudsters were the first to commit fraud, participate in insider trading and manipulate stocks.

  3. Detecting Accounting Manipulation

    "One-time charges" and "investment gains" are two strategies companies can use to distort their numbers.

  4. Enron: The Fall Of A Wall Street Darling

    Enron is a classic example of greed gone wrong and how investors were led astray.

  5. Detecting Financial Statement Fraud

    Find out how to tell if a company is manipulating its financial data, so you don't invest in the next Enron.

  6. Top 8 Ways Companies Cook The Books

    Find out more about the fraudulent accounting methods some companies use to fool investors.

  7. Creative Accounting: When It's Too Good To Be True

    Accounting practices have matured, but there are still plenty of ways that companies can disguise their financial results.

  8. What Is A Pyramid Scheme?

    Considering joining an "investment club" that promises phenomenal returns on your sign-up fee? Read this article and think again!

  9. Financial Statement Manipulation An Ever-Present Problem For Investors

    The SEC has taken steps to eliminate this type of corporate fraud, but it remains a real risk for investors.

  10. A Case Study: Earnings Manipulation And The Role Of The Media

    Here we explore why the media focuses on certain earnings manipulation cases in post-Enron Wall Street.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Racketeering

    Racketeering refers to criminal activity that is performed to benefit an organization such as a crime syndicate. Examples of racketeering activity include...

  2. Lawful Money

    Any form of currency issued by the United States Treasury and not the Federal Reserve System, including gold and silver coins, Treasury notes, and Treasury bonds. Lawful money stands in contrast to fiat money, to which the government assigns value although it has no intrinsic value of its own and is not backed by reserves.

  3. Fast Market Rule

    A rule in the United Kingdom that permits market makers to trade outside quoted ranges, when an exchange determines that market movements are so sharp that quotes cannot be kept current.

  4. Absorption Rate

    The rate at which available homes are sold in a specific real estate market during a given time period.

  5. Yellow Sheets

    A United States bulletin that provides updated bid and ask prices as well as other information on over-the-counter (OTC) corporate bonds...

  6. Bailment

    The contractual transfer of possession of assets or property for a specific objective.
Trading Center