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Financial Shenanigans

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

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
 It is easy to do it
 It is unlikely you will get caught

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
Small fast-growth
Newly-public companies
Privately held companies
Basket-case companies

Schilits Seven Shenanigans
1. Recording revenue too soon
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 income to a later period
7. Shifting future expenses into the current period

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

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


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

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

Shenanigan No. 5:
Failing to disclose all liabilities
 Reporting revenue when cash is received in advance of providing services
 Failing to accrue expected or contingent liabilities
 Failing to disclose all material commitments and contingencies
 Engaging in transactions to keep debt off books

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

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