Financial Shenanigans Summary

Revenue serves as a representation of how much a company is worth in terms of how many products sold or services offered. The revenue recognition principle states that “revenue should be recognized when earned” (Averkamp 2004, online). When revenue is recognized is split over several periods, it can make a company appear to be more profitable, and display a stability in earnings that does not exist. When revenue is recorded as one lump sum at a future period such a recession, it can make companies appear to be profitable during a time when they should not be. In his book, Financial Shenanigans, Howard Schilit discusses several ways in which companies manipulate revenue; I will be discussing three of those situations. Schilit states that sometimes companies “record revenue from transactions that lack economic substance” to boost their profits (2010, p. 76). This method focused on selling customers intangible products that were not necessary. The problem with this is that it deceptive in that is allows companies the freedom to prey on the gullible. It is a known fact that most people will buy anything if they believe that it will protect their future, and when money is involved that fear doubles. Auditors can detect this by knowing their clients’ product offerings and asking

What he means by this is that sometimes when the parties doing business know each other, their objectivity can get lost in the decision making process. One party may miss or knowingly overlook something, so that they other can benefit such as a discounted rate on a service or product. From an outside perspective, that could be perceived as shady business practices. Auditors can detect these acts by doing their due diligence and making sure that all of the numbers in their client’s financial statements add