Speaker 1: Hello, and welcome to another episode of the podcast on
Speaker 1: Tracy Allowett and I'm Joe Wisenthal. Joe, what is my
Speaker 1: all time favorite topic? I know the answer to this fraud?
Speaker 1: Financial fraud. Yeah, yeah, you're actually right. I'm actually right.
Speaker 1: It's such a surprise that I would get this quite sure.
Speaker 1: You you asked it so definitively and we've been doing
Speaker 1: this for a while. But thank you, thank you for
Speaker 1: giving me that credit. I only say that because you
Speaker 1: didn't know my age, uh in that one episode that
Speaker 1: we did. Uh, So thank you for um. Even if
Speaker 1: you don't know how old I am, you know what
Speaker 1: I'm interested in and that means a lot. So yes,
Speaker 1: I am definitely interested in financial fraud. And one of
Speaker 1: the most interesting aspects of financial fraud, in my humble opinion,
Speaker 1: is usually the counting let's say, chicanery that goes along
Speaker 1: with it. Right, Because business happens and people buy stuff
Speaker 1: and sell stuff. But between the time something happens and
Speaker 1: the time when it actually gets recorded on paper and
Speaker 1: recognized as us cells and cash coming in and out
Speaker 1: of the business, a lot can happen. Yeah, that's right,
Speaker 1: And if you think about it, finance wall Street. It's
Speaker 1: all a numbers game, right, And the way that we
Speaker 1: think about that those numbers is uh well, basically dictated
Speaker 1: by something that we like to call accounting, and there
Speaker 1: are various accounting rules that govern how people are supposed
Speaker 1: to report their earnings and the wider goings on of
Speaker 1: their businesses. But of course there's also a lot of
Speaker 1: leeway in the way that you can come up with
Speaker 1: those numbers, and even if you're not committing outright fraud,
Speaker 1: you can definitely utilize disingenuous accounting practices. Practice is that
Speaker 1: can either deliberately mislead your investors or maybe unintentionally, but
Speaker 1: usually deliberately. You know, it's funny. I'm really excited about
Speaker 1: this topic as well. He was just reading the autobiography
Speaker 1: of the Nike CEO, Phil Knight, and he was previously
Speaker 1: an accountant, and he talked about that it was through
Speaker 1: being an accountant that he really learned what made businesses
Speaker 1: fail or thrive. And it got me thinking that whereas
Speaker 1: we often think of something happening in reality and then
Speaker 1: the accounting being this sort of reflection of reality, that
Speaker 1: maybe the accounting is the reality, and that there's nothing
Speaker 1: more real in a sense than the process of writing
Speaker 1: down a number. So I'm very excited. Uh, we're talking
Speaker 1: about accounting, and so why don't you tell us what
Speaker 1: we're gonna be talking about today specifically? Yeah? Wow, okay,
Speaker 1: so we're definitely going to go deep in this episode.
Speaker 1: Our guest today is actually someone who's come through by
Speaker 1: a listener suggestions, So thank you to Harvard Winters on
Speaker 1: Twitter for suggesting him. Our guest for today is Howard
Speaker 1: schill It. He is the founder and CEO of schill
Speaker 1: Itt Forensics. He's also the author of a book called
Speaker 1: Financial Shenanigans. We're gonna be talking with him about exactly
Speaker 1: what those accounting shenanigans might be, and also about the
Speaker 1: importance of accounting in general. To your point shows, Howard,
Speaker 1: thank you so much for coming on, Tracy and my pleasure.
Speaker 1: So I guess this is a general starting point. Do
Speaker 1: you think accounting gets enough credence when it comes to
Speaker 1: the way we think about business or the wider economy.
Speaker 1: So let me talk about accounting in the way it
Speaker 1: fits into UH investors process of figuring out which company's
Speaker 1: to own, which company is not to own. Think of
Speaker 1: think of it more as a behavioral science and a
Speaker 1: sort of diagram the players and what their objectives are
Speaker 1: and who's winning and who's not winning. So as we know,
Speaker 1: every public company four times a year has to present
Speaker 1: themselves to the investment community, to the constituents who have
Speaker 1: to make decisions, and the mindset of the of the
Speaker 1: public companies, the senior executives is to tell the story
Speaker 1: in such a way that the investors are very impressed.
Speaker 1: So we could say it's not providing the information in
Speaker 1: a balanced fashion, it's always trying to have a very
Speaker 1: positive spin. There are rules, there are generally accepted accounting
Speaker 1: rules g A a P or called gap. But beyond that,
Speaker 1: companies have a whole second universe of information they provide,
Speaker 1: which is non gap metrics. Okay, The other constituents are
Speaker 1: the consumers, the readers, So those are the people who
Speaker 1: are part of my universe and trying to help them
Speaker 1: figure out whether the representations from the company is a
Speaker 1: consistent congruent with the underlying reality as Joe was describing before,
Speaker 1: or whether it is information that is demonstrably different and misleading.
Speaker 1: So the account so think of the accounting and how
Speaker 1: that fits in as how management can tell the story.
Speaker 1: So it's it's it became a fascinating subject to me.
Speaker 1: I was an accounting professor, but it became a fascinating
Speaker 1: subject to me when I began to understand it. Not
Speaker 1: in some mechanical way of just putting numbers on on paper,
Speaker 1: but it's how management can choose to tell the story
Speaker 1: to advance what their interest is. Let's get into different
Speaker 1: ways of telling the same story, because in theory it
Speaker 1: should be simple. If you're a car company, you're like, Okay, well,
Speaker 1: we sold cars this quarter, and our medals costs were
Speaker 1: this much, and our labor costs were this much, and
Speaker 1: we take the revenue and subtract the costs of their
Speaker 1: dear shareholder, was your profit for the quarter. I know
Speaker 1: it's not that simple. But where in the process does
Speaker 1: the discretion of the accountants or management start to enter
Speaker 1: the picture? Okay, wonderful question. So that the information gets
Speaker 1: recorded typically when there's a transaction. So let's use an
Speaker 1: example of somebody who's selling cars. It's your Volkswagen and
Speaker 1: you are in the fourth quarter of two thousand and seventeen,
Speaker 1: and you know, the Wall Street community has a consensus
Speaker 1: estimate of what your revenue and what your sales will be.
Speaker 1: You get a call from a customer Volkswagen, it's like
Speaker 1: a dealer where they say, the cars that you were
Speaker 1: going to be shipping out to us December? Uh, why
Speaker 1: don't we hold off on that until because our business
Speaker 1: is slow and we don't have any place for it. Okay,
Speaker 1: So here's the pressure that Volkswagen has. The numbers that
Speaker 1: everybody's expecting include that delivery sales get recorded when you
Speaker 1: ship them out. So the decision Volkswagen has to make
Speaker 1: it The point is what do we do? The customer says,
Speaker 1: don't ship the goods? Do they ship them to a
Speaker 1: another location? So in order to trick the auditors, Remember
Speaker 1: the line of defense for the investors is the auditor
Speaker 1: can say, no company, you can't do this. So in
Speaker 1: order to uh solve the problem that Volkswagen has, they'll
Speaker 1: miss their numbers if the sales are short. So do
Speaker 1: they act honestly and announced to their put out a
Speaker 1: press release to the investors and basically say this is
Speaker 1: what happened. The sales of say fifty million dollars that
Speaker 1: we expected in the fourth quarter, it's not going to
Speaker 1: come in until the first quarter of next year because
Speaker 1: of you know this episode where the customer called out,
Speaker 1: that's the honest way to do it, or do they
Speaker 1: come up with an artificial way of making the numbers?
Speaker 1: So that's when it gets really interesting. So the the
Speaker 1: accounting itself is simply solving a business problem. So that
Speaker 1: was what they would have to do if the sales
Speaker 1: are a problem. Well, let's take something which actually happened
Speaker 1: about or so years ago at Volkswagen where they change
Speaker 1: their depreciable life of their planted equipment. So, as you know,
Speaker 1: most companies have uh certain assets that depreciate and that
Speaker 1: is reflected as an expense. They Volkswagen was depreciating their
Speaker 1: planted equipment over ten years, a short period, so they
Speaker 1: seem very conservative. And then you read the footnote in
Speaker 1: the next period and you see a slight change in
Speaker 1: wording where the depreciation which had been over a ten
Speaker 1: year period, the wording was it's now ten to fifteen years.
Speaker 1: Get very subtle one. What's going on there? The company
Speaker 1: was struggling. See we figured it out because you don't
Speaker 1: just whimsically change your your accounting policies if if you
Speaker 1: don't need to, and by stretching out their depreciable life
Speaker 1: by AFT, they obviously lowered their expenses and they were
Speaker 1: able to meet the numbers. So so the accounting I
Speaker 1: gave one example on the revenue side, one example on
Speaker 1: the expense side. But each one of these situations is
Speaker 1: there's a problem. The company has a choice of do
Speaker 1: we disclose what's really going on to the investors or
Speaker 1: do we try to cover it up? Right, So how
Speaker 1: are you just described two examples, and of course there
Speaker 1: are various ways to do these cover ups as you
Speaker 1: describe them. I'm wondering, given that you've been an accounting
Speaker 1: professional for a long time, have you noticed that the
Speaker 1: common sort of accounting fludges or cover ups have changed
Speaker 1: over the years. Is there one that used to be
Speaker 1: quite pervasive or popular and now it's maybe something else? Yeah,
Speaker 1: very very interesting questions. So the book that I described
Speaker 1: Financial Shenanigan, the twenty five anniversary edition was is published,
Speaker 1: so I could sort of give you a retrospect. So
Speaker 1: so the first edition came out while I was still
Speaker 1: a professor. So so in terms of the tricks and tracy,
Speaker 1: let me get to that. So in the in the
Speaker 1: earlier years, we'll say, up until Sarbanes Oxley came out
Speaker 1: a little bit over a decade ago, which placed greater
Speaker 1: restrictions and the possibility of jail time for the CEO
Speaker 1: and CFO if they sign off on financial statements that
Speaker 1: are not in compliance with the rules. Uh back, I'd
Speaker 1: say until roughly a little more than a decade ago,
Speaker 1: most of the big stories were mucking around with sales
Speaker 1: and expenses, things that are part of what we call
Speaker 1: the gap based numbers. Okay, after that and and this, uh,
Speaker 1: the takeaway should be things are more dangerous today and
Speaker 1: the so so the accounting trickery has largely migrated from
Speaker 1: the gap based results to what's called non gap that is,
Speaker 1: things that start with ibida. So if there's one takeaway
Speaker 1: your listeners should embrace, that is, if you could ignore
Speaker 1: ibada because ibada is simply a non gap construct which
Speaker 1: is easily manipulatable. So I'd say that's again, things are, are,
Speaker 1: in my judgment, moving in a in a very bad
Speaker 1: direction because the it's so much easier for management to
Speaker 1: play games and still not be violating the rules or
Speaker 1: the laws because there are no rules. Howard, I want
Speaker 1: to press you on this point because it has become
Speaker 1: a really hot topic in recent a people talk about
Speaker 1: the gap between basically adjusted earnings what you're talking about
Speaker 1: do versus the gap numbers these sort of official, legally
Speaker 1: required numbers um. And we've seen some pretty let's say
Speaker 1: strong examples of adjusted earnings recently. The one that springs
Speaker 1: to mind have to be we work when they have
Speaker 1: something called community adjusted EBITDA, which seemed to be ebit
Speaker 1: don minus the cost of sales, which seemed really really
Speaker 1: weird to me. So how much of a problem is
Speaker 1: this and why did adjusted earnings become so pervasive when
Speaker 1: it comes to business reporting? So the question of why,
Speaker 1: I think it's the executive community have just gotten more
Speaker 1: clever and the investor community have not really kept up
Speaker 1: with sort of what what they need to do. So,
Speaker 1: just to sort of put this in the context of, uh,
Speaker 1: the last twenty five years, I told you that's the
Speaker 1: the when the first book came out. So over that
Speaker 1: period I've also been working helping institutional investors. And what
Speaker 1: you know, what's become clear is that the the category
Speaker 1: of tricks identifying keeps growing, or another way of saying it,
Speaker 1: management has continued to evolve in terms of the creativity
Speaker 1: of tricking investors. I try to help the good guys
Speaker 1: and say these are the tricks I've learned. Now starts
Speaker 1: stepping up your game to protect yourself. But the what's
Speaker 1: fallen pretty far behind is once management figured out that
Speaker 1: ibadah and other non gap derivative measures of that and
Speaker 1: your example, if we were it fits exactly into that category.
Speaker 1: You started out with the gap based earnings, and you decide,
Speaker 1: as management, we're going to tell investors to ignore this expense,
Speaker 1: and that expands. Yeah, with with we work. They're basically
Speaker 1: saying the only expense that investors should pay attention to
Speaker 1: is the cost of good soul and all of the
Speaker 1: selling and marketing and R and D. To ignore it's
Speaker 1: it's ridiculous. I have so many questions listening to this,
Speaker 1: but one of them is, and I'm kind I'm not
Speaker 1: like a hardcore efficient markets hypothesis kind of guy, but
Speaker 1: I generally think markets are somewhat efficient. If they put
Speaker 1: out the gap numbers. I mean, I know, they say,
Speaker 1: here's the non gap numbers with our preferred adjustments that
Speaker 1: they'd like you to they'd like you to look at.
Speaker 1: But the gap numbers are all there, So preadjustments and
Speaker 1: just buy the book. Accounting in theory sits there right there.
Speaker 1: Why how can investors really get fooled? And Matt, it's
Speaker 1: like I could see some people not looking. But for
Speaker 1: serious investors, isn't the data there for them? Okay? So
Speaker 1: let me use one company as a case study to
Speaker 1: sort of help us, you know, get our hands around understanding.
Speaker 1: So Valiant was the big story of the last decade.
Speaker 1: It was a company that went from a two billion
Speaker 1: dollar market value to ninety billion, which was big of
Speaker 1: an en Ron back down to three billions, nineties six
Speaker 1: percent of its value. Over we'll say a five year
Speaker 1: period from roughly two thousand, twelve thirteen until sixteen, there
Speaker 1: gap based results cumulatively. Again, this is a company that
Speaker 1: went up. How many times you would have assumed that
Speaker 1: their gap based results would have been pretty amazing. Their
Speaker 1: cumulative gap based earnings during that period was around negative
Speaker 1: three billion dollars. Okay, it was there, It was audited.
Speaker 1: It was you know, you look at every ten k
Speaker 1: and you add up the total bottom line, and that
Speaker 1: was it. The alternative universe that the company was putting
Speaker 1: out with something called cash earnings. You do the exact
Speaker 1: same drill. You add up for that five year period
Speaker 1: the total each year it was positive nine billion. It
Speaker 1: was so easy to see that if it's essentially measuring
Speaker 1: the same underlying health of the business. One was gap
Speaker 1: based earnings, the other was this surrogate measure they call
Speaker 1: cash earnings. So how does it make sense if, uh,
Speaker 1: your non gap metric is shooting to the stars and
Speaker 1: the audited gap based measure is plummeting deep into the sea.
Speaker 1: So Joe, you know, the question is how did people
Speaker 1: not see this? It was there, but for some reason,
Speaker 1: the the love affair that they had with the company,
Speaker 1: they kept pointing to a metric that didn't make any
Speaker 1: sense with billion. There was also an exciting story. People
Speaker 1: thought they had found some new model riot of buying
Speaker 1: up drugs using debt and slashing the R and D expenses,
Speaker 1: And people thought this could be the new model of
Speaker 1: how format works. So, yes, it's true that the non
Speaker 1: gap numbers a accelerated and be there was a huge
Speaker 1: gap between non gap and gap, But people also fell
Speaker 1: in love with Let me sort of jump in and
Speaker 1: say that's the problem where they fell in love with
Speaker 1: a story. Right, you use the term platform company, people
Speaker 1: melt right. The term platform company is sort of the
Speaker 1: current iteration of what in the sixties was called a conglomerate,
Speaker 1: in the nineties was called a roll up. So you're
Speaker 1: absolutely right. For people who who fall in love with
Speaker 1: stories and don't actually look at the numbers, that's that's
Speaker 1: exactly what was happening in that situation. They fell in
Speaker 1: love with the story and they they saw the two
Speaker 1: point nine billion or whatever that losses I was describing,
Speaker 1: but they said, but their cash earnings, and they built
Speaker 1: a better mouse trap. Right, instead of being like Merk
Speaker 1: or the other big pharmaceuticals where they spend so much
Speaker 1: on R and D and most of it doesn't result
Speaker 1: in successful products, h Valiant figured out a better model.
Speaker 1: And I looked at that and said, you really think
Speaker 1: that people that Fiser and Merk are so stupid that
Speaker 1: they didn't know that there was an alternative by versus
Speaker 1: make Why did they figure something out which seems so
Speaker 1: obvious but it wasn't. Because when you are a drug company,
Speaker 1: you know the cost of being in that business is
Speaker 1: you have to spend a lot of money in the
Speaker 1: drug discovery and uh, So if you want to de
Speaker 1: risk yourself, which is Alliance Pitch, you buy Bosh and Loom,
Speaker 1: you buy other companies forty billion dollars, Well, nobody's giving
Speaker 1: it to you for free, so you are buying. Yeah.
Speaker 1: So the the notion was I think completely misguided, right.
Speaker 1: And in the case of Valiant, from what I remember
Speaker 1: and to Show's point, the story was almost embedded in
Speaker 1: the numbers, right because a big part of what they
Speaker 1: were doing were add backs based on the acquisitions that
Speaker 1: they were making, so sort of immediately embedding that growth
Speaker 1: story into their numbers. One of the things that I
Speaker 1: want to press you on, just on that note is, um,
Speaker 1: you know, we talked about how Valiant would basically borrow
Speaker 1: from capital markets at a very cheap rate or a
Speaker 1: relatively cheap rate, predicated on this notion that it was
Speaker 1: this huge growth company that was going to monetize any second.
Speaker 1: Is there a sort of feedback loop between capital markets
Speaker 1: and market valuations that tends to be aided by loose accounting.
Speaker 1: So uh, if you were trying to put together a
Speaker 1: portfolio of what would be interesting shorts, you probably would
Speaker 1: want to get a list of the companies that are
Speaker 1: the biggest customers of the investment banks, that is, the
Speaker 1: ones that uh true, it's you know, Endron back in
Speaker 1: thousand was probably the most profitable client for the investment
Speaker 1: banks because if you think of it, companies that are
Speaker 1: really generating substantial cash flow, they're funding most of their
Speaker 1: operations and their expansion through their cash flow. Whereas companies
Speaker 1: that have a dearth of cash flow coming from their business,
Speaker 1: they always have their hand down, they always need more
Speaker 1: and more. So sort of this this virtuous loop where
Speaker 1: the ones that are are in need of cash, right,
Speaker 1: the ones who keep coming back to the capital markets
Speaker 1: are probably not the strongest players. In fact, just the opposite.
Speaker 1: And when you think about the ones that are pitched
Speaker 1: the most vociferously by the analyst of the firm, doesn't
Speaker 1: make sense that they're going to be pitching the companies
Speaker 1: for investors to buy of the ones that they have
Speaker 1: the most merchandise to sell, you know, think of the Uh,
Speaker 1: the investment bank no different than merchants. They they are
Speaker 1: would deny that they're right. They would say, oh, there's
Speaker 1: definitely a wall between you know. But but I'm saying,
Speaker 1: just look at the reality of the business. Whatever the
Speaker 1: whatever the the constructs are inside is not the point.
Speaker 1: It's if your job is to raise a large amount
Speaker 1: of capital for X y Z company, what does that mean?
Speaker 1: Not just put together the the consortium of who's going
Speaker 1: to be buying it, but you have to sell a
Speaker 1: whole bunch of shares, right, So your your client is
Speaker 1: the corporate American expressesn't pick any company and you need
Speaker 1: to sell that. So that I'm saying that sort of
Speaker 1: the analogy to a merchant is you have a whole
Speaker 1: bunch of inventory that you have to move. In order
Speaker 1: to move the inventory, you have to get people excited
Speaker 1: about it, and you get people excited by saying, we've
Speaker 1: upped our opinion on this company from you know, neutral
Speaker 1: to buy, from buy to strong buy. So that's so again,
Speaker 1: I don't care what kind of you know, structural walls.
Speaker 1: There are Chinese, French, Italian walls, whatever you're gonna call them. Um,
Speaker 1: the the the companies that uh generate the great fees
Speaker 1: from investment banking are the ones that I would put
Speaker 1: on the list of be careful. You mentioned in Valiant,
Speaker 1: and that brings me back to another question I had,
Speaker 1: which is how much of the the fudges or the
Speaker 1: cover ups changed since you first wrote the book thanks
Speaker 1: to the growth of intellectual property based business models. So
Speaker 1: you know, it's one thing if you're selling cars and
Speaker 1: you record the sale when the car leaves the factory gate,
Speaker 1: versus companies that don't really have much factories and instead
Speaker 1: maybe they have a drug or some sort of really
Speaker 1: strong brand, or they sell ads or something like that.
Speaker 1: How much has that changed the type of fudges that
Speaker 1: you've seen. Yes, that that's actually a very interesting question
Speaker 1: in that the accounting rules were written many many years ago,
Speaker 1: before the information based society. So think of back in
Speaker 1: the forties and fifties and the railroads and so okay,
Speaker 1: So so that's the time the accounting rules were written.
Speaker 1: Now we're in a world where you have, you know,
Speaker 1: a group on coming on and you know, just different
Speaker 1: type of models where uh, the there are no specific
Speaker 1: thou shout nots in the accounting rules for type of
Speaker 1: transactions that were not envisioned back when the accounting rules
Speaker 1: are written. So think about the opportunity set for companies
Speaker 1: to play games, where in the accounting rule book there
Speaker 1: is no thou shall not do this, right, So you
Speaker 1: then as management come up with a funky way of
Speaker 1: recording revenue, you then have it reviewed by your auditor,
Speaker 1: and the auditor it's hard for the auditor to push
Speaker 1: back and say, well, this is a violation of the
Speaker 1: rule if there's no thing, nothing specific in any rule
Speaker 1: book that addresses that type of transaction. So, in terms
Speaker 1: of what makes the challenges so great is that there's
Speaker 1: a lot of interpretation of whether it's GAP compliant or
Speaker 1: whether it's non gap compliants. Right, Howard, I would love
Speaker 1: to press you more on the role of the auditors
Speaker 1: and also the accounting standards bodies, but I'm aware that
Speaker 1: we if we start going down that road, will probably
Speaker 1: go on for an hour. And there's something slightly more
Speaker 1: immediate that I want to ask you, which is lately
Speaker 1: there's been some discussion prompted by a tweet from Donald
Speaker 1: Trump where he's sort of vaguely mused about maybe changing
Speaker 1: the quarterly reporting period to maybe a sort of bi
Speaker 1: annual one, so companies reporting earnings every six months instead
Speaker 1: of every three months as it is currently. As an accountant,
Speaker 1: how how do you feel about that and would it
Speaker 1: ultimately be a good or a bad thing for investors. Okay,
Speaker 1: so short answer, it would be a terrible move. But
Speaker 1: let me give a little more flavor to that. So,
Speaker 1: the way companies should be thinking about their business is
Speaker 1: long term. So having pressure to every quarter on a
Speaker 1: very short basis uh report to the investors puts a
Speaker 1: lot of pressure on short term thinking versus long term.
Speaker 1: So there is a problem, and I'll sort of tell
Speaker 1: you what I think the solution is, but it's not
Speaker 1: why Donald Trump had suggested. So again, so long term
Speaker 1: thinking and managing business is good. Short term gaming toward
Speaker 1: whatever bad. However, it is very important that investors have
Speaker 1: current information in order to make decisions. So if you
Speaker 1: stretch out with now every three months, every six months,
Speaker 1: the void, the information void is going to be filled
Speaker 1: by folks who are trying to drive the stock price,
Speaker 1: so they're always unintended consequences. So the problem is not
Speaker 1: that companies are reporting four times a year. I think
Speaker 1: the problem is a circus around the earnings and you know,
Speaker 1: sort of the the earnings call and the Wall Street
Speaker 1: consensus estimate. I think if if I were going to
Speaker 1: change the events, I would say, absolutely, you keep the
Speaker 1: requirement that companies file with the SEC every three months
Speaker 1: in accordance with gap and not allowed to say anything
Speaker 1: about non gap metrics. Go back to when the rules
Speaker 1: were written. The rules were written for a reason that
Speaker 1: all these numbers, certainly the audit the annual numbers are audited,
Speaker 1: but even accordly, uh, those are going to be reviewed
Speaker 1: by the outside auditor. So again, the best solution is
Speaker 1: continue to have h the quarterly filings with the SEC,
Speaker 1: eliminate non gap in any document, and eliminate the earnings calls.
Speaker 1: So give people the information, but then don't make a
Speaker 1: big circus of explaining it and massaging it. I want
Speaker 1: to sort of make this very useful to our listeners.
Speaker 1: So earning season is perpetually right around the corner. So
Speaker 1: short of reading your book, which I am actually going
Speaker 1: to go out and buy your book now because I'm
Speaker 1: very interested in this and want to learn more. But
Speaker 1: what are the sort of basic guide you would give
Speaker 1: to investors to spot red flags? I touched on the
Speaker 1: point about behavioral analysis. When you're reading any document, you
Speaker 1: just want to be alert to see if there's anything
Speaker 1: unusual or different. Give you an example, so the company
Speaker 1: in a press release, So a press release is different
Speaker 1: than the tank you the press release around that can
Speaker 1: begin with whatever title you know heading you want to
Speaker 1: have for them. So if the the standard way the
Speaker 1: company begins that and how they structure that information is
Speaker 1: the company the revenue gap based revenue is up ten
Speaker 1: and the profits are up this, which is more standard.
Speaker 1: If you see a change and they start talking about, oh,
Speaker 1: the d S O S the day sales of receivables
Speaker 1: improved by twenty days, your listeners should say, why is
Speaker 1: this different? Why are they starting to push a metric
Speaker 1: that they never talked about before. It's it's just spotting
Speaker 1: things that they haven't done before. You need to simply
Speaker 1: be alert and question something. A company is often trying
Speaker 1: to cover something up, but when they cover up, often
Speaker 1: is putting a spotlight on something that they want you
Speaker 1: to look at. And by them putting the spotlight on it,
Speaker 1: they're actually leading you to where they're playing the game.
Speaker 1: So so un unbeknownst to the company that's playing the game,
Speaker 1: just by them jump, you know, climbing to the top
Speaker 1: of the mountain and screaming something that's so proud of,
Speaker 1: they're actually telling you, as the investor, pay close attention,
Speaker 1: not necessarily believe what they just said, But why are
Speaker 1: they screaming about something that they've never mentioned before? And
Speaker 1: often the irony is they've just led you to where
Speaker 1: the Shenanigan is. Definitely sounds like a magician's tricks of
Speaker 1: something exciting going on in one hand while the more
Speaker 1: interesting thing happens in the other. All right, well, um,
Speaker 1: that was Howard chill It, the founder and CEO of
Speaker 1: Chilett Forensics and also the author of Financial Shenanigan. Thank
Speaker 1: you so much for being on, Howard. It's really a
Speaker 1: fascinating conversation. Well, thank you so much, Tracy, And thank you, Joe.
Speaker 1: Thank you. I was great, so Joe. Based on that conversation,
Speaker 1: I'm slightly tempted to do an All Thoughts spinoff called
Speaker 1: Audit Trails. I love it. I think I want let's
Speaker 1: do more accounting, Let's do more accounting related episodes, because
Speaker 1: I really do feel like accounting probably is sort of
Speaker 1: denigrated in the world of business in terms of people
Speaker 1: realizing it's significance. But the more I hear about it,
Speaker 1: read about it, and listen to people like Howard, the
Speaker 1: more I suspect that there's a lot of the real
Speaker 1: important stuff about business is happening on the accounting side,
Speaker 1: and that I don't know, it just feels like there's, uh,
Speaker 1: we need to be talking about accounting more. Basically, No,
Speaker 1: you're You're absolutely right, And I think we alluded to
Speaker 1: this in the intro. But if you think about investing
Speaker 1: in finance as a numbers game, well then you better
Speaker 1: be thinking about how those numbers are actually created and presented.
Speaker 1: But the other really interesting thing I thought was a
Speaker 1: point that you brought up, which is about whether or
Speaker 1: not the current accounting rules are well adjusted for the
Speaker 1: way our economy is heading in terms of intellectual property.
Speaker 1: And you know, so much of the value of the
Speaker 1: economy now being through intangible items like the importance of
Speaker 1: the brand, and and that just leads down a really
Speaker 1: interesting sort of wormhole um into all sorts of things. Yeah,
Speaker 1: and you know, we had an episode I think it
Speaker 1: was a couple of years ago. Remember we talked to
Speaker 1: the those accounting professors about why valuation models weren't working,
Speaker 1: and they also talked about so I feel like that
Speaker 1: also is pretty interesting rabbit hole to explore it. There's
Speaker 1: actually a lot more I'm now curious about and thinking
Speaker 1: about I'm curious about whether machine learning can help identify
Speaker 1: some of those patterns that get broken all of a sudden,
Speaker 1: such as the depreciation schedules or other areas like that.
Speaker 1: So let's let's revisit this topic soon. All right, accounting
Speaker 1: series coming up that has been another episode of the podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway, and I'm Joe wise of Thought. You could
Speaker 1: follow me on Twitter at the Stalwart, and you can
Speaker 1: follow Howard on Twitter at Howard schill It. And you
Speaker 1: should follow our producer to for Foreheads. He's on Twitter
Speaker 1: at for hest, as well as the Bloomberg head of podcasts,
Speaker 1: Francesca Levi at Francesca Today. As always, thanks for listening.
Speaker 1: Three year