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Pastimes : LIST of COs. WITH HIGHLY QUESTIONABLE ACCTG. PRACTICES
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To: David K. who wrote (14)8/30/2000 11:32:02 AM
From: Paul Berliner  Read Replies (2) of 59
 
The Unify example is a bit extreme. Bad stuff like that happens to a couple of companies each year - where revenues were improperly recognized, like with Sunbeam or Cendant.

It is almost impossible to detect these activities until the auditors expose them because one cannot discern from looking at financial statements whether or not the revenue is completely bogus.

I look for companies that are managing their top and/or bottom line through shady, though clever & legal accounting chicanery or suspect business models that each have the effect of sooner or later catching up with the company.

I read through countless financial statements at my current job and through time, I have learned to detect practices that may contribute to earnings hitting a wall. Its alot easier than one would think - I'm no genius.

The primary things I look for are:

1. Companies that are growing strictly through acquisitions (weak/zero internal growth).

2. Companies that aggressify a revenue recognition or expense recognition method in connection with an acquisition or product expansion.

3. Companies with flat sales & falling gross margins but stable or increasing EPS growth.

4. Companies booking the majority of the revs from affiliates and related praties.

5. Tremendous one-time charges in connection with a major or unsynergetic acquisition. No doubt that this had the effect of recently coming back to haunt Honeywell (which acquired Allied Signal) and countless software companies. Its in the companies' interest to take as large a charge as possible because if the anticipated expenses do not hit the amount charged, they can reverse the remaining reserve in a future financial period to pad earnings. This is what Tyco frequently did. And because they primarily flow it through the inventory line item (which is completely legal), the partial charge reversal in the later period is nearly impossible to detect unless the company discloses it.

6. Other Company-specific, special situations. See the following page:
lbcapital.ckt1.com

FWIW, I do not look at insider sales because it generates too many false signals and is a poor reason, IMO, to open a position.

thanks for your comments.

-Paul
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