We do three types of training:
Training courses for private investors
Training courses for institutional investors
One-to-one coaching for institutional analysts
Our forensic accounting course has received a lot of acclaim and has been generating a lot of interest. We believe that such skills will increasingly be a necessity in the next market downturn and the time to act therefore is now. The course is structured in 10 modules:
Part 1: The Theory
01 Introduction: Why understanding creative accounting is important, and why now
02 Bad actors and case studies
03 Issues with recognition of revenue, and what to watch for with new standards effective from 2018
04 How companies manipulate expenses
05 Other tricks used to inflate profit
Part 2: How to Detect Earnings Manipulation
06 Warnings signals to watch for and common characteristics of manipulators
07 Tools and ratios used by short sellers and forensic accountants
08 Balance sheet parameters – what to look for and examples
09 P&L tricks, ratios and company examples
10 Cash flow: common tricks and company examples
Our Forensic Accounting Course is therefore designed to help investment analysts detect earnings manipulation. It focuses more on creative accounting than conducting detailed forensic analysis but we show the tools short sellers employ to detect fraud as well as some of the historical frauds perpetrated.
Your analysts will go away with an increased awareness of the importance of
• Working capital ratios, and how best to modify them to detect early revenue recognition.
• Cash from operations - how it can be boosted to make companies appear more valuable.
• Expense capitalisation – how companies defer recognition of liabilities.
• Accounting policy tricks companies use to flatter their earnings.
• Expense manipulation to boost or in some cases, depress profits.
• Other methods of temporarily boosting earnings, or faking earnings.
• Warning signals to detect deteriorating accounting quality.
The course has over 100 real life examples of tricks and 6 in-depth case studies. Delivered by a veteran analyst with 30+ years of experience, it also draws on a number of relevant academic studies.
The course uses many examples to build pattern recognition among students. We see little advantage in teaching how to calculate the Beneish M-Score (a popular indicator of earnings manipulation), as it is readily available on Bloomberg or in a spreadsheet. Instead, we focus on why it works, how it’s constructed, show its performance and flag current offenders. We then give examples of how companies manipulate earnings for each parameter in the M-Score. The benefit to students is they understand the philosophy and can better spot similar examples in future. It also makes for a more interesting course.
We believe that at the end of a long bull market, we shall see a repeat of the series of frauds uncovered at the end of the tech boom. We believe that it could be worse now, as executive compensation encourages manipulation, auditors have become more sloppy, sell-side analysis has become “juniorised”, and company accounts are even more complicated.
We see this as likely to be most prevalent among small-caps but large caps are by no means immune and we believe that some highly rated glamour stocks will be exposed in the next downturn.
We show below a sample slide from the course which illustrates that sometimes Finance Directors can be overly conservative. Here we are looking at changes in accounting estimates and we illustrate how variations in warranty provisions can be used to boost margins and earnings, or in this case to depress them.
The illustration here is of a comparison of (1) the trailing 12 month ratio of P&L warranty charges to revenue vs (2) the trailing 12 month ratio of cash spend on warranty costs to revenue. Twice in the last few years, Apple has built up its warranty provisions way in excess of actual spend, possibly because of introduction of a new product. This depressed margins at the time by up to 1%. More recently, the P&L charge has been below cash spend, flattering earnings.
This is just an illustration of the type of examples we study - there are over 100 others, many considerably more complicated and in greater depth.
If you are one of the many asset managers which spend huge sums on the research team, yet whose training budget is not always successfully deployed, please consider giving us a trial. Research skills can be learned, honed, and advanced at a relatively limited cost. To find out more, please contact us.
We have had very positive feedback on our one to one coaching programme, generally for younger analysts at larger institutions. We work with an analyst on a project, and help accelerate their progress up the learning curve. We do this for staff at various levels, from 1 year experience to those who have passed tthe CFA qualification, but are keen to develop their skills. All participants have found it extremely useful and of course it has teh additiojnal benefit of saving senior analysts' time.