paidWarning Signs

Warning Signs: Recording Revenue Too Soon (EM Shenanigan No.1)

●Recording revenue before completing any obligations under contract

●Recording revenue far in excess of work completed on a contract

●Up

-front revenue recognition on long-term contracts

●Use

of

aggressive

assumptions

on

long-term

leases

or

percentage-of

–

completion accounting

●Recording revenue before the buyer’s final acceptance of the product

●Recording

revenue

when

the

buyer’s

payment

remains

uncertain

or

unnecessary

●Cash flow from operation

s lagging behind net income

●Receivables

(especially

long

-term

and

unbilled)

growing

faster

than

sales

●accelerating sales by changing the revenue recognition policy

●Using an appropriate accounting method for an unintended purpose

●Inappropriate use of ma

rk- to-market or bill-and

–

hold accounting

●Changes

in

revenue

recognition

assumptions

or

liberalizing

customer

collection terms

●seller offering extremely generous extended payment terms

Warning Signs: Recording Bogus Revenue (EM Shenanigan No.2)

●Record

ing revenue from transactions that lack economic substance

●Recording revenue form transactions that lack a reasonable arm’s

-length

process

●Lack of risk transfer from seller to buyer

●Transactions involving sales to a related party, affiliated party, or j

oint

venture partner

●Boomerang (two

-way) transactions to nontraditional buyers

●Recording revenue on receipts from non

-revenue-producing transactions

●Recording

cash received from

a

lender, business

partner, or vendor

as

revenue

●Use of an inappropriate o

r unusual revenue recognition approach

●Inappropriately

using

the

gross

rather

than

the

net

method

of

revenue

recognition

●Receivables

(especially

long

-term

and

unbilled)

growing

much

faster

than sales

●Revenue growing much faster than accounts receivable

●Unusual increases or decreases in liability reserve accounts

Warning

Signs:

Boosting

Income

Using

One-Time

or

Unsustainable

Activities (EM Shenanigan No.3)

●

Boosting income using one-time events

●

Turning proceeds from the sale of a business into a recurring revenue

stream

●

Comingling future product sales with buying a business

●

Shifting normal operating expenses below the line

●

Routinely recording restructuring charges

●

Shifting losses to discontinued operations

●

Including proceeds received from selling a subsidiary as revenue

●

Operating income growing much faster than sales

●

Suspicious or frequent use of joint ventures when unwarranted

●

Misclassification of income from joint ventures

●

Using

discretion

regarding

Balance

Sheet

classification

to

boost

operating income

Warning

Signs:

Shifting

Current

Expenses

to

a

Later

Period

(EM

Shenanigan No.4)

●

Improperly capitalizing normal operating expenses

●

Changes in capitalization policy or accelerated capitalization of costs

●

New or unusual asset accounts

●

Jump in soft assets relative to sales

●

Unexpected increase in capital expenditures

●

Amortizing or depreciating costs too slowly

●

Stretching out depreciable asset life

●

Improper amortization of costs associated with loans

●

Failing to record expenses for impaired assets

●

Jump in inventory relative to cost of goods sold

●

Failure by lenders to adequately reserve for credit losses

●

Decrease in loan loss reserve relative to bad loans

●

Decline in bad debt expense or obsolescence expense

●

Decrease in reserves related to bad debts or inventory obsolescence

Warning

Signs:

Employing

Other

Techniques

to

Hide

Expenses

or

Losses (EM Shenanigan No.5)

●

Failing to record an expense from a current transaction

●

Unusually large vendor credits or rebates

●

Unusual transactions in which vendors send out cash

●

Failing to record an expense for a necessary accrual or reversing a past

expense

●

Unusual

declines

in

reserve

for

warranty

or

warranty

or

warranty

expense

●

Declining accruals, reserves, or

“

soft liability

”

accounts

●

Unexpected and unwarranted margin expansion

●

Unusually

“

lucky

”

timing on the issuance of stock options

●

Failing to accrue loss reserves

●

Failing to highlight off-balance-sheet obligations

●

Changing

pension,

lease,

or

self-insurance

assumptions

to

reduce

expenses

●

Outsized pension income

Warning

Signs:

Shifting

Current

Income

to

a

Later

Period

(EM

Shenanigan No.6)

●

Creating reserves and releasing them into income in a later period

●

Stretching out windfall gains over several years

●

Improperly accounting for derivatives in order to smooth income

●

Holding back revenue just before an acquisition closes

●

Creating acquisition- related reserves and releasing them into income in

a later period

●

Recording current-period sales in a later period

●

Sudden and unexplained declines in deferred revenue

●

Changes in revenue recognition policy

●

Unexpectedly consistent earnings during a volatile time

●

Signs of revenue being held back by the target just before an acquisition

closes