Business Bookshelf

Three new releases lean on CPAs to clean up financial reporting. A small business tax primer is handy, too.


The Financial Numbers Game:
Detecting Creative Accounting Practices
By Charles W. Mulford and Eugene E. Comiskey
378 pages; hardcover; $39.95
John Wiley & Sons, New York, 2002
I n a September 1998 speech, former SEC Chairman Arthur Levitt said: “I’d like to talk about another widespread but little challenged custom: earnings management. This process has evolved over the years into what can be characterized as a game among market participants—a game that, if not addressed soon, will have adverse consequences.” Using Levitt’s warning as a backdrop, Charles W. Mulford and Eugene E. Comiskey, CPAs and professors of accounting at the DuPree College of Management at the Georgia Institute of Technology in Atlanta, have written a timely, useful book that gives all segments of the business community a better understanding of today’s headlines.

Drawing from their experience as consultants to the financial industry, Mulford and Comiskey identify common corporate reporting “errors” and what to do to correct them. The book moves from a summary of what financial reporting should accomplish to a description of how the financial management “game” is played (essentially by stretching GAAP) and a look at earnings management. The authors say the game’s players have been rewarded with a better earnings picture, higher stock prices and more valuable stock options and incentive earnings. They delve deeply into the topics and issues, and each highly informative chapter is substantiated with ample footnotes. There are excellent charts, graphics and glossaries throughout.

The Financial Numbers Game illustrates its message with instances of known financial statement manipulation from more than 400 public companies, including Conduit, Waste Management, Sybase, Sunbeam, MicroStrategy, Nine West Group and Baker Hughes. The descriptions of the various methods those companies used to disguise problems make for interesting reading—and a lesson on what not to do.

For Chapter 5, “Financial Professionals Speak Out,” the authors surveyed CFOs, financial analysts, lenders, CPAs, accounting educators and advanced MBA students to get their input. They gave participants examples of situations and asked them to comment on and rate them as either GAAP compliant, fraudulent or somewhere in between. Participants looked at items on the classification of earnings management and items on the motivations and objectives of earnings management and earnings management actions. The results were widely varied, possibly because of the experience levels of those polled, but their comments make engaging reading.

The Financial Numbers Game equips the financial statement reader with the knowledge to better detect creative accounting practices in the areas of premature or fictitious recognition of income, aggressive capitalization/amortization policies, misreported assets or liabilities, income statement creativity and cash-flow reporting. Although it was written about public companies, the principles, warnings and information it presents are equally applicable to privately held entities—especially those in situations where their financial statements will be relied upon for any reason.

Financial Statement Fraud: Prevention and Detection
By Zabihollah Rezaee
315 pages; hardcover; $65
John Wiley & Sons, New York, 2002

Z abihollah Rezaee is a CPA, certified fraud examiner and professor of accountancy at the University of Memphis. His extensive writings for professional journals (including the Journal of Accountancy ) cover forensic accounting and financial statement fraud, and he has written books and served as a consultant to many organizations, including the United Nations.

“For the capital markets to function efficiently and effectively, market participants, including investors and creditors, must have confidence in financial information disseminated to the market,” Rezaee says in the preface. He asserts it’s a CEO’s responsibility to adhere to the highest ethical standards and put in place audit committee procedures to ensure that a business’s financial statements are correct. His view that management should go beyond GAAP in providing “relevant, useful and reliable information” may draw lively debate.

The author describes the wide spectrum of participants involved in a company’s financial statements with valuable insight. He discusses the nature, causes and detection of financial statement fraud, and the corporate governance responsibilities and roles of boards of directors, audit committees, management, internal auditors, external auditors and other governing bodies in preventing it. Charts compare different regulatory bodies’ rules; one that illustrates well-known cases of “cooking the books” by Rite-Aid, Aurora Foods, Livent, W.R. Grace and Enron is both easy to follow and informative.

Rezaee believes widespread use of the Internet greatly increases the likelihood of deception and makes tighter security essential. He reasons that the technology used to process and exchange financial information, particularly in light of the newly consolidated financial powers conferred by the Gramm-Leach-Bliley modernization act, makes the interactions of financial entities harder to follow and misrepresentations much more difficult for oversight officials to catch. That could ultimately destabilize markets, he says. To counter this, more extensive fraud investigation education is needed, as are more trained fraud examiners, he says.

Financial Statement Fraud is a good reference for understanding some of the current corporate financial statement problems and is an important guide for the parties involved in making sure that financial statements are correct.

Building Public Trust: The Future of Corporate Reporting
By Samuel A. DiPiazza Jr. and Robert G. Eccles
179 pages; hardcover; $24.95
John Wiley & Sons, New York, 2002
(Copyright2002 PricewaterhouseCoopers)

S amuel A. DiPiazza Jr. (CEO of PricewaterhouseCoopers) and Robert G. Eccles (president of Advisory Capital Partners) ask us to imagine a time 10 years from now, when (they hope) all publicly listed companies will issue fully transparent financial statements. This, they believe, is the way to rebuild the trust that has been lost in recent years. The authors of this visionary book invite readers to join the discussion on how to reach their ideal.

Using illustrations and drawing on examples from the experiences of some major companies, they present a formula for transforming corporate reporting. They believe all the elements of what they call “the corporate reporting supply chain” (executives, board members, outside auditors, information distributors, analysts, investors and other stakeholders) must work in step with regulators and standard setters. The authors advance a “three-tier model of corporate transparency” which includes

Uniform international generally accepted accounting principles.

Standards for reporting industry-specific measurements and reporting.

Standards for company-specific measurements and reporting.

They foresee all parties using technologies such as the Internet and XBRL as part of the process, and they provide information about how some companies and regulators already have begun working on the transparency issue.
Even visionaries have to be realistic, and DiPiazza and Eccles recognize that the road to realizing their concept of the future of corporate reporting will involve dialogue, compromise, study and changes of habit. They frame the discussion very well in this interesting, educational book. Keep an open mind and join in.

Tax Savvy for Small Business: Year-Round
Tax Strategies to Save You Money, 6th Edition
By Frederick W. Daily
266 pages; hardcover; $34.99
Nolo, Berkeley, California, 2002

F rederick W. Daily—a tax attorney with more than 30 years of experience—thinks small business owners need all the help they can get to understand and use the law to help them minimize taxes. CPAs with business owner clients provide as much assistance as possible and, at times, recommend supplementary reading. The updated self-help guide Tax Savvy for Small Business is such a reference aid, and its goal is to familiarize small business owners with the various ins and outs of taxes relevant to them.

The book contains an introduction, information about the 2002 Job Creation and Worker Assistance Act, more on the 2001 tax cuts, 22 sections, a glossary of tax-related terms, an appendix that includes some IRS forms and publications and a frequently asked questions (FAQ) section with interesting case situations. It covers a wide range of information such as types of entities, recordkeeping, business taxes, working at home, fringe benefits, buying and selling a business and dealing with the IRS. (Daily has been forceful in handling the IRS, as attested to in his earlier books Stand Up to the IRS and Surviving an IRS Audit .)

The guide offers practical solutions to a number of small business tax issues, as well as highlighted tips, sample business-tax returns and forms and many resource lists. Easy-to-read charts help support the text. Instructions for “Dealing with the IRS” are particularly informative. The author provides first-class information about handling audits, maintaining good records and documentation and the appeals process. He discusses various types of business entities, including C and S corporations, partnerships, LLCs, personal service corporations and family businesses. The portion about how to select a tax pro is on the mark and tax professionals would benefit from it, too.

CPAs should recommend this well-written guide to their small business clients. It’s also an ideal resource for CPAs themselves.

Stanley Person, CPA, of Person and Co., believes in reading for education and relaxation. His e-mail address is .


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