Financial Shenanigans and Contexxia

Financial Shenanigans and Contexxia

By Rajan 30 March, 2016

Interview with

  • Dr. Progyan Basu, Clinical Professor – Accounting and Information Assurance Department, Robert H. Smith School of Business, University of Maryland.
  • Jason Kardon – Rising senior and scholarship awardee
  • Daniel Klein – Rising senior and scholarship awardee

Interviewed by Srinivas Murty (Srini), Vice President-Product Management, Ez-XBRL Solutions.

Srinivas MurtyThank you all for joining Could you please tell me something about this program that was started last year?

Progyan Basu: The Schilit Scholars in Accounting program has been funded by one of our alums, Dr. Howard Schilit, who is very well known in the field for detection of financial shenanigans. He has written a book on Financial Shenanigans and he has had a very successful business. He wanted to work with me to help UMD develop a collection of students who have this special expertise. This technique is specifically looking for financial fraud or financial shenanigans using accounting practices. These are very hard to detect because, although these financial statements have already been verified by auditors, there can still be some shenanigans which may be hidden. Last year we started with 2 students, Jason and Daniel. They are taking this as an independent study course and are learning to use the Schilit techniques, applying them to different companies, and learning to be able to apply those techniques to detect financial shenanigans.

Why did we use a product like Contexxia? I found the software to be a very useful tool. These techniques require us to review the footnote disclosures. Very often you will not be able to detect issues from just reading the financial statement. You have to go through very extensive footnotes and it is difficult to manually go through all the footnote disclosures that a company provides and try to see, for example, what are the differences, what has changed from previous years. I found this software very useful.

SriniThank you! Jason and Daniel, I met with you both earlier. I wanted to know what was your motivation for starting and using this program. Maybe we can start with you Jason.

Jason Kardon: I think for us this tool helped us look into the financial statements, search them, and really get into a more in-depth level than just by pulling standard documents off of EDGAR. I think, for me at least, definitely my favorite capability was the highlighted green showing changes year-to-year and that’s something that you don’t see from just pulling them from EDGAR. I thought that was very useful and a good thing to have.

SriniOkay. What did you come expecting from the program and what did you get. There might have been other tools you used in addition to what we offer.

Jason Kardon: We got the Contexxia tutorial session which pretty much set the expectation for what the program could do and it definitely fulfilled that. There was no point where we found it lacking and definitely we found it to be good tool and we found what we were looking for. It provided more capability than was available anywhere else.

SriniThanks! How about you Dan? How was your experience?

Daniel Klein: I got into the program after Dr. Schilit came to do an introductory talk when he came in the fall of 2015. I had heard about the program and I found it very interesting to have the opportunity to work so closely with someone so renowned in the field. In terms of working with Contexxia, I would reiterate what Jason said. Additionally, some of the other functionality such as making notes in our projects were very nice.

SriniTell me about what you think you learnt in this program and what you will do with this in your career?

Jason Kardon: Professionally, what I want to be doing is forensic accounting, looking at statements, finding fraud, etc., and this program was very much up the alley of what I want to be doing. Learning from a very clear expert in the field is most certainly very helpful and a big bonus and I certainly appreciate learning from him.

Daniel Klein: My background is finance and accounting and I felt like this is a perfect blend amongst the two where you know about the investing/stock market side but you also have to know how these things are measured and depending upon the statements. In terms of career, I’m working with a tech startup after this so it’s a little unconventional. But I don’t see myself going out of the accounting field in the future down the line. So I will maybe go back to doing finance and accounting in the future.

SriniHoward Schilit wrote the first edition of his book 20 years ago, and there have been iterations and updates. Obviously shenanigans, as the term is called, have undergone change in the sense that companies have become more savvy as more things have become public knowledge. So where did you focus or where did you think this program changed?

Progyan Basu: What we did with the two students in the program was we took some publicly available companies that we know had financial shenanigans. For example, Hertz, Valeant, and now we are working on Boeing. These companies have, from what has come in the press, skirted the rules about different accounting standards. I essentially had them the go and research these companies and come up with a report. If for example, they were hired as consultants by an investment banking firm and they were given the information that people have heard about financial shenanigans at Valeant. And then if they were asked “Will you please tell us what kind of things they did and what could you have seen from their financial reports and their 10-K statements?”. Their work was about what would they do.

Names of the companies have changed, but there are always going to be issues. As long as we as investors value the financial reports, there will always be incentive for people to make the financial reports look better than they are. Why do people rob banks? Because that’s where the money is. Why do people manipulate financial statements? Because that’s what investors use to evaluate performance of companies. I don’t that will ever change. The format will change, and it will probably become harder and harder to detect them, but it’s something that we have to be able to do.

SriniMost of your work is around publicly available financial statements filed with the SEC. Besides, that, were you looking at anything else? Did you look at any other sources of data or information?

Jason Kardon: Nothing really that was hard number data, but we did a lot of work with news releases and reports and stuff like. Kind of what’s been coming out about these companies.

SriniOne more question. You have heard of XBRL. Companies have been filing XBRL data for several years now. Did any of your work involve using that data at all?

Progyan Basu: No, we really haven’t looked at XBRL. That would be one of the things that I really want to get into. To be honest with you, I was trained in the traditional ways of doing financial statements so I still look at Balance Sheets and Income statements. I am personally not that familiar with XBRL. We are still trying to learn how to read XBRL data.  So, the answer is we haven’t really looked at XBRL data.

SriniBut do you foresee using XBRL data?

Progyan Basu: I think eventually it will happen. Once XBRL becomes the standard way we read financial reports, a lot of shenanigans will probably go away. You may not be able to manipulate much as all the data is provided. But I don’t know how long it will take for us to go away from the traditional financial statements to XBRL. The transition will be pretty long because we are still teaching our students to prepare and read income statements, balance sheets, and cash flows in the traditional way. To go to XBRL will require a different mindset. It’s not something that I foresee happening in the next few years.

Srini: Jason or Dan, do either of you understand XBRL?

Daniel Klein: We understand it is a standardized way of report but not much else.

SriniTalking about footnotes, given that you were looking at textual changes in addition to any numerical information that was provided, did anything stand out when doing text analysis?

Daniel Klein: One of the things we looked at was revenue recognition policies and anything that had changed. So, even if there is a slight word adjustment, it’s probably pretty telling and we found that with Valeant where they had changed it.

Jason Kardon: Yes, we found another example with Hertz, they changed the useful life of the depreciation of some of their assets, and we were able to find that through Contexxia.

SriniDid you look at any of the other sections?

Jason Kardon: Our biggest focus was on the financial statements themselves. We found that and the footnotes to be important. Risk Factors came up a couple of times as well.

Daniel Klein: Mostly it was financials and footnotes that we focused on. I have some feedback. When you export to Excel, some of the numbers were not exported in nice columns.

SriniI will definitely pass along your feedback to our team so we can fix them. It was very interesting to hear your thoughts about the program and Contexxia. Thank you so much for your time doing this interview the Friday before spring break. That’s greatly appreciated.


Biography of Dr. Progyan Basu

Schilit Scholars in Accounting – Smith School alumnus Howard Schilit, PhD’81, CEO of Schilit Forensics and co-author of Financial Shenanigans, wants to give two rising seniors the opportunity of a lifetime to develop their fraud accounting acumen for detecting fraudulent financial statements.