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Financial Shenanigans by Schilit, Perler and Engelhart: Summary for Auditors

Howard Schilit, Jeremy Perler and Yoni Engelhart’s Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports is a field guide to the ways companies make their results look better than they are. First published by Schilit in 1993 and now in its fourth edition (McGraw-Hill, 2018), it sorts the tricks into four families, earnings manipulation, cash flow, key metric and acquisition accounting shenanigans, and gives each one a name and a number, fifteen in all. It was written for investors and analysts reading public filings from the outside, and its case studies include companies that were later investigated by regulators, restated their accounts or collapsed.

An internal auditor reads it from the other side of the same numbers. Every shenanigan in the book is a risk that a financial reporting control is supposed to prevent or detect, and the book’s catalogue is close to a ready-made fraud risk assessment for revenue, expenses, reserves, cash flow classification, performance metrics and acquisitions. That makes it unusually practical for a function that supports a SOX 404 programme in the United States or, in the United Kingdom, a board preparing its first Provision 29 declaration on material controls. This guide summarises the book without reproducing it, sets out the fifteen shenanigans with the warning signs and tests an auditor can use, places the book’s cases in the regulatory record, and ends with a worked example of a UK food manufacturer’s audit function using the framework to test the controls behind its board’s declaration.

In this guide

The book in one page

QuestionThe answer, in our words
What is it?A practitioner’s catalogue of accounting gimmicks and fraud techniques in published financial reports, with case studies and the warning signs that would have revealed them.
Who is it for?Investors, analysts and anyone who reads financial statements for a living; the publisher pitches it at investors. For auditors, audit committee members and finance teams it works as a checklist of what can go wrong.
What is the framework?Four families of shenanigans, each numbered: seven earnings manipulation shenanigans, three cash flow shenanigans, two key metric shenanigans and three acquisition accounting shenanigans. The titles describe what is being done to the numbers, such as recording revenue too soon or shifting financing cash inflows into the operating section.
What is the argument behind it?That management has many ways to flatter results within and beyond the accounting rules, that the techniques recur across decades and countries, that cash flow and metrics can be manipulated as easily as earnings, and that acquisitions can be used to hide deterioration in the underlying business.
What else does it cover?The corporate cultures that encourage dishonest reporting, how companies that use the tricks eventually unravel, and the forensic mindset the authors credit for spotting problems others missed.
Why read it as an auditor?Because each shenanigan is a financial reporting risk with a control that should address it, and because the book trains the habit of asking what the numbers are hiding rather than whether they add up.
How long does it take?A week of evenings for a first read; the four parts that set out the shenanigans work best kept as a reference and consulted one family at a time.

Who the authors are, and how the book came about

Howard Schilit holds a doctorate in accounting from the University of Maryland and is a CPA. He began his career as an associate professor of accounting at American University, then founded and led CFRA, set up in 1994 as the Center for Financial Research and Analysis, a research firm whose work includes forensic accounting analysis for investors; it was sold in 2003. He later founded Schilit Forensics, a forensic accounting consultancy, and has testified before Congress and the SEC. The first edition of Financial Shenanigans, under his name alone, was published by McGraw-Hill in 1993; a second edition followed in 2002. Jeremy Perler, a CFA and CPA who had worked at PwC, CFRA and Coatue Management and served on advisory committees of the FASB and the PCAOB, joined him as co-author of the third edition in 2010. Yoni Engelhart, a CFA and Harvard Business School graduate who had worked at CFRA, Wellington Management and Partners Capital, joined for the fourth. At the time of the fourth edition both were partners at Schilit Forensics.

The fourth edition appeared in 2018, and its preface, written the year before, looks back over the quarter century since the first. Its publisher describes it as updated with the cases and lessons of those twenty-five years, and promises readers help in recognising cultures that encourage dishonesty, methods of inflating revenue and earnings, cash flow manipulation, misleading metrics, and acquisitions used to hide a deteriorating business. Comparing the third and fourth editions’ contents shows the main structural change: the third edition was organised around earnings manipulation, cash flow and key metrics shenanigans, and the fourth adds a separate part of three acquisition accounting shenanigans. The publisher’s description calls Schilit the “Sherlock Holmes of Accounting”, which is a fair summary of the book’s tone: forensic, case-driven and written by people whose business was finding what others had missed.

The structure: six parts, nineteen chapters

The fourth edition opens with a preface and two foundation chapters, gives one chapter to each of the fifteen shenanigans across four parts, and closes with two chapters on how the tricks unravel and the mindset needed to see them. The numbering of the shenanigans restarts within each family, so the book speaks of Earnings Manipulation Shenanigan No. 4 or Cash Flow Shenanigan No. 2, and the families are the unit an auditor should carry away.

PartChaptersTitles
Front matterPrefaceReflections on My Last 25 Years
Part One: Establishing the Foundation1 and 225 Years of Shenanigans; Just Touch Up the X-Rays
Part Two: Earnings Manipulation Shenanigans3 to 9No. 1 Recording Revenue Too Soon; No. 2 Recording Bogus Revenue; No. 3 Boosting Income Using One-Time or Unsustainable Activities; No. 4 Shifting Current Expenses to a Later Period; No. 5 Employing Other Techniques to Hide Expenses or Losses; No. 6 Shifting Current Income to a Later Period; No. 7 Shifting Future Expenses to the Current Period
Part Three: Cash Flow Shenanigans10 to 12No. 1 Shifting Financing Cash Inflows to the Operating Section; No. 2 Moving Operating Cash Outflows to Other Sections; No. 3 Boosting Operating Cash Flow Using Unsustainable Activities
Part Four: Key Metric Shenanigans13 and 14No. 1 Showcasing Misleading Metrics That Overstate Performance; No. 2 Distorting Balance Sheet Metrics to Avoid Showing Deterioration
Part Five: Acquisition Accounting Shenanigans15 to 17No. 1 Artificially Boosting Revenue and Earnings; No. 2 Inflating Reported Cash Flow; No. 3 Manipulating Key Metrics
Part Six: Putting It All Together18 and 19The Unraveling; The Forensic Mindset

A few anchors from the chapter openings show how the book works. The first chapter begins with Qwest Communications and its chief executive telling employees, early in 2001, that hitting the numbers mattered more than any product or philosophy. The second takes its title from a story Warren Buffett told shareholders about a seriously ill patient who, shown bad news on his X-rays, offers the doctor money to alter them, which is the book’s image for companies that change the report instead of the business. The chapter on recording revenue too soon uses Computer Associates as its leading example of that trick. One published review reports that Part One revisits the scandals at WorldCom, Enron, Waste Management and CUC, and the chapter on the unravelling studies Hertz and Toshiba alongside a younger company that rose and fell within a decade, which the same review identifies as Valeant.

The fifteen shenanigans, family by family

The titles in the table are the book’s. The explanations, warning signs and tests are the guide’s own reading of each shenanigan from the internal audit side; the book’s own techniques, warning signs and examples are more numerous and should be read in the original. Two of the book’s chapter openings frame a family in a way worth keeping. The chapter on bogus revenue sets out four techniques, among them revenue from transactions that lack economic substance, from transactions without a reasonable arm’s-length process, and from receipts that are not revenue at all. And the chapter on shifting current income to a later period starts from the question of why a public company would ever understate its profits, and answers it with the desire to show smooth, predictable growth.

ShenaniganWhat it does to the numbers (our explanation)Warning signs to look for (our reading)An audit test
EM No. 1: Recording revenue too soonBrings revenue into the current period before the company has earned it: before delivery, before acceptance, or by keeping the books open past the period endReceivables or contract assets growing faster than sales; a spike in the last days of a quarter; credit notes and returns just after period endCut-off testing either side of the period end; contract terms on acceptance and right of return; post-period credit note analysis
EM No. 2: Recording bogus revenueCreates revenue that should not exist: transactions without substance, arrangements with related or friendly parties, or cash receipts that are not revenueLarge sales to new or related counterparties; reciprocal purchases; revenue without matching cashConfirm terms with counterparties; trace cash to independent sources; test related-party identification
EM No. 3: Boosting income using one-time or unsustainable activitiesLifts operating results with gains, one-off sales or reclassified items presented as recurringOperating profit rising without gross margin improvement; gains inside operating lines; “other income” growthAnalyse the composition of operating profit; test classification of non-recurring items
EM No. 4: Shifting current expenses to a later periodCapitalises costs that should be expensed, stretches asset lives or slows amortisation, so that today’s costs land in tomorrow’s accountsCapitalised costs rising as a share of revenue; lengthened useful lives; depreciation falling against the asset baseTest capitalisation against policy; review changes in useful lives and their approval
EM No. 5: Employing other techniques to hide expenses or lossesLeaves liabilities unrecorded or releases accruals and reserves to keep expenses downReserves falling as a share of the balances they cover; changes in estimates that always improve profitSearch for unrecorded liabilities after period end; roll forward reserves; test approval of estimate changes
EM No. 6: Shifting current income to a later periodHolds back profit in good times, through reserves or deferrals, to release it later and smooth the trendReserves built in strong years and released in weak ones; results that meet targets with uncanny precisionReserve movement analysis across several years; link releases to documented triggers
EM No. 7: Shifting future expenses to the current periodTakes large charges now, such as write-downs or restructuring, to flatter later yearsBig charges at a change of management; later reversals of provisionsTrack utilisation and reversal of restructuring and impairment provisions
CF No. 1: Shifting financing cash inflows to the operating sectionPresents borrowing-like cash, such as receivables sold to a bank or supplier finance, as cash generated by operationsOperating cash flow improving while receivables fall unusually; factoring or supplier finance programmesIdentify every receivables sale and supplier finance arrangement; test classification and disclosure
CF No. 2: Moving operating cash outflows to other sectionsRecords operating costs as investing outflows, for instance through capitalisation or by acquiring rather than buildingStrong operating cash flow with weak free cash flow; rising capital expenditureTest classification of capitalised spend and of payments in the investing section
CF No. 3: Boosting operating cash flow using unsustainable activitiesPulls cash forward by stretching payables, running down inventory or collecting early in ways that cannot be repeatedPayables days rising at the period end; a year-end cash spike that reverses in JanuaryCompare payment runs and supplier days either side of the period end
KM No. 1: Showcasing misleading metrics that overstate performancePromotes adjusted or operational measures that flatter performance or quietly change definitionDefinitions that change; a metric diverging from the statutory numbers; weak reconciliationsReconcile each published metric to the ledger; test the control over definitions
KM No. 2: Distorting balance sheet metrics to avoid showing deteriorationManages ratios such as receivable days, inventory days or debt measures so that deterioration does not showRatios that improve only at period ends; reclassifications that move items out of the measured balanceRecompute the ratios monthly from the ledger; test period-end reclassifications
AA No. 1: Artificially boosting revenue and earningsUses acquisitions to manufacture growth or profit, for example through acquisition reserves released later or acquired revenue presented as growthFrequent acquisitions; organic growth not disclosed; post-deal reserve releasesReview purchase accounting and the later movement of acquisition provisions
AA No. 2: Inflating reported cash flowExploits the fact that the purchase price sits in investing while the acquired business’s working capital unwinds into operating cash flowOperating cash flow rising with each deal; free cash flow measures that exclude acquisitionsSeparate acquired working capital movements from underlying cash generation
AA No. 3: Manipulating key metricsUses the complexity of acquisitions to flatter organic growth, same-store or pro forma measuresChanging perimeters of “organic”; pro forma figures without reconciliationTest the definition and calculation of organic and pro forma measures against deal records

The table makes the book’s central point visible: the families overlap, and a single deterioration in a business can be hidden in any of them. Slowing sales can be masked by recording revenue early, by releasing reserves, by selling receivables to lift operating cash flow, by redefining the growth metric or by buying a company. The opening chapter of the acquisition part puts its finger on why deals are such fertile ground: some costs that would normally be expenses end up on the balance sheet as goodwill or intangible assets, and some cash that would normally reduce operating cash flow is classified as investing. The financial statement fraud guide covers how the numbers get cooked from the internal audit side, and the ACFE fraud tree guide places these schemes in the financial statement fraud branch of the ACFE’s classification of occupational fraud.

The cases, and what the regulators found

The book is built on cases, and its stated purpose is to help readers recognise deceptive reporting before they suffer losses from it. The table sets the cases that the chapter openings and a published review place in the book beside the official record of what happened to each company. The facts in the last two columns come from regulators, prosecutors and press reports, not from the book, and the mapping to shenanigan families is the guide’s.

CompanyWhere it appears in the bookWhat the official record showsThe families it illustrates (our mapping)
Qwest CommunicationsThe opening of chapter 1, on a culture of hitting the numbersThe SEC alleged in 2005 that Qwest fraudulently recognised more than $3 billion of revenue from 1999 to 2002, partly by presenting one-time sales of network capacity as recurring service revenue; the company had paid a $250 million penalty in 2004Boosting income with one-time activities; misleading metrics
Computer AssociatesThe chapter on recording revenue too soonStaff called the practice the “35-day month”: the books were held open after quarter end until revenue met estimates. The SEC said more than $3.3 billion of revenue was recognised prematurely between 1998 and 2000, $2.2 billion of it in fiscal 2000 and 2001; in 2004 the company agreed with the SEC to pay $225 million to shareholders and prosecutors deferred charges against it, and its former chief executive was sentenced in 2006 to 12 yearsRecording revenue too soon
HertzThe chapter on the unravellingThe SEC found that pre-tax income was misstated from 2012 to early 2014, in an environment that put improper emphasis on meeting budgets and estimates; Hertz’s 2015 restatement removed $235 million of previously reported pre-tax income, and the company paid a $16 million penalty under an order of December 2018. The former chief executive, said to have pressed staff to “find money”, settled in 2020Hiding expenses through reserve changes; shifting expenses by keeping cars longer
ToshibaThe chapter on the unravellingAn independent committee found in July 2015 that profits had been overstated by 151.8 billion yen between 2008 and 2014; the chief executive and two predecessors resigned; Japan’s securities watchdog recommended a record fine of 7.37 billion yen in December 2015, and the probe blamed aggressive targets and a culture that discouraged questioning superiorsCulture as the root of several families
ValeantThe unravelling case that a review identifies as ValeantThe SEC found in 2020 that revenue from sales to Philidor, a pharmacy Valeant had helped set up and fund, was improperly recognised and the relationship not disclosed, and that executives promoted double-digit same-store organic growth that relied heavily on those sales; the company, renamed Bausch Health, paid $45 millionRecording revenue too soon or without substance; misleading metrics

Two patterns run through the record. The first is that the accounting was the symptom and the culture the cause: a chief executive demanding that the numbers be hit, targets set without regard to what the business could deliver, staff who could not question superiors, and pressure to “find money” when results fell short. The second is that the misleading metric travels with the accounting trick. Qwest dressed one-time sales as recurring revenue; Valeant’s organic growth figure depended on the same sales whose recognition was wrong. For an auditor the lesson is to test the published performance measure and the ledger together, because a weakness in one usually appears in the other. The Smartest Guys in the Room summary and the Money Men summary follow two other cases of the same kind in full, and the corporate scandals guide draws the audit lessons across twelve.

Culture, the unravelling and the forensic mindset

The book’s last part turns from techniques to people. The chapter on the unravelling follows what happens when companies that have used the tricks to hide a deteriorating business can no longer do so, and the losses that follow for investors. The final chapter answers a question the authors say they are often asked, why they saw problems that other analysts missed, and their answer is not effort or cleverness but a mindset: scepticism, curiosity and humility, combined with an understanding of human behaviour. The table translates the four elements into audit practice; the translation is the guide’s.

Element of the mindsetWhat it means for an auditor (our reading)What it looks like in an engagement
ScepticismTreat reported results as claims that need evidence, especially when they are goodAsk for the independent evidence behind the most favourable number in the pack
CuriosityAsk why a number moved, not only whether it reconcilesAnalytical review that explains each significant movement in the business’s own terms
HumilityAccept that management knows the business better, and let the evidence rather than suspicion carry the conclusionFindings stated as conditions and evidence, not accusations; open questions put to the finance team first
Understanding of behaviourIncentives and pressure explain where the tricks will beRead the bonus plan and the budget process before choosing where to test

The Global Internal Audit Standards make the same demand in their own vocabulary. Standard 4.3 requires internal auditors to apply professional scepticism, which it describes as staying curious, critically assessing the reliability of information and seeking additional evidence when information may be incomplete, inconsistent, false or misleading; Standard 4.2 expects auditors to consider the probability of significant errors and fraud when deciding the nature and extent of their work. The professional skepticism guide describes how to train the habit, and the entity-level controls guide covers the controls above the processes, where tone and incentives sit and where the cases show the trouble starting.

The nine ideas worth keeping

  1. Name the trick, and the test follows. The book’s numbered catalogue turns a vague risk, “manipulation of results”, into fifteen specific actions, each of which leaves a different trace and calls for a different control.
  2. Earnings are not the only target. Cash flow and published metrics can be shaped as easily as profit, and an assessment that stops at the income statement has covered a third of the ground.
  3. Timing is a recurring weapon. Four of the seven earnings shenanigans, by their titles, move revenue, expense or income between periods rather than inventing it, which is why cut-off and changes in estimates deserve at least as much attention as fictitious entries.
  4. Smoothness can be manufactured. Holding back profit in good years to release it in bad ones flatters the trend while leaving the total unchanged; reserve movements over several years show it.
  5. Operating cash flow is a classification, not a fact. Receivables sales, supplier finance and capitalised costs all change which section of the cash flow statement a payment lands in.
  6. Acquisitions blur everything. Purchase accounting, acquired working capital and shifting definitions of organic growth make a serial acquirer hard to read, and the book gives acquisitions a family of their own for that reason.
  7. The metric and the ledger fail together. In the cases, the misleading performance measure rested on the same transactions as the accounting problem; test them as one.
  8. Culture comes before the accounting. The record of Qwest, Hertz and Toshiba shows pressure from the top preceding the tricks; the control environment is where to look first.
  9. The mindset is the method. Scepticism, curiosity, humility and an understanding of incentives are what the authors credit for their results, and they are what the Standards ask of auditors.

The vocabulary: thirteen terms defined for practitioners

TermWhat it means in the book’s framework (our words)What it looks like in an audit
ShenaniganA gimmick or fraud that makes a company’s reported performance or condition look better than it isA financial reporting fraud or bias risk in the risk and control matrix
Earnings manipulationThe first family: seven ways of moving or inventing revenue, expense or incomeRevenue, accruals, estimates and cut-off testing
Cash flow shenaniganThe second family: three ways of flattering operating cash flowClassification testing of the cash flow statement
Key metric shenaniganThe third family: misleading performance and balance sheet measuresTesting of KPIs and alternative performance measures
Acquisition accounting shenaniganThe fourth family, new as a separate part in the fourth editionPurchase accounting, provisions and organic growth definitions
Recording revenue too soonRecognising revenue before it is earnedCut-off, acceptance terms and post-period credit notes
Bogus revenueRevenue from transactions that lack substance or are not revenue at allCounterparty confirmation and related-party testing
One-time or unsustainable activitiesNon-recurring gains presented as part of operating resultsClassification of gains and other income
ReservesEstimated liabilities and allowances that can be built or released to shape resultsRollforwards and approval of changes in estimates
Organic growthGrowth excluding the effect of acquisitions and disposals, as a company chooses to define itDefinition control and recalculation from deal records
Free cash flowOperating cash flow less capital spending, in a definition each company setsReconciliation to the statutory cash flow statement
The unravellingThe point at which hidden deterioration can no longer be concealedGoing concern and liquidity indicators
The forensic mindsetScepticism, curiosity and humility with an understanding of behaviourStandard 4.3 professional scepticism in practice

What it means for internal audit: an activity-by-activity map

The book is written for people who can see only the published numbers. An internal audit function can see the ledger, the contracts, the estimates and the people, which makes the book’s warning signs into tests rather than suspicions. The table maps the framework to the audit activities it changes; the fraud risk management guide supplies the surrounding programme and the fraud risk assessment guide the method for scoring each scheme.

Audit activityWhat the book impliesProcedure it changes
Financial reporting fraud risk assessmentFifteen named schemes in four families, not one generic riskScore each shenanigan for the business; record which controls address it; leave none unassessed without a reason
SOX 404 and Provision 29 scopingThe material controls must cover the ways results can be flattered, not only the ways errors occurMap each high-scoring shenanigan to a key or material control; see the SOX scoping guide and the Provision 29 guide
Revenue and cut-off testingTiming is a recurring weaponTest cut-off around every period end used for reporting, not only the year end; see the revenue recognition audit guide
Estimates, reserves and provisionsReserves can be built and released to shape the trendMulti-year rollforwards; approval and rationale for every change in method; the management review controls guide covers the review control
Journal entry testingMany shenanigans need a top-side or period-end entryRisk-score entries for the families that matter; see the journal entry testing guide and the journal entry analytics catalogue
Cash flow statement and treasuryClassification can manufacture operating cash flowInventory every factoring, receivables sale and supplier finance arrangement; test classification; the treasury audit guide covers the wider treasury audit
KPIs and alternative performance measuresMetrics travel with the accounting trickReconcile every published measure to the ledger; test the definition control and its change log; the IPE guide covers the data
Acquisitions and integrationDeals blur growth, profit and cashReview purchase accounting, the later release of acquisition provisions and the organic growth perimeter for each deal

Two cautions belong beside the table. The first is that the book’s techniques run from the clearly fraudulent to the merely aggressive, and an audit report has to keep that distinction. Most of the patterns in the table have innocent explanations most of the time, and the auditor’s job is to test, document and escalate, not to label; the control deficiency evaluation guide describes how a weakness is graded. The second is that the book’s warning signs are lagging and external. Inside the organisation the earlier signals are in the budget process, the incentive plan and the tone of the finance team, which is where the cases show the trouble starting.

The criticisms, and what the book leaves out

The book’s strengths are also the source of the usual criticisms. It is a catalogue built from cases, so it can read as a list of tricks with examples rather than a theory of why they work, and a reader who wants to understand the economics of fraud will learn more from the Lying for Money summary‘s account of trust and checking. Its perspective is the analyst’s, working from published filings, so its emphasis falls on what can be seen from outside rather than on the internal controls that should have stopped a trick, the people inside who saw it, or the evidence an investigator would need to prove intent. And its rules and most of its cases are American. The fourth edition addresses manipulation in global markets, but a UK or European reader has to translate the mechanics into IFRS terms; the families travel well, while some of the details, such as how particular cash flows may be classified, depend on the standard being applied.

Three limits matter most to an auditor. Its preface dates from 2017 and the book was published in 2018, so later cases and later standard-setting are not in it; the IASB’s amendments on supplier finance disclosures, issued in May 2023, are one example of a change that bears directly on its cash flow family. It is not a guide to the regimes that ask management or boards to vouch for their controls, from SOX 404 in the United States to Provision 29 of the UK Corporate Governance Code, which applies to financial years beginning on or after 1 January 2026; the link between a shenanigan and the control that should stop it is the auditor’s to make. And because its techniques run from fraud to aggressive judgement, it cannot tell the reader where a particular company’s treatment crosses the line; that takes the facts, the standard and the evidence. None of this weakens the framework; it means the auditor supplies the control side that the authors, writing for investors, leave to others.

Editions, reading time and how to read it

WhatDetailsBest for
First editionHoward M. Schilit, McGraw-Hill, 1993The history of the framework
Second editionMcGraw-Hill, 2002Historical interest
Third editionSchilit and Perler, McGraw-Hill, 2010: earnings manipulation, cash flow and key metrics shenanigansReaders who own it; the core families are already there
Fourth editionSchilit, Perler and Engelhart, McGraw-Hill, 2018: adds a part on acquisition accounting shenanigans and closes with chapters on the unravelling and the forensic mindsetThe current edition and the one to buy
Other formatsAn e-book edition from McGraw-Hill; an audiobook edition is also listedThe audiobook suits the cases; the families need the page
Reading planPart One, then the family that matters most to the business being audited, then Part Six; keep the rest as a referenceAn auditor preparing a fraud risk assessment
Companion readingThe financial statement fraud guide for the control side; the Smartest Guys in the Room summary for one case told in fullTurning the catalogue into a programme

The most efficient way to use the book in an audit function is as a lens rather than a read. Before a fraud risk assessment or a financial reporting audit, take the fifteen titles, strike out the ones that cannot apply to the business, and for each of the rest write one sentence on how it would be done here, by whom, and which control would catch it. The sentences that cannot be finished are the gaps.

A one-hour discussion guide for an audit team

  1. Ten minutes: strike out. Go through the fifteen shenanigans and strike out the ones that cannot apply to the organisation. Most teams strike fewer than they expect.
  2. Fifteen minutes: how would it be done here? For the five that remain highest, describe how the trick would be performed in the organisation’s own processes, which accounts it would touch and who would have to be involved.
  3. Fifteen minutes: which control catches it? For each of the five, name the control that would prevent or detect it, and whether the function has tested that control in the last two years.
  4. Ten minutes: the metric. Take the performance measure the board watches most closely and ask how it could be flattered without breaking an accounting rule. Then ask who controls its definition.
  5. Ten minutes: the pressure. Read the current year’s bonus targets and the budget assumptions, and decide where, if results fell short, the pressure to find money would go first. That is where the next test belongs.

Worked example: Pennine Foods tests the controls behind its declaration

Pennine Foods plc is a fictional UK-listed food manufacturer with £900 million of revenue, five UK sites, a December year-end and an internal audit function of four. Its board made its first Provision 29 declaration on the effectiveness of its material controls in the 2026 annual report. In the 2027 plan the chief audit executive proposed, and the audit committee approved, a review asking a different question from the usual controls testing: if management wanted to flatter the results, which of the fifteen shenanigans could it use at Pennine, and do the material controls stand in the way? Two auditors ran the review over eight weeks, with ten days from a forensic accountant engaged for the purpose.

Shenanigan familyWhere it could appear at PennineWhat the function foundWhat changed
Recording revenue too soonYear-end shipments to retailers, and stock held in a third-party warehouse for a private-label customerShipments in the last three days of December 2026 were £11.2 million against a usual £6 million; £2.4 million was stock moved to the warehouse and invoiced before the customer had called it offThe bill-and-hold criteria added to the revenue policy; cut-off testing extended to the three days either side of each quarter end
Hiding expenses through reservesThe accrual for retailer promotions and rebates, the largest estimate in the accountsThe accrual method changed in 2026, reducing the year-end accrual by £3.1 million; the change was approved by the finance director but its rationale was not documented or reported to the audit committeeChanges in method for material estimates now go to the audit committee with a written rationale and a back-test of the previous year
Shifting current expenses to a later periodA factory automation project at one siteOf £1.8 million of internal labour capitalised in 2026, £0.4 million related to training and routine maintenanceThe amount corrected; capitalisation of internal labour added to the material controls list
Shifting financing cash inflows to the operating sectionA £42 million supplier finance programme arranged with a bankThe programme was disclosed, but the control over its classification and the related disclosures sat with treasury and was not on the material controls listAdded to the list, with a quarterly review by the financial controller
Boosting operating cash flow unsustainablyThe December payment runSupplier days rose from 54 at the end of November to 63 at the year end and fell back to 53 by the end of JanuaryThe year-end payables movement now reported in the audit committee pack with the operating cash flow
Misleading metricsLike-for-like volume growth and adjusted operating profit in the annual reportIn 2026 the like-for-like definition was changed to exclude a lost contract, and the prior year was not restated on the same basisA definitions register for every published measure, with changes approved by the audit committee and comparatives restated
Acquisition accountingA bakery acquired in 2025£0.9 million of acquisition provisions released into 2026 operating profit without disclosureDisclosure added; releases of acquisition provisions reviewed as part of the year-end estimates paper

None of the seven items was a fraud, and the forensic accountant found no evidence of intent. Apart from the capitalisation error, which was corrected, each was a judgement that could be defended on its own, and each was the kind of judgement that, accumulated across a business under pressure, becomes the pattern the shenanigans describe: a little revenue early, a reserve trimmed, a cash flow helped at the year end, a metric redefined. The four items that touched profit (the accrual change of £3.1 million, the acquisition provision releases of £0.9 million, the margin of £0.6 million on the early shipments and the £0.4 million of capitalised costs) had together added about £5.0 million to 2026 operating profit, against adjusted operating profit of £61 million. They had been invisible in the controls testing because each sat just outside a control or inside a judgement that nobody had been asked to review alongside the others.

The chief audit executive’s report to the audit committee made three points. The material controls list, built for the first declaration around the risk of error, needed to cover the risk of bias as well, and four controls were added before the declaration due as at 31 December 2027. Changes in estimates and in metric definitions now had a single owner and an audit committee route. And the review itself would be repeated each year as part of the function’s fraud risk assessment, because the families do not change but the places they appear do. The finance director, who had expected a hunt for fraudsters, said afterwards that the exercise had read the accounts the way an analyst would, and found things the finance team would rather have found first.

Frequently asked questions

Which edition of Financial Shenanigans is current?

The fourth edition, by Howard M. Schilit, Jeremy Perler and Yoni Engelhart, published by McGraw-Hill in 2018. It adds a part on acquisition accounting shenanigans to the earnings manipulation, cash flow and key metric families of the third edition (2010).

How many shenanigans are there?

Fifteen, in four families: seven earnings manipulation shenanigans, three cash flow shenanigans, two key metric shenanigans and three acquisition accounting shenanigans. The numbering restarts within each family.

Is the book only about fraud?

No. It covers outright fraud and aggressive but arguably permissible accounting, which is why its signals need testing before anyone draws a conclusion. For an auditor the useful distinction is between the risk, which the book names, and the evidence, which the audit has to gather.

Is it useful outside the United States?

Yes, with translation. The cases and rules are mainly American, but the families apply under IFRS, and the framework fits a UK board’s Provision 29 work or a European company’s controls testing as well as a SOX 404 programme. The Provision 29 guide covers the UK regime.

What is the single most useful habit the book teaches?

Testing the published metric and the ledger together. In the cases, the misleading performance measure and the accounting problem rested on the same transactions, so a reconciliation of each published measure to the ledger is often the quickest way in.

Where does the book fit in an auditor’s reading?

With the fraud and financial reporting titles, as the technical catalogue beside narrative accounts such as The Smartest Guys in the Room. The internal audit reading list groups the site’s recommended books by theme.

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The Internal Audit Desk Reference, free by email.

GIAS 2024 on one page, the sample-size tables, the risk and control matrix, the five-C finding, the SOX deficiency ladder, the CIA exam at a glance, and nine more. Printable. Written by working auditors.

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Cover of The Internal Audit Desk Reference: fifteen one-page cheat sheets and templates (PDF)
Cover of The Internal Audit Desk Reference: fifteen one-page cheat sheets and templates (PDF)

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The desk reference: 15 cheat sheets, one page each.

GIAS map, sample sizes, the RCM, the five-C finding, SOX deficiency ladder, CIA at a glance. Free, printable.

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