Sunday, 9 March 2014

The Sherlock Holmes of Accounting: Howard Schilit Explains the Mystery of His Art

By Usman Hayat, CFA

Because of his track record in detecting the manipulation of financial results, Howard Schilit has been called the Sherlock Holmes of accounting. Whereas most forensic accountants come in after the fact for the investigation and litigation, Schilit is the rare exception who comes in to detect accounting manipulation before it is widely discovered.

Currently, Schilit works as the CEO of Schilit Forensics, a New York–based forensic accounting consultancy, founded by him. Working for large institutional investors, Schilit has not only made accounting interesting but also made a highly profitable business out of it. Once an academic who taught accounting, Schilit is the lead author of Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports. To find out what it is this modern-day Sherlock Holmes does and how exactly he does it, we recently interviewed him. Here is an edited version of the interview.

CFA Institute: What is the difference between accounting fraud and accounting manipulation?

Howard Schilit: The horrendous accounting fraud — what we saw in Enron, Tyco, and WorldCom — is relatively rare. It breaks the law and violates accounting standards. Accounting manipulation that I like to call accounting shenanigans is different. It tends to be done within the letter of the law and technical interpretations of accounting standards but present a misleading picture of the economic performance of the company. Sadly, this is quite common. I deal with accounting shenanigans. This is my world. There are no smoking guns here. You have to find signs of companies camouflaging problems. I pick up these signs by doing a behavioral analysis of the management of the company.