Bankruptcy and Fraud Analysis: Shorting and Selling Stocks
Journal of Forensic & Investigative Accounting Vol. 2, Issue 2
Bankruptcy and Fraud Analysis: Shorting and Selling Stocks
Hugh Grove Tom Cook Eric Streeper Greg Throckmorton*
To auditors, investors, fund managers, short sellers, and other external users, fraud and bankruptcy models may serve as important tools in analyzing the financial information presented by companies. Along with the earnings management ratios, quality of earnings and quality of revenue (Schilit 2003), more elaborate models and metrics (Altman 1968 and 2005, Dechow, Sloan and Sweeney 1996, Sloan 1996, Beneish 1999, and Dechow, Ge, Larson, and Sloan 2007, and Robinson 2007) may serve as a veritable arsenal of techniques for detecting financial problems within companies. When used together as a group, these models may also act as good leading indicators or predictors of future stock price performance. Furthermore, Security and Exchange Commission (SEC) letters to companies questioning their financial reporting may serve as a good screening tool for applying these models since such letters may alert auditors, investors, and other external users to potential financial reporting problems within a company. When companies file their annual 10-K reports, SEC personnel evaluate the financial data and try to determine if there are any potential improprieties or unusual methods being used. If there are, they will send a comment letter to the company outlining the dispute. As of May 12th, 2005, the SEC began publicly releasing comment letters which were issued after August 1st, 2004. They are now available through the SEC’s Edgar Database. The comment letters are sent by individual SEC staff members as part of a review and do not constitute a position taken by the SEC. These letters are only meant to outline reporting concerns, in contrast to Accounting and The authors are, respectively, Professor of Accounting, Professor of
Bankruptcy and Fraud Analysis: Shorting and Selling Stocks
Hugh Grove Tom Cook Eric Streeper Greg Throckmorton*
To auditors, investors, fund managers, short sellers, and other external users, fraud and bankruptcy models may serve as important tools in analyzing the financial information presented by companies. Along with the earnings management ratios, quality of earnings and quality of revenue (Schilit 2003), more elaborate models and metrics (Altman 1968 and 2005, Dechow, Sloan and Sweeney 1996, Sloan 1996, Beneish 1999, and Dechow, Ge, Larson, and Sloan 2007, and Robinson 2007) may serve as a veritable arsenal of techniques for detecting financial problems within companies. When used together as a group, these models may also act as good leading indicators or predictors of future stock price performance. Furthermore, Security and Exchange Commission (SEC) letters to companies questioning their financial reporting may serve as a good screening tool for applying these models since such letters may alert auditors, investors, and other external users to potential financial reporting problems within a company. When companies file their annual 10-K reports, SEC personnel evaluate the financial data and try to determine if there are any potential improprieties or unusual methods being used. If there are, they will send a comment letter to the company outlining the dispute. As of May 12th, 2005, the SEC began publicly releasing comment letters which were issued after August 1st, 2004. They are now available through the SEC’s Edgar Database. The comment letters are sent by individual SEC staff members as part of a review and do not constitute a position taken by the SEC. These letters are only meant to outline reporting concerns, in contrast to Accounting and The authors are, respectively, Professor of Accounting, Professor of
References: Altman, E., “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy,” Journal of Finance, September 1968: 189-209. Altman, E. and E. Hotchkiss, Corporate Financial Distress and Bankruptcy, Third Edition, J. Wiley and Sons, Jersey City, N.J., 2005. Beneish, M., “The Detection of Earnings Manipulation,” Financial Analyst’s Journal, September/October 1999: 24-36. Binder, J., “The Event Study Methodology Since 1969,” Review of Quantitative Finance and Accounting, Volume 11 1998: 111-137. Cook, T. and H. Grove, “Stock Market Reaction to Allegations of Earnings Management,” Journal of Forensic and Investigative Accounting, 2009, Issue No. 2-forthcoming. Dechow, P., R. Sloan, and A. Sweeney, “Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC,” Contemporary Accounting Research, Spring 1996: 1-36. Dechow, P., W. Ge, C. Larson, and R. Sloan, “Predicting Material Accounting Manipulations,” Working Paper, July 2007. Del Giudice, V. “GM May Fail Even After Bankruptcy Reorganization, Altman Says,” Bloomberg.com, May 23, 2009. Krugman, P. “How Did Economists Get It So Wrong?” The New York Times, September 4, 2009. Robinson, E., “Barclays PhD’s Build Hedge Fund Giant Inside No. 3 U.K. Bank,” Business Week, January 5, 2007: 80-89. Schilit, H., Financial Shenanigans, Center for Financial Research Analysis, 2003. Siegel, “Efficient Market Theory and the Crisis,” The Wall Street Journal, Wednesday, October 28, 2009, page A23. Sloan, R., “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings?” Accounting Review, Volume 71, 1996: 289-315. The opinions of the authors are not necessarily those of Louisiana State University, the E.J. Ourso College of business, the LSU Accounting Department, Roosevelt University, the Senior Editor, or the Editor. 293