Creative Accounting and Deceptive Practices

Over the past decade companies, investment banking advisors, accountants and other consultants have all contributed to distorting the traditional accounting concept of cash flow most commonly referred to as Earnings Before Depreciation and Amortization or EBITDA by adding back adjustments.
EBITDA is a standard measure used for company valuation and thus stock value as well as for bank covenants in loan agreements. While selected adjustments can be justified, many of those being made in recent years have been used simply to deceive investors and creditors leading to higher stock valuations and in my view fraudulent accounting or just outright fraud.
Companies argue that these non-GAAP adjustments are important as they help to provide a clearer picture of a company’s underlying cash flow by removing extraordinary events. However, if these events are recurring for at least several quarters then I believe the adjustments are deceptive to investors. The latest adjustment likely to become more prevalent will be the use of EBITDAC or EBITDA excluding Corona virus impacts. As we are unaware of the full impact and duration of COVID-19, I do not believe it’s prudent for a company to add back all the expenses related to Covid such as business disruption, layoffs, furloughs, etc., especially if the business impact will be over several quarters. Regulators and investors need to be especially vigilant in analyzing company’s quarterly earning and financial reports in these unprecedented times.

Covid-19 Financial Victims

During these unprecedented times and with unemployment rates reaching staggering proportions not witnessed since the Great Depression, now is the time to be extra vigilant. This is most important given the prevalence of technology including the internet, email, social media platforms, virtual wallets, etc. In many cases, fraud and the perpetrators behind it are targeting the most vulnerable sectors of our society not least of which the elderly and the sick.

Some of examples of fraud:

  • An email coming from Amazon, PayPal, Apple, Google, etc asking you to click on a link embedded in the email which then asks you to put in your credit card for verification purposes. This is FRAUD!
  • A call from someone claiming to be an IRS representative and asking for your credit card over the phone. This is FRAUD!
  • A letter purporting to be an official document from the IRS, a US government agency or court asking for a credit card. This is FRAUD!
  • A stock broker calling from a firm you have never heard of selling a stock of a company that has a miraculous cure for Covid-19. This is FRAUD!

Please be wary of the fraudulent practices you see trending around you. These things can happen to anyone, and they can happen to you. Some cons are better than others, so please be aware of financial predators and fraudulent behavior during COVID-19 when people are especially vulnerable.