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Unformatted text preview: hey are earned rather than the period in which they are realized. Because
accrual accounting relies more heavily on managerial assumptions, it is more subject to manipulation. When
management manipulates results over time, reported earnings will diverse from cash flows. The difference between
accruals and cash flows (known as abnormal accruals) theoretically can be used to detect potential manipulation.
For more on this topic, see also: Madhav V. Rajan and Brian Tayan, “Financial Restatements: Methods Companies
Use to Distort Financial Performance,” GSB Case No. A-198, Jun. 10, 2008.
David F. Larcker and Anastasia Zakolyukina, “Detecting Deceptive Discussions in Conference Calls,” Jan. 06,
2010. Available at SSRN: http://ssrn.com/abstract=1572705; and Jessen L. Hobson, William J. Mayew, and Mohan
Venkatachalam, Analyzing Speech to Detect Financial Misreporting (July 2010). Available at SSRN:
Aldert Vrij, “Detecting Lies and Deceit: Pitfalls and Opportunities,” John Wiley &. Sons, 2000.
Jonathan R. Laing, “Is Your CEO Lying,” Barron’s, Jun. 26, 2006. Full transcript available through Lexis Nexis:
“Computer Associates: CEO Interview,” CNBC/Dow Jones Business Video, Apr. 30, 2001. Financial Manipulation: Words Don’t Lie, CGRP-07 p. 3 In a similar vein, Erin Callan, former CFO of Lehman Brothers, used language that was generic
and excessively positive to obscure the company’s deteriorating financial position. In a
conference call just months before Lehman’s collapse, she used the word “great” 14 times,
“strong” 24 times, and “incredibly” eight times. By contrast, she used the word “challenging”
six times and “tough” only once. This had the effect of conveying a positive tone without
providing specific factual data to support her message (see Exhibit 2).7
As another example, executives at Bally Total Fitness were considerably hesitant in answering
specific questions about the company’s operating performance during a 2005 conference call.
Responses were vague and indirect. The syntax was complicated and at times quite stilted. Such
speech patterns may indicate that an individual is less than forthcoming or that he is having
difficulty suppressing information that he does not wish to divulge (see Exhibit 3). Ultimately,
the company restated its financial multiple times, the CEO and CFO were both forced to resign,
and the company filed for bankruptcy.
WHY THIS MATTERS
Given the difficulty of detecting financial manipulation, it may be time for shareholders and
analysts to develop new techniques for identifying deception. Law enforcement agencies and
federal investigators rely on linguistic tools and behavioral analysis. Why wouldn’t shareholders
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This document was uploaded on 02/02/2014.
- Spring '14