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Chapter 8. Earnings Tricks and Games: Manipulating the Numbers and “Creative...

Chapter 8. Earnings Tricks and Games: Manipulating the Numbers and “Creative” Fraud

“Now little beads of sweat appear. Soon he is creating charts with earnings on one side and Wall Street expectations on the other... As the quarters proceed he finds himself keeping bad accounts receivable, delaying the recognition of expenses, and altering inventory levels. At one point, dispensing with all formality, he finds himself directing his accounting staff to cross out real numbers and insert false ones.”

—Michael Young in his book Accounting Irregularities and Financial Fraud on how the head of a company division can become drawn into a massive financial fraud

In one recollection in his autobiography Straight from the Gut, Jack Welch crystallizes the ease with which executives have been able to hide holes in their financial results. The former chairman and chief executive of General Electric recounts the nightmare he faced in April 1994 when told that Joseph Jett, a star government bond trader at the conglomerate’s then investment banking unit Kidder, Peabody, was accused of making a series of fictitious trades that had left a $350 million hole in GE’s accounts. Welch held a conference call with 14 of the leaders of GE’s diverse businesses to deliver the bad news and to apologize for an event that was sure to hurt the company’s stock price and for which he blamed himself.


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