The lectures with Thomas Lys, were incredibly enlightening as well as entertaining. Accounting can be a boring subject, understanding the differences between cash flow statements, income statements and balance sheets is not at all easy. Thomas Lys really strived to show us how to understand how the numbers between the different reporting types are connected, what they mean in reality, and more interestingly how they can be fudged. Obviously, not so we can fudge them, but so that can tell when the wool is being pulled over our eyes. I would have loved to have had the opportunity to have an assignment to explore this aspect further (wow, I never thought I would say that about accounting). Although, if I tried I could probably find a few current examples…

Thomas Lys was involved in the prosecution for the Enron case and he showed us how they managed to “cook the books”. As one of the most famous and arguably sophisticated accounting scandals, it was a great example and a good finale to the 10 odd hours we spent with him. In Enron’s case, cooking the books came down to a series of energy swaps within and outside of Enron which he showed us in some detail.

Generally Thomas gave us a few quick ways to see whether a company could be guilty of fraud. One of the ways you can check if the books are being cooked is by how discretionary accruals (an expense that hasn’t yet been realised) are recorded and how they behave over time. A drop in the ratio of discretionary accruals/total assets at the end of the fiscal year is an indicator of the company’s accounting methods (soft or hard) and a possible sign that the accounting is not being done properly.  Another good indicator generally is if a company uses a little known auditor. It helps to know the industry, if say in manufacturing the % value of your accounts receivable is high, it might suggest that you are financing your customers’ purchases (not good since it can lead to default). One other easy one is disparity between trends between income and cash flow, if income is increasing but cash flow isn’t, something could be going on. These are all things that many of us can look out for when reading the news and just checking publicly available information. Most of all he showed us how we should think of and treat different types of income and expenditure, and how we can find them in balance sheets, income statements and cash flow statements.

I really enjoyed this class. I’ll probably need the notes by my side if I need to go through accounts information in detail. But, it took the confusion out of these seemingly similar spreadsheets of financial information. I would definitely be tempted to take an MBA level class in this, just to have the chance to understand this subject better and get some practice.