Spotting Fraud: Forensic Accounting 101

Published on
February 4th, 2020
Duration
29 minutes


Spotting Fraud: Forensic Accounting 101

The Expert View ·
Featuring Stephen Clapham

Published on: February 4th, 2020 • Duration: 29 minutes

How can investors recognize fraud and other accounting irregularities in companies before they invest? Stephen Clapham, a forensic accounting expert and founder of Behind the Balance Sheet, joins Real Vision to break down the telltale signs. Drawing on his decades of experience working in research roles in the hedge fund industry and investment banking, Clapham explores what he believes is a pervasive trend of companies manipulating their earnings and balance sheets. As he walks through the mechanics of his thesis, Clapham pulls back the curtain on the three key areas he believes investors should always examining before investing. Filmed on January 22, 2020, in London. Find more at BehindTheBalanceSheet.com

Comments

Transcript

  • RS
    R S.
    4 April 2020 @ 22:06
    Quietly, he pretty much actually called the market top here. -30% since.
  • dm
    david m.
    20 February 2020 @ 16:43
    Will be looking into courses offered. Great interview. Full disclosure, my favorite part was "jiggery pokery". Thank you.
  • KL
    Ken L.
    5 February 2020 @ 19:49
    Given Tesla's stock going parabolic. RV needs to invite him for a Tesla discussion.
    • SC
      Stephen C. | Contributor
      17 February 2020 @ 18:52
      I am debating whether to do a series of blogs on Tesla's accounts, a webinar (or several) going through them, or just to leave it as it's pretty complicated. Would be interested to hear people's views - email me at info@behindthebalancesheet.com.
  • SP
    Sat P.
    5 February 2020 @ 20:44
    I love these videos on fraud. This was very educational, excellent!
    • SC
      Stephen C. | Contributor
      17 February 2020 @ 18:51
      Thanks - glad you enjoyed
  • AA
    A A.
    6 February 2020 @ 03:59
    A single tear down my cheek as I lament for a past in which all he stated once made sense in the world. But though I wish we could go back to some remnant of the past applications of Finance.... unfortunately this monster this abomination has been let loose on the world. I fear it way too late.
    • SC
      Stephen C. | Contributor
      17 February 2020 @ 18:50
      I hope you are wrong
  • RE
    Richard E. | Contributor
    7 February 2020 @ 13:56
    S&P 500 is a small portion of the US public equity market. The margins in the smaller cap public stocks look different too. To compare S&p 500 to the overall US economy is apples and oranges. Sometimes it might be similar, but is certainly prone to disconnects. After all, other videos have shown us that the bubble is probably in private equity and private credit. The public market has shown it won't pay the prices the private market is paying. So NIPA margins coming lowers, scare me a lot more about private equity than the S&P 500.
    • SC
      Stephen C. | Contributor
      17 February 2020 @ 18:50
      Richard, you make a good point. And there are reasons why S&P 500 and NIPA could diverge at this pointg. I have not done any work on how much, but the convergence trend between the two series has been extremely strong and I would be amazed if this did not recur. It may not go 100% as previously, but the overwhelming likelihood is that there will be some degree of convergence.
  • PD
    Peter D.
    7 February 2020 @ 21:45
    @Stephen in your courses do you touch on what quants look at when calculating and programming their buy and sell algorithms? If not do you have a source for that information. You made one point in here with gross margins and got my wheels turning as to what other points they calculate into their black boxes. Considering they are such a large part of the market now it would be good information to have. Thanks for the amazing interview. Hope you're invited back soon or that this starts an in-depth discussion on the details behind the financials.
    • SC
      Stephen C. | Contributor
      17 February 2020 @ 18:47
      Well I hope to be invited back. In our courses, we tend to focus on what is in the numbers, but we do touch on this area, as I think it's becoming increasingly important. If I were a CFO, I woudl certainly want my data to look attractive to quants and there are only a few factors that youc an easily manipulate. Gross margin is one, as I mentioned in the interview. Thanks
  • HS
    Henry S.
    8 February 2020 @ 14:42
    Really enjoyed this video. We need more content like this, getting into and understanding the balance sheets and cash flows is more vital now than ever.
    • SC
      Stephen C. | Contributor
      17 February 2020 @ 18:44
      Glad you enjoyed it - I shall be doing more blogs this year so please sign up or just check out my website
  • SA
    Scott A.
    8 February 2020 @ 17:27
    Great video, totally opposite of macro and equally as important. Stephen's three rules are practical things all of us individual investors can benefit from. I found his comment about CEO's targeting quant models very interesting. And on a lighter note, my wife, daughter and son-in-law are all auditors, will make for great dinner conversation!
    • SC
      Stephen C. | Contributor
      17 February 2020 @ 18:44
      Scott, enjoy dinner. Email me and I shall send you some of my auditor slides
  • MS
    Michael S.
    8 February 2020 @ 23:29
    Excellent! Stephen should be a RV regular, in some form.
    • SC
      Stephen C. | Contributor
      17 February 2020 @ 18:43
      Yay! yes please!
  • DP
    David P.
    9 February 2020 @ 21:15
    Thank you for introducing Mr. Clapham to RV. Regarding Telsa, his concluding comment was that further in-depth evaluation of the company's books would be "a waste of time." I can guess why this might be, but it would be better if he would enlighten us himself!
    • SC
      Stephen C. | Contributor
      17 February 2020 @ 18:42
      Thanks David. I think that stocks like Netflix or Tesla do not trade based on current numbers. So what if a Netflix or Tesla is exaggerating its earnings? Does it matter if you are on a p/e of 100x or 200x? But I believe that accounting trickery gives a clue to management integrity, or the lack of it.
  • JL
    Jenny L.
    14 February 2020 @ 17:50
    Very good video. I learned a lot. Love the fact that Real Vision introduce me to some very smart experts across the pond.
    • SC
      Stephen C. | Contributor
      17 February 2020 @ 18:39
      Thanks Jenny, glad you enjoyed it
  • JF
    Jennifer F.
    9 February 2020 @ 03:51
    EXELLENT ADVICE
  • TS
    Theodoros S.
    7 February 2020 @ 18:34
    Auditors are not doing their job properly. So true!
  • WA
    Wissam A.
    4 February 2020 @ 17:17
    Me Thinks that Tesla will the first one exposed!
    • PG
      Pinchas G.
      4 February 2020 @ 20:58
      TESLA hit $900 today!
    • jS
      john S.
      5 February 2020 @ 09:31
      Me Thinks you follow the herd
    • TZ
      Tibor Z.
      5 February 2020 @ 18:18
      It is absurd as it seems but I think that Tesla will be one of the winners in the car industry! The rest have to hurry up with EVs not to go bankrupt. When EVs will hit price parity with ICE and the rest of the car industry will not be able to manufacture EVs on a profit the game will be over for them! Biggest disruption in the existence of the whole auto industry! And I am not a blind Tesla fan boy! Just to be clear on this!
    • AC
      Andrew C.
      7 February 2020 @ 03:31
      Fake it till you make it. I reckon Tesla may just make it through and survive. Accounting Fraud, yes, but they do have a product and revenue. Cook the books till revenue corrects everything Theranos?
  • ml
    m l.
    6 February 2020 @ 09:48
    This is type of content we want ! Less hockie pokie technicals more this
  • JF
    John F.
    6 February 2020 @ 01:12
    Would really like to see RealVision bring John Hussman on for at least a one-hour interview, preferably with Mike Green.
  • WG
    Wade G.
    4 February 2020 @ 17:40
    Coincidentally, before listening to this, had been reading Hussman, who was quoting liberally from Graham & Dodd's "bible" of value investing, Security Analysis. This quote was striking to me: “the analyst will perform his best service by keeping them from buying inferior stocks during periods of enthusiasm and high prices. His next service is to induce them to buy their standard issues when the market level is below, rather than above its indicated long-term normal figure. His third service is to guard the investor from paying extremely high prices for good stocks.” I'd like to thank Mr. Clapham for his "best service" here. Plenty to digest and act upon.
    • SC
      Stephen C. | Contributor
      4 February 2020 @ 17:51
      Hussman has been negative for some time and people therefore tend to discount his view because he has been early, but his analysis is detailed, data driven and valuable. The Graham & Dodd point is clear - now is the time to invest in quality.
    • JF
      John F.
      6 February 2020 @ 01:10
      Would like to see RV bring John Hussman on for at least a one-hour interview. Preferably with Mike Green.
  • CM
    Chris M.
    4 February 2020 @ 17:27
    Excellent video. Even though I have a CPA, registered to get info on his classes. Can't believe he couldn't get an interview after 47 submissions. Lesson is that all these analysts writing reports are probably under 30 and lack market experience. Agree with his conclusion, timing is the tricky part. The end will be ugly.
    • SC
      Stephen C. | Contributor
      4 February 2020 @ 17:54
      Believe it! London is a young man's game, and I can understand why successful fund managers don't want some old guy looking over their shoulder. Good news is my new role is great fun, and hoping toi bring my courses to New York this summer
    • SP
      Sat P.
      5 February 2020 @ 20:49
      We’re living in an era where people don’t want truth from those with experience and wisdom...
  • PG
    Pinchas G.
    4 February 2020 @ 20:55
    I signed up for the behind the balance sheet investment undegree. I am super excited!
    • SC
      Stephen C. | Contributor
      5 February 2020 @ 20:09
      I am delighted you have done so and I promise you will learn a lot, have fun and acquire/ enhance your investing skills.
  • CL
    Claudio L.
    4 February 2020 @ 23:07
    RV should bring up a wider perspective related to corporate accounting with more interviews like this one, great interview, cheers.
    • SC
      Stephen C. | Contributor
      5 February 2020 @ 20:07
      thanks - it's not the most fun subject but it is important
  • RS
    Rob S.
    5 February 2020 @ 08:39
    The 47 companies that decided not to interview this man clearly made a big mistake, or did they? Perhaps they didn't want someone around that actually knew what was going on... Cheers Stephen will be checking out your website.
    • SC
      Stephen C. | Contributor
      5 February 2020 @ 20:07
      None of them have been in touch since the interview, so I am not sure!
  • PS
    Paul S.
    5 February 2020 @ 12:49
    The sad part are his comments around nobody wanting 50 year old analysts From experience - 35 is too old A bizzare industry where actual experience counts for naught
    • SC
      Stephen C. | Contributor
      5 February 2020 @ 20:07
      To be fair to the people who did not want to see me, I can understand that a highly successful 42 year old fund manager does not want some old codger telling him "if only you remembered the last cycle......" etc. But you would hope to at least get a hearing. The good news is that I am doing something quite different which is an unusual privilege at my age. My online school is a completely new experience, running an online business and I am quite clueless and learning every day - there are not many people who can enjoy such a benefit. So it's daft, but has not been all bad for me, and one of my training clients might offer me a job, you never know :)
  • GR
    Garey R.
    5 February 2020 @ 16:53
    Exceptional interview rooted in quantifiable actions and measures! Have him back on at some point in the future!
    • SC
      Stephen C. | Contributor
      5 February 2020 @ 20:07
      thanks - I am hoping they will have me back
  • TZ
    Tibor Z.
    5 February 2020 @ 18:15
    Just 3 words : MORE OF HIM !!!!!
    • SC
      Stephen C. | Contributor
      5 February 2020 @ 20:06
      that's so kind of you thanks
  • MR
    Mitchell R.
    5 February 2020 @ 14:35
    Great interview! Greed > Logic
  • MB
    Michael B.
    5 February 2020 @ 11:01
    A really outstanding talk exposing issues that need to come to light
  • GG
    Gary G.
    5 February 2020 @ 06:56
    Great!!
  • NR
    Nelson R.
    5 February 2020 @ 03:44
    Great video, bring Stephen back.
  • JJ
    Jeffrey J.
    5 February 2020 @ 00:58
    Wish he would do the course on Tesla. Wouldn't be a waste of time.
  • ml
    m l.
    4 February 2020 @ 23:27
    I would pay multiples of subscription if we had this guy on again... 45 minutes of just going through Tesla accounting would be solid
  • RB
    RODERICK B.
    4 February 2020 @ 20:50
    Great Stuff
  • KE
    Kathryn E.
    4 February 2020 @ 19:59
    Awesome interview. Stephen could have his own mini series on this topic. Thanks RV
  • SB
    Sean B.
    4 February 2020 @ 19:50
    This was very good. Thank you
  • DJ
    D J.
    4 February 2020 @ 18:18
    Thank you for this
  • MC
    Minum C.
    4 February 2020 @ 17:42
    Terrific stuff. I'd love to see this gentleman be invited back to review specific cases after the poop hits the fan.
    • SC
      Stephen C. | Contributor
      4 February 2020 @ 17:52
      I am hoping to be invited back sooner! But definitely looking forward to seeing how the accounting theme plays out
  • SS
    Sam S.
    4 February 2020 @ 14:05
    Wow!
  • IS
    Ionel S.
    4 February 2020 @ 13:09
    I've just loved it: full of common sense and actionable!!!