Foreword

Enron. Worldcom. Tyco. Healthsouth. Sunbeam. Cendant.

Just the mention of those names puts a chill and fear in the hearts of investors.

Each represents a recent accounting fraud that burned investors badly.

Shell-shocked investors began to feel helpless, wondering if investing in securities is a loser’s game. Is the game rigged? they wondered. If not, how do you win? What’s the holy grail of successful investing?

I believe that I have found the holy grail. The new book by Charles Mulford and Eugene Comiskey, Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance , points us to it. Find a company’s sustainable cash flow from operations. Use it as a means of finding the creators of real value and as a way of confirming reported earnings.

Case in point: Enron. In the year 2000, Enron reported cash flow from operations of $4.8 billion. In contrast, its legitimate, sustainable cash flow was -$3.1 billion. That same year, the company claimed that it generated about $1 billion in profits.

Mulford and Comiskey provide a simple and sensible approach for calculating sustainable cash flow from operations. They show how easily reported cash flow from operations can be inflated by the way items are classified among the operating, investing, and financing sections of the statement of cash flows—typically well within the boundaries of generally accepted accounting principles. Consider, for example, the effect of acquisitions on cash flow. Specifically, cash paid for working capital is shifted to the investment section rather than being shown as a reduction in cash flow from operations.

Many other books on financial analysis focus on techniques that improperly inflate profits by manipulating revenue or expenses. But none, however, points us precisely to the holy grail: sustainable cash flow from operations.

Read this book and begin your journey. This may be the most important book in your investment collection library.

 

Dr. Howard M. Schilit, CPA
Author, Financial Shenanigans:
How to Detect Accounting
Gimmicks and Fraud in
Financial Reports, and Founder,
CFRA (Center for Financial
Research & Analysis)