Business Financial Information Secrets

CHAPTER 12Wall Street's Latest Trick – Financial Engineering

WHAT FINANCIAL ENGINEERING IS NOT

We start this chapter on financial engineering by addressing the question of why we have elected to include this subject matter in the “how” portion of the book. The answer is simple and comes down to one key concept: Financial engineering, whether utilized by Wall Street or Main Street (i.e., private businesses), offers a lesson on how businesses can massage, tweak, adjust, and, for lack of a better term, manipulate financial information and results to present a financial story that helps achieve a specific goal or objective (which usually involves increasing a company's valuation).

Before we dive into the concept of financial engineering and what it entails, it is helpful to identify what financial engineering is not. We want to put out of your mind any preconceived notions about the topics of fraudulent financial reporting or heavy‐handed manipulation of accounting and other deliberately misleading information put into financial reports.

There are two specific points that are important to understand:

1. Financial engineering does not refer to the intentional misreporting and misleading presentation of accounting transactions and financial operating results. It does not refer to cooking the books. While we would love to recall some of the great accounting frauds of the past (e.g., Enron), this subject would warrant a whole book to itself. We just point out here that almost all “great” ...