Today I am reviewing Financial Fine Print: Uncovering a Company's True Value, By Michelle Leder. Read my other book reviews here.
Michelle Leder created the influential website footnoted in the aftermath of the early 2000s storm of accounting frauds which involved many of America's largest and most respected institutions. The contributors to footnoted comb through corporate financial filings and then publish the interesting and often surprising things they dig up. I have long been a regular reader of footnoted and I am always extremely impressed with the quality of the content. In many ways, footnoted has inspired the sleuthing that you occasionally come across on this site.
What many may not know is that Leder created footnoted at the same time as she published her first and only book, Financial Fine Print. I finally read it last month after a reader suggested that, since I liked Thornton O'glove's Quality of Earnings (read my review here) and Howard Schilit's spectacular Financial Shenanigans (read my review here), I would also find Leder's book interesting. Perhaps even more enticing was the fact that Thornton O'glove had this to say in the foreward to Financial Fine Print:
[I]t is my opinion that Financial Fine Print: Uncovering a Company's True Value is one of the most informative books ever written for investors. Financial Fine Print enables investors to become their own forensic accountants, helping them to navigate the labyrinth associated with the increasingly complex financial reports of U.S. Corporations.
To call this book one of the "most informative books ever written for investors" is quite simply a drastic overstatement and I think it was a mistake for Leder to allow O'glove to raise the reader's expectations to this level. Readers will find that it quickly becomes apparent that the book does not live up to this hype.
But first, let's talk about the good aspects of the book. For one, Leder did a great deal of research into aggregate statistics and the impact of regulatory changes on corporate America's filings. For example, from page 52:
In 1992, only 31 companies in the Standard and Poor's (S&P) 500 reported a one-time charge. By 1999, more than half had taken at least one special charge. By the end of 2002, only 58 companies in the S&P 500 index did not announce any special charges, according to Thomson Financial/Baseline.
O'glove and Schilit did not do this kind of research, and so Leder gets some points for this. This kind of commentary occurs frequently and is generally interesting. Unfortunately, while it is valuable in terms of general interest, it provides no practical benefit to investors attempting to analyze financial statements (which is ostensibly the book's purpose). This is really the core problem here; rather than providing practical advice, it is more a mishmash of facts about corporate America and coverage of the most famous frauds from the early 2000s.
The coverage of actual accounting frauds is far below the standard set by Schilit and (to a lesser extent) O'glove. What effort she does put into creating practical tips leads to gross oversimplifications that are quite difficult to put into action. Here's an example (page 91):
Don't automatically dismiss small related party deals as too insignificant to worry about. They could be a sign of lax management.
Unfortunately, the book is even less practical than this would suggest because many of the rules have changed over the decade since it was published. Some things, like the accounting for options (Chapter 5) have changed dramatically, rendering most of the content in this book inapplicable to today's reader. This isn't Leder's fault of course, but because the book was clearly written in response to the accounting scandals of the time, rather than in the timeless manner of Schilit's Financial Shenanigans (published initially at the same time as this book) or even O'glove's somewhat lesser work Quality of Earnings (published in 1987!), there is really no reason to purchase this book today.
I am somewhat surprised that Leder wrote this book. It stands in stark contrast to the high quality of content at footnoted, though this could simply be a case of a writer who has come into her own over time. For those of you who are actually interested in learning more about spotting financial fraud and what to look for when analyzing companies, I suggest skipping this one and picking up the gold standard, Financial Shenanigans. And of course, read Leder's current work at footnoted which is among the best you will find anywhere online.