How to Find the Devil in an Employer’s Financial Details

Want to make sure you don’t hire on with the next WorldCom? Hints on a company’s real health may be hidden in the financial filings public firms must submit to the government. But don’t worry: You don’t have to be a numbers whiz to spot the red flags.

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Joseph Brazel, Ph.D., associate professor of accounting at North Carolina State University, matched the Securities and Exchange Commission filings of companies that committed fraud with similar firms that didn’t. He discovered those that cooked the books by exaggerating income often disclose non-financial information that provides an early warning of mischief or, at best, a shaky trajectory.

By searching a potential public company employer’s annual 10-K filings at the SEC’s EDGAR database, you, too, can do a quick check of the company’s financial health.

Search the 10-K for number of employees or patents, he says. "Have their patents grown with their revenue? If it hasn’t, you have to be a little cautious. When a company goes into fraud the revenue goes up but operational data is going flat or downhill."

For example, if the company reports increased revenue, check to make sure it’s reporting increases in these areas, too:

  • Number of employees
  • Number of patents
  • Number of subsidiaries
  • Web influence
  • Number of distribution dealers
  • Number of R&D employees
  • Manufacturing space
  • Number of production facilities
  • Warehouse space
  • Number of acquisitions
  • Number of new products
  • Number of countries doing business in

If the company reports higher income and earnings while these measures are declining, proceed with caution. Seek a second opinion from someone who can actually read sophisticated financial statements.

You can peruse Brazel’s research here.  

— Dona DeZube

Comments

2 Responses to “How to Find the Devil in an Employer’s Financial Details”

December 06, 2009 at 9:45 am, psdaengr said:

Calculated risk avoidance is a poor path for professional advancement. When individual companies are considered, the size of company, number or employees, and number of acquisitions may have little correlation with the probability of a company’s continuing to hire or imploding. One of the largest and most stable REITs in the country went from steady expansion to bankruptcy simply because credit for ALL companies dried up. This kind of data has been used many times in the calculation of published “best places to work” indexes, which have been unreliable indicators of future employment stability. Hiring patterns are changing globally. Without a proven predictive formula and relevant benchmark data each candidate would have to re-run the study, develop a formula to weigh and compare the statistics, develop an index for predicting future behavior and then compare results to test predictive accuracy. Meanwhile, there is no way to weigh the opportunity against the calculated risk.

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January 28, 2010 at 4:21 am, Mike said:

If your prospective employer is not a public company? I am visualizing the ROFLTAO after you request their financials in order to determine their health. Remember, even the Titanic was healthy until the collision with the iceberg.

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