This is the fourth book that the Georgia Tech professors have written together on financial analysis. Their last book, The Financial Numbers Game, which published in 2002 at the height of the Enron scandal, is in distinguished company as one of the best books on investing and financial analysis, according to Financial Times.

It was coincidence that their last book on "creative" (read: unethical) accounting appeared immediately after the scandals surrounding Enron and accounting firm Arthur Andersen. This year's release of Creative Cash Flow is timely, as well. Corporate executives are frantically shuffling through the new rules mandated by Sarbanes-Oxley. The regulations aim to make earnings reports more transparent, but it will take some time to get them implemented and see the effects -- yet investors want that transparency now.

As Creative Cash Flow points out in chapter one, financial professionals tend to label cash and cash flow as "fact", "real", and "harder to manipulate."

Mulford and Comiskey, mindful of the investor, disagree:

Although the ending balance in cash and the change in cash from one period to the next are not readily subject to manipulation, the components of total cash flow, the operating, investing, and financing amounts are more susceptible to management. Such steps, collectively referred to here as creative cash flow reporting, may be taken both within and beyond the boundaries of GAAP. Moreover, when financial professionals speak of cash flow and the difficulty of managing or misreporting cash flow, they typically are referring to some measure of operating cash flow or closely related free cash flow. Free cash flow is generally defined as operating cash flow minus capital expenditures and, for companies that pay them, preferred dividends. Thus, while analysts, investors, and creditors might be led to believe that operating cash flow and free cash flow are somehow above the creative accounting fray, that belief is unfounded. Operating cash flow and free cash flow are subject to manipulation, which, unfortunately, occurs often.  -- Creative Cash Flow Reporting (Wiley, 2005)

Mulford said CFOs rely on cash flow for firm valuation and debt-service capacity. "CFOs are understandably interested in how these important groups view their company as they determine the amount of capital to which a firm has access and its cost," he said.

"Steps taken to boost operating cash flow in an artificial manner may increase it, but in the long-run, analysts, investors and lenders will grow to understand that the cash being generated is not sustainable and does not provide the confirmation of earnings that cash flow generated without such gimmicks provides," he warned.

An excerpt of Creative Cash Flow Reporting is available at Wiley.com.

More info: Creative Accounting: Prevention and Detection