Our latest forensic accounting red flag is from a restaurant operator that reported rosy accounting earnings that weren’t matched by real economic profit.

We pulled this highlight from Saturday to Monday’s research of 179 10-K filings, from which our robo-analyst technology collected 24,318 data points. Our analyst team used this data to make 4,084 forensic accounting adjustments with a dollar value of $480 billion. The adjustments were applied as follows:

  • 1,780 income statement adjustments with a total value of $31 billion
  • 1,633 balance sheet adjustments with a total value of $213 billion
  • 671 valuation adjustments with a total value of $236 billion

Figure 1: Filing Season Diligence


Sources: New Constructs, LLC and company filings. 

We believe this research is necessary to close the gap between the suitability and fiduciary standard of investment advice services.

Today’s Forensic Accounting Needle In A Haystack Is For Restaurant Investors

Analyst Lindsay Bohannon found an unusual item yesterday in The Habit Restaurants’ (HABT: $15/share) 10-K.

HABT leases the majority of its restaurant facilities, as do most companies in the industry. These operating leases constitute a form of off-balance sheet debt that companies will be required to recognize in their financial statements starting in 2018. On page 24 of the footnotes (page 91 overall), we found that the total value of HABT’s operating lease obligations increased from $158 million in 2015 to $194 million last year.

Discounted to its present value, HABT’s off-balance sheet debt increased by $28 million, or roughly 10% of the firm’s invested capital. When we account for this increase in invested capital, we see that HABT’s ROIC fell from 8% in 2015 to 6% in 2016. HABT’s GAAP earnings may be rising, but its economic earnings are in decline.

This article originally published here on March 7, 2017.

Disclosure: David Trainer, Lindsay Bohannon, and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.

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