Anthony Scilipoti on Forensic Accounting, the AI Bubble, and Spotting Corporate Collapse

Anthony Scilipoti

I was an accountant working at Arthur Andersen, doing the normal audit sort of preparatory work. And I found it unfulfilling, because the work I would do — I'd find something interesting, or a concern with the accounting — and for the client, it didn't end up going anywhere. Then some due diligence work came up, where we could actually look at transactions: companies calling to say, "We want to spin out this business," or "We want to make this acquisition." I put my hand up and said, "Can I do that sort of work?" I started doing it, and I loved it — huge fulfilment. And then it's all about the people you meet. I met a gentleman named Mel Rosen. He was head of accounting at York University, and a forensic accountant with his own practice. He taught us to pass the UFE, the CPA exam of the time. I told him I'd like to work with him, and he said, "Get your CA work done, and then we'll think about it." That's what I did — I was under his tutelage for some four years, and that's what really made it happen.

Anthony Scilipoti

I was not. I left Arthur Andersen in 1997 — couldn't even spell Enron at the time. It's a very sad thing, what happened.

Anthony Scilipoti

They had a number of off-balance-sheet exposures. They'd enter into derivative-type contracts tied to an energy price, or even the company's own stock price — this debt only comes due if the stock price falls to X, this derivative transaction only triggers if the price of electricity per kilowatt-hour rises to a certain level, and if it falls to some other level, they have to pay a counterparty. Those risks were essentially off-balance-sheet, not sitting on the company's liabilities — they were contingent. And at the time the accounting rules were such that these numbers weren't included in liabilities, just in the notes. So people weren't paying attention, because nobody reads the notes. Then things started to happen — a change in commodity prices, the dot-com bust, the recession in the early 2000s — and that movement in commodity prices triggered the derivatives. Surprise, surprise, they can't make the payments. And they weren't required to reserve against any of it, because if it wasn't on the balance sheet, investors wouldn't have noticed there weren't enough assets to cover it.

The implication for Arthur Andersen — and this is near and dear to my heart — is that the auditors on the file had signed off on all of this. When the proverbial hit the fan, the regulator asked for the auditors' working papers, the papers that would support the audit work, and they knew perhaps they hadn't done enough — so they shredded the documents. All of a sudden they became guilty because of their own actions. It was found in the courts, on appeal, but that was way after the fact — Arthur Andersen had already been brought to its knees, and it was over. I became a scapegoat for everything wrong with accounting at the time. Change needed to happen: Arthur Andersen folded, and the partners were absorbed into other firms.

Anthony Scilipoti

You're hired to be independent and to attest that the financial statements present fairly, in all material respects, in accordance with a set of accounting standards. The challenge is time — you have to do this quickly, and there's pressure on cost. Think of it this way: I tell you I've prepared my own report card, I got an A, and if you confirm it's an A, I'll pay you. Then you come back and say, actually it's more of a B-plus. "What do you mean it's a B-plus? How much am I paying you again?" This ties into so many things, AI included. Business is judgement — people run companies, companies don't run themselves. The decisions behind a transaction end up reflected in the financial statements, but the group that made the decision comes back to the office and says to accounting, "We just did this, can you figure out how to account for it?" And the accountants think, "Oh God, what do I do now?" And by the way, present it as brightly as possible, so our investors and stakeholders are excited by the results — don't present it badly.

Anthony Scilipoti

I think it's actually exacerbating the situation.

Anthony Scilipoti

Instead of reading the statements myself, I put it into AI and ask ChatGPT to look for something specific. It gives me every instance, and I read it, and it's all there. But did the AI miss anything? Did it understand the linkages between each of those sightings? Say I'm looking at a REIT that's capitalising costs. Capitalise them versus running them through the income statement — running them through the income statement makes operating earnings, and net EPS, look worse. Put them on the balance sheet instead, and it looks like an investment in the future, and everything's fine. So there's a grey area — was it an operating expense or a capital item? The first thing I looked for was capitalised interest — it gave me all the quotes. Then capitalised costs — same. You'd think that's enough. But I showed one of my guys: let's actually go to the income statement, where it told us to look. AI made it faster — I no longer had to flip through 300 pages, it told me where to go. From there I could say, if that's what's happened, we need to look at this other note for the implications, and then the cash flow statement, to see how it's actually affecting what gets reported as cash flow. Those linkages — AI gets me to the answer more quickly, but if I don't already know where I want to go, it just gives me information. That information doesn't help my decision if I didn't start with where I wanted to get to.

Anthony Scilipoti

A hundred per cent. This is what I love — everything's going to AI, and the bottom level, the junior analyst, is going to be replaced by it. "Find me all the references to where the company capitalised costs" — AI can do that, I get it. But you need someone with experience to know which of those references matter, and what they mean for the business. This brings a real challenge: if the junior person doesn't get in on the ground floor, they'll never learn to make those connections. The only way to learn is by being in the weeds, not by being in AI. It ties to my own children. When I was in elementary school we had to do the times tables and recite them — I always struggled with my nine-times table and my twelve-times table, but I had to memorise them. My children came along using calculators, and apparently that was okay. I went bananas — I said you're not going to use the calculator, you need to learn it without one, and then you can use the calculator. Same with AI: you need to understand how the financial statements are prepared, understand the linkages, develop mental models — so that when AI gives you information, you can digest it and make decisions.

Anthony Scilipoti

I taught at York for about fourteen years — a truly fulfilling time, and I still love doing guest lectures. I'd go over the outline and tell the students assignments are due at the beginning of class — hand them in after the 8:30 start and it's a zero. Invariably, in the first ten years, somebody would show up late, and I'd say it's a zero, and they'd whine that it was draconian. I'd say, "In the real world, when a client demands a report by 9am Monday and you show up at 9:05, how does that look?" People see that there's a rule and it's followed, and they build respect for it.

Anthony Scilipoti

Correct. Experience teaches you what the numbers mean. When you have experience, you say, "I've seen that before" — a lot of what I see happening today links back to things I saw when I started my career, over the last thirty years. I think that's something AI can't quite do unless you tell it where to look, because it doesn't know the link I'm thinking of. If I can supply that initial step, it can get me there quicker and more accurately. But if I don't already have a model of what I'm looking for, it's not going to get there on its own.

Anthony Scilipoti

I hate calling things bubbles, but I think we're in a period of extreme euphoria — where "fundamentals" gets thrown around in this industry the way "love" gets thrown around among humans. Someone looks at a chart and sees a double bottom — that's the fundamentals. Someone else is looking at the RSI, or cash flow, or the multiple relative to earnings — those are the fundamentals. Historically, and if we follow Buffett, a company is the present value of its future cash flows, and you develop those by forecasting what's going to drive the business — that's what I think the fundamentals actually are. So when a company today generates little or negative free cash, and yet the market wants to trade it at a multiple of revenue, its valuation has become detached from its current fundamentals and is trading on future expectations.

I've been asked what I'd want if I could have anything, and I say tomorrow's newspaper — then I'd know what was going to happen. We're all trying to do the mostly impossible: figure out what happens tomorrow. All I know is I've seen this before. When investors say the numbers don't matter, the financial statements no longer matter because this is changing the world, I say I've seen this — I saw that Nortel was changing the world, and Lucent, and Cisco, and 360 Networks. They built the infrastructure of the internet we're using today. But those companies don't exist anymore. What they built still exists; they don't. Either bankrupt or folded into other companies. Cisco still exists, but has never traded at its historical valuation, even though it's a multiple bigger today by earnings and revenue.

Anthony Scilipoti

That's right. And I think we're in a very high-risk situation right now because the cost of risk is priced very low — and that's when the risk is highest. Look at the high-yield bond spread, between the ten-year Treasury and non-investment-grade bonds in the US — near the tightest it's ever been. Investors are willing to lend to non-investment-grade companies at a spread over government bonds that's practically the tightest in history. There's no risk priced into the bond market. In equities, the VIX — a measure of S&P 500 volatility — is trading at a benign level, not the lowest ever, but benign. In essence, investors are saying there's no risk, everything's fine.

Anthony Scilipoti

For sure. Interest rates are coming down — all the governments want them down, because debts have continued to balloon in a period that's been relatively buoyant by historical standards, and they believe lower rates keep the buoyancy going. And if you followed Powell, despite pressure from Trump to cut rates, he's going to cut them because he's concerned about the employment situation, or the economy more broadly.

Anthony Scilipoti

You're right, but it seems he's noticing more strain in the employment market, and that's what's leading him to believe it's time to cut. What happens when we cut rates and markets are at all-time highs? It could turn into "sell the news," because the market's been moving up in anticipation — the belief being that cutting rates gives companies lower-cost capital, which they put to work and generate a return from. But every company is only as good as its customer base. If the average Joe — I call him Joe Sixpack, we all have a buddy Joe Sixpack — is struggling, how does that trickle down and create growth?

Anthony Scilipoti

I don't know — 350 billion, maybe. His largest cash holding as a percentage of market cap, I think, ever.

Anthony Scilipoti

Markets and companies will continue longer than you and I will be alive, so when you're investing, it depends on your horizon. I think what's happening today is investors have learned, rightly, that every time the market falls, it rallies back. And I like your comment that you're not here to predict markets — it's a fool's game. What I do instead is look at the underlying companies, and except for some of the Mag 7 that are growing their earnings, the smaller and mid-caps are not. When Walmart flags a problem with its sales forecast, and Target is struggling, and Lululemon can't sell the same number of pants, and Starbucks is rethinking its pricing — that's Joe Sixpack, and Stevie Winebox who's stepped up from Joe Sixpack, in the middle, and I think they're the ones struggling. This can continue — markets can keep going up for any length of time, partly because it's a function of how much liquidity is in the market. If investors have lots of cash, they'll keep investing.

The people making the most money today are not, generally, the ones you'd expect from history — Ray Dalio, Warren Buffett. There's a quote I've learned over time: "During raging bull markets, knowledge is superfluous, and experience is a handicap." If you know what happened in all the other blow-ups, you know how painful it can be. But if you've never experienced it, and every time something went wrong it just rallied back, you think it's going to keep happening.

Anthony Scilipoti

Which is the most dangerous words in life and in finance. I'd like to write a book one day marrying finance with life, because it's one and the same. I remember an interview Alice Schroeder gave — she's done very few — and one of the most illuminating things was that when Buffett looked at patterns, he wasn't trying to find what's different this time. He was trying to focus on what's the same.

Anthony Scilipoti

What I see as the same: we transitioned our forensic accounting skill set into what's now Veritas, an independent equity research firm, and later an asset management arm. That started because we wrote a sell report on Nortel in 2000, and people thought we were crazy. I was 29 at the time, so I didn't fully realise what I was doing — it's amazing when you're young.

Anthony Scilipoti

I knew the accounting, but I didn't realise what happens when you drop a pebble in the water. When John Roth got quoted in the newspaper saying we were hurting his ability to raise capital, clients were cancelling, employees were contacting us upset — I didn't mean to hurt anybody, I was just saying the truth. Hence the name Veritas.

So let me link the past to today. Back then you had Nortel, Cisco, and Lucent, building out the internet's infrastructure. They needed customers, and those customers needed to raise money, because building infrastructure doesn't generate cash flow for a while. They'd raise money from equity holders and eventually take on debt. But Lucent and Nortel would also say, buy this $10 million of product, pay us over an extended period, and by the way, here's a line of credit so you can buy routers from Cisco too — because Nortel could borrow money, had a strong balance sheet, could raise capital. Ultimately, when the equity market wobbled and there was no one left to sell to, Nortel didn't get paid on its debts, and the wheels came off. Then 360 Networks, JDS Uniphase, and the rest of that ecosystem went by the wayside.

Now take that and think about today. You've got Nvidia, Microsoft, and OpenAI. Nvidia is investing in OpenAI. Microsoft is an investor in OpenAI. Microsoft offers cloud services to OpenAI, so OpenAI becomes its customer — but Microsoft gave it the money to pay for that. Nvidia invests in OpenAI, and Nvidia is also a supplier of chips to OpenAI. It's all circular.

Anthony Scilipoti

There's a company that just went public earlier this year, CoreWeave. Who's its largest customer? CoreWeave is essentially a data farm for large AI users like Microsoft, its largest customer. Microsoft hasn't invested in it, but Nvidia supplies pretty much all its chips, and Nvidia is a meaningful investor in CoreWeave. When CoreWeave went public, it was trying to close its equity financing at the last moment — Nvidia bought $250 million of shares so the deal could close. JP Morgan gave them a loan just before the IPO, which they repaid to JP Morgan once public. And who's one of the lead underwriters? JP Morgan. No one's doing anything bad, no one's cheating — these are just the same symptoms of things that were going on twenty-five years ago. None of these things mean anything until they mean something.

The key wrinkle — and this is why I want to take it back to the accounting — is that Nortel's financial statements didn't show that long-term loan as part of current assets; they showed it as a long-term asset. So the simple calculation of current ratios only took current assets, and that long-term receivable never showed up in the liquidity calculation. It also never showed up in operating cash flow — and if it's not part of operating cash flow, operating cash flow looks better. No one looked at long-term receivables, because everyone's taught in their CFA that free cash flow is operating cash flow less CapEx. But that's the problem with investing purely by ratio: the ratio needs to be adapted to the company, the life cycle, the industry, the business model. If a company sells on long-term receivable terms extending beyond one operating cycle, but it's part of normal operations, that should be in operating cash flow. After Nortel, FASB actually changed the rules, and long-term receivables became part of current assets. We wrote about this — we said this is wrong, free cash flow is actually negative, this number needs to be shown, because they were extremely vulnerable if the customer couldn't pay.

Today, look at the accounting: when Nvidia invests in CoreWeave, the dollar amount is so small relative to Nvidia's balance sheet that the disclosure is basically irrelevant — it's a related party, but they only own five per cent, immaterial to Nvidia's total balance sheet. So it doesn't matter. But if this is happening across hundreds of transactions, where Nvidia is investing in its own customers, then if it ever runs short of cash, or those customers run into trouble selling services built on the chips they bought, things start to fall apart.

Anthony Scilipoti

It's fantastic business savvy, in fairness. If I'm trying to build a new paradigm — AI — I need to invest in it as a key player, to foster that paradigm. And what happens next? If my name, as a key investor and leader in the industry, is seen making an investment, what does everybody else do? Warren Buffett buys something, and everybody piles in. If Nvidia is buying something, what do all the private equity firms do, looking around?

Anthony Scilipoti

You got it.

Anthony Scilipoti

I said Spider-Man.

Anthony Scilipoti

That's one of the things — we're celebrating our 25th anniversary this year, and I developed ten investing rules that relate to life as well. One of them: being negative sounds intelligent. Being negative is typically looking at facts, looking at numbers, and presenting them in a way that sounds compelling. If I want to sell you the positive side, I have to sell you the dream: AI is going to change the world, people won't need to work, it's going to replace jobs, margins are going to go higher, healthcare's going to improve — all the phenomenal things that could happen. You'd see that and want to invest — you're buying a dream. But if I tell you a lot of this is built on intricate transactions with no disclosure, you say, "That doesn't matter, Anthony, we're changing the world, buddy." I like to say none of these things matter until they matter, and when they matter, they matter a lot. With great power comes great responsibility, you're right — but this shouldn't be read as me saying something's going to blow up. I'm just saying there are linkages, things we've seen in past euphoric times. Things could continue for any length of time — I don't know. But we're getting to a point where there's very little cost to risk today.

Anthony Scilipoti

Now you're putting me on the spot — I don't remember all of them.

Anthony Scilipoti

Number one — and I borrowed this from Warren, though he's not going to listen to me, even though I did reach out — his rule is don't lose money. My concern with that is that any investment requires the absorption of risk, so if you're not willing to potentially lose money, you won't make money either. You don't want to invest from a position of fear. My own number one rule is avoid embarrassing loss — avoid the loss of a company potentially blowing up. If a company looks a little expensive and might go down five, ten, or twenty per cent, you can deal with that. But if something goes wrong and you could wake up one day down twenty or fifty per cent, that's the one you don't want in your portfolio — investors will never invest with you again, and you'll be scarred. Emotion has no place in investing — that's another rule. Another: don't trust management. I run an operating business myself, and it's not that you shouldn't trust anything they say — it's a mindset. Go in with the mindset of "don't trust," and you'll stay curious, you'll ask questions. It's not that you think they're bad people — I didn't say that — just don't trust. Verify, then trust. And another: read the notes to the financial statements before you read the statements themselves. The notes tell you how the company modified the accounting, the choices it made in how to account for transactions. Once you know how the statements were prepared, you can interpret them properly. Accounting is a language — if I told you tomorrow you'd speak Spanish, you could use AI and figure it out, but the nuances of the language, someone with a PhD in it will understand far more than you. Same with financial statements — the more you understand what went into them, the better you'll interpret them.

Anthony Scilipoti

I like how you posed that, because it sets up what we've learned over time. The problem with "red flags" is you don't want to be crying wolf — I've learned to temper that, because you could be wrong. We don't call them red flags, we call them flammable items. This goes to our process — a three-stage process we use and teach; we run Veritas U, where we teach investors how to make better decisions. The first stage is understanding the business and the control environment — the accounting being used, so that when you study the financial statements, everything makes sense. You understand the structure: how management is compensated, what stage of the life cycle the company is at — those are all constraints and opportunities.

Then you look for a flammable item — say, negative cash flow. That could be a red flag in the normal way, unless you understand the first part: maybe they're investing in an AI startup that's a huge opportunity, with a demonstrated return on invested capital above 20 or 50 per cent. Yes, it's negative cash flow today, but I'm investing for tomorrow's cash flow. Without understanding the first part, you'd flag it and not invest — but by itself, it's not a problem, it's just a flammable item. It depends. Then you get to the third bucket: the spark. You're always looking for a spark. Take that same negative cash flow — if a new competitor enters the space and takes market share, now it's a problem. If the company's also taking on very expensive debt — again, by itself that's fine if the return on invested capital exceeds the cost of capital — but if a new peer shows up, that model may not work anymore, and now you have a blow-up.

On my podcast, The Fact Finders, I interviewed a former private investigator who got me onto this mental model. He says if the CEO beats his wife, runs stop signs, kicks his dog, doesn't get along with the neighbours — that's probably a problem. But none of that shows up in the financial statements or in interviews. You have to follow what the organisation actually stands for, how it operates, its values — not just what it writes down. Culture and values aren't in the financial statements or the press releases.

We wrote about Valeant — the only sell on Valeant, in 2012–2013. The company didn't blow up until 2015. They talked about integrity, about changing the world with drug reformulations. But dig deeper, and they were manipulating the accounting, changing drug pricing, and building a fraudulent network of online pharmacies.

Anthony Scilipoti

Yep.

Anthony Scilipoti

I sat with them, talked to them, before. It's a situation where someone is such a masterful spinner of a story —

Anthony Scilipoti

The CEO and the management team — Mike Pearson. He was executing. He came from a great pedigree, wasn't taking a salary, everything was tied to the stock price, tirelessly working the company. And he'd proven himself, because price creates narrative. You don't believe it on day one, but then they make an acquisition that shouldn't have worked, and it works, and the stock price goes higher. Then they do something else that seems a bit strange, and they change their accounting — the way they present their non-GAAP metrics, which is another huge flammable item. They report an adjusted EBITDA calculated one way this year, and a different way the next. That's a non-audited number — it's whatever management wants, and the market just believes it. Valeant was notorious for this, but it didn't matter, because the stock price kept going higher. And once a stock price keeps going higher, it's so difficult, in money management, to stay the course while underperforming. You saw this in the financial crisis, in that movie, The Big Short — those individuals became clients of ours. I know Porter Collins, if he ever listens to this, and Danny, and the rest — we befriended each other during that madness, and afterwards. It was like they were crazy — you look at yourself and think, "I'm seeing this and nobody cares." It's so hard being on the other side, trying to raise money from clients who are saying, "You're up five, the market's up twenty, you don't know what you're doing." That's how you earn your living, and I think that becomes the problem. With Valeant, it just went on for so long.

You have to look at the market conditions at the time, because people run businesses inside a certain economic environment. There was brand-new bond-market activity — QE. No one had heard of QE before the early 2010s. Central banks were buying long-dated bonds to keep rates low. What does that do for a company like Valeant, growing through acquisition and needing capital? They could borrow at very low rates, so their hurdle rate, their cost of capital, was very low — transactions that wouldn't have made sense when risk-free rates weren't in the one-or-two-per-cent range suddenly made sense.

If I had to go back in time, we should have said "buy Valeant" at the beginning, because we'd studied Biovail. Valeant bought Biovail, a Canadian company run by Eugene Melnyk — we'd written a sell report on Biovail itself in the early 2000s, and it had become a figment of its former self. But it had something: drug formulations that were long-dated in their release, which they'd repurpose to be slow-release. And a phenomenal tax structure, set up in Barbados — the more income you make, the lower the percentage tax, and Valeant inherited that structure when it bought Biovail, letting it extract enormous value out of tax.

They also set up their head office in Quebec — French-speaking. The Caisse, one of the largest pension funds in Canada, has a mandate that isn't just to make money for pensioners, but also to invest in Quebec-based companies and foster growth. I used to think that was a problem, but I've changed my view — I think CPP should do the same, should be encouraged to invest in Canada, and US pension plans encouraged to buy US companies. Setting up in Quebec gave Valeant a set flow of capital from that pension fund. I remember meeting the leaders at the Caisse at the time, and they said, "We don't want to own it — we agree with you, Anthony, we're worried about all this." These are the subtleties you need to notice. You wouldn't know that was a flammable item unless, from the first page, you asked, "Why did they set up in Quebec?" That's part of the mental model: be curious, because nothing happens without a reason. If you notice something and think, "That's really weird, no one else does that," most people say, "It's fine, doesn't matter." Actually, that's what matters.

Anthony Scilipoti

I remember Buffett and Munger getting tangled up with the SEC in the early '70s — the structure was legal, rational, but not transparent, if I recall correctly, and incredibly complicated. They ended up simplifying it, but they weren't doing anything wrong. I've sat with management teams, gone through a 10-K, and seen the whole list of operating subsidiaries scattered across every jurisdiction. The thing about investing today is there's so much pressure on analysts to cover more stocks, because money management fees are a fraction of what they were a decade ago — the fixed costs of investing, the audit, the back office, haven't come down nearly as much. All the squeeze has landed on the cost of money management itself, so analysts look for shortcuts: "Just give me the number, Anthony — just that one number." They get the one number management hands them, and move on.

I once spoke to a well-known CFO — I won't say who — about earnings management. They told me: after the earnings call, they'd call analysts and, legally, lead them toward the numbers to expect next quarter, even if they weren't confident, and sometimes manipulate that if they wanted to. I always thought that was a bit nefarious, but that's how people, and the world, work. So — is complicated a problem? It's really a question of why it's happening. Nothing happens without a reason. Point to some company operating out of the British Virgin Islands, buried in the list, and ask what it does. Management starts sweating: "Why are you asking that?" "I don't know." You have your answer before you even ask the question.

Anthony Scilipoti

They interviewed Andrew Fastow, the CFO of Enron — he's given many interviews on this, and we use a few in our training. Companies don't start out crooked. They have to convince someone to buy a product or service; money comes in and gets converted into something that adds value. The problem is outside stakeholders come in and say, "I need you to make X, because you want my money, and I'll give it to you so long as you deliver this return." That works until there's a problem, and no CEO wants to disappoint. So it's simple: the CFO comes to me, the CEO, and says, "Anthony, we were going to make a dollar, but we're coming in at 95 cents." And I say, "Go back to your room and find me five cents. You like your job? Your kids' private school? Your stock options — how much they're worth? All these employees we give stock to every quarter as part of their compensation? That's a problem — we can't disappoint." And it starts. It always starts slowly — it's what Fastow himself said: it started with a little bit, and I figured I could bring it back the next quarter. It's the same as life — smoke a bit, drink a bit, tell a small lie, no one notices, and you're okay, so maybe you do a bit more of each, and no one notices, and it's all fine — until it isn't.

Anthony Scilipoti

I don't have that data.

Anthony Scilipoti

It's not a common metric to report. My guess would be not necessarily — no, I'd say no.

Anthony Scilipoti

EBITDA is the mother of all disastrous measures — because of what investors want to believe it is: something like cash flow, something comparable to total debt. It is not. It's purely an operating performance metric, calculated before interest, tax, depreciation, and amortisation — that's it. The problem is everything else: what do I do with stock options? Joint-venture gains? Gains on investments I happened to sell this year? The charges from an acquisition I made this year — do I include the profits from the deal in EBITDA but not the transaction costs?

Anthony Scilipoti

If making acquisitions is part of my business model, they're no longer one-time costs.

Anthony Scilipoti

This gets us back to our course, The Secrets of Free Cash Flow — our most-watched, most-taught course. We say free cash flow is operating cash flow less CapEx, but it's not that simple — it depends. Every question — what should it be, how should I calculate it — depends on the company, and on what decision you need to make. You always start with the facts before you think about a transaction and how to account for it. It's the facts, the constraints, and the objectives. The facts: what did I sell, what did I buy, from whom, at what cost, under what terms. The constraints: am I a private company, where only my partners see the statements, so it matters less where I put something — or is there an outside onlooker, outside investors, a debt covenant, the SEC, FASB, PCAOB if I'm in the US, IFRS and CPAB if I'm in Canada? And the objectives: I want to sell my business this year and my buyer values on EBITDA — I'll tell you how I'm accounting for it. My investors want free cash flow — I'll tell you how we're accounting for it. Facts, constraints, objectives — that's what I teach when I teach accounting.

Anthony Scilipoti

Two separate questions, but — I hate them, personally, in public companies. I understand why companies want to use them, but my take is, if you look at most buybacks, they're just covering up stock options.

Anthony Scilipoti

So it's an expense. What stock options really do comes down to human motivation: compensate someone on the stock price, and they'll make decisions that move the stock price. In my early classes I always say economic reality is way over here, as far as I can reach with my hand, and the accounting is way over there. Take a simple manufacturing company — we make a thousand pens an hour, 8,000 pens in a day, and a salesperson sells a thousand of them. How do I cost that thousand? Take the average across all 8,000? Stop the press and cost the exact last thousand? Or cost the first thousand, which might be a bit higher because of set-up costs? All three are legitimate business realities, matched to different accounting choices — FIFO, LIFO, or average cost. The reality is I sold the last thousand; the accountant says we want to show a high margin, so we'll use average. That's the same disparity between economic reality and accounting that runs through stock options — and I think they should be an expense.

If they're not an expense — and I borrow this from Buffett, even the chair of the accounting standards board has said things like this — then what are they? You can choose to pay someone in stock options, or in cash. Pay your people in options and I pay mine in cash: I show a lower EBITDA and a lower EPS than you do, your stock trades higher — until it doesn't, and when the stock falls, the people who were counting on those options leave, while mine, paid in cash, stay. So it should be an expense. Taking it further — this is why I brought up reality versus accounting — an employee, even the CEO or CFO, can affect the market's perception of the company in the near or medium term, but in the fullness of time the results prove out what actually happens. The guy on the shop floor, even the sales manager, may have no impact at all on the stock price. Powell cuts rates, and that moves the price — as an employee I'm better or worse off, but I had nothing to do with it. A new competitor enters the market — I have no effect on that. GDP slows down, but my business is B2B, totally insulated from consumer GDP swings, and my stock price falls anyway — I had no control over that. So stock options incentivise the wrong thing, and push people toward decisions that manipulate the stock price, which may or may not be good for the company.

Anthony Scilipoti

I think options are super interesting, because a lot of companies report a profit that disappears once you factor in the stock options. A friend put me onto this about ten years ago — I was visiting his factory, and he doesn't give stock options at all. I asked how he competes. He said, "I hire the best people. They tell me their public-company job offers them options — so I'll give them the options on that company's stock, not mine, plus pay them in cash and a cash bonus." That's how he recruited all the best people. Afterwards, I wondered whether, if I went fishing in a pond, I could improve the odds of what I was looking at — so I started looking for companies that had stopped giving stock options. There aren't many, but when you find one, it's usually a good place to start looking for an investment.

Anthony Scilipoti

You look at what the company's key measures of success are, and whether those align with investors' interests — longevity, the ability to generate cash, to grow and sustain itself. If incentives aren't tied to cost control, to organic revenue growth rather than just acquisitions, or if they're tied to acquisitions with no regard for the balance sheet, that's a problem. It's hard to point to one single thing, but one useful question is: is it consistent? Did the company set a performance metric — hit it, get 100 per cent, miss it, get a graduated scale — and then, when management missed it, quietly change the metric so management still got the bonus? I think that's a problem, because it signals everything is fine regardless. The more experience you have, the more you realise how much you don't know. Boards make these calls, and everyone says "boards are bad" — but no, the board wants to retain the CEO, often a significant personality other companies want too, and retention often comes down to money. That becomes the problem.

Anthony Scilipoti

To embrace the position of the shareholder, and the stakeholder more broadly — employees, customers, the communities the company operates in, even competitors — and ensure the executive is making decisions in the best interests of all of them. Too often, boards just focus on shareholder value. But what is shareholder value? Something calculated off the financial statements or the stock price? Or a vibrant employee base with a great culture that will carry the company through whatever happens to the stock price? Are they focused on the communities they operate in, ensuring sustainability — because if they're just milking a community or an environment, what happens once they've finished milking it? It's more than shareholder value narrowly calculated.

Anthony Scilipoti

Often by relationships — back to "humans run companies." I'll ask you onto my board if I like you and think you'll agree with me. We have a board, and a separate board for our foundation, and I want people who make us better — which might mean some conversations aren't always "yes, Anthony." I actually don't want that, even from my own partners or employees. I welcome it: tell me what I'm doing wrong, or we're not going to get better. I'm not going to improve if nobody tells me I'm doing something wrong.

Anthony Scilipoti

But it's the only way to progress. I'm not saying we'll always do what you suggest, but I want to hear it. The danger is that if you listen and then do nothing, it looks like you disregarded it — so you go back to the person: thanks for the input, here's what we've decided as a result. Then they feel like they were part of it.

Anthony Scilipoti

A huge share of money is now passively invested in ETFs of one form or another — we've never seen this much concentration invested essentially blindly. Though indexing works, and has worked over a long period — price creates narrative, and if indexing works, why not do it? The danger I see with passive investing is that, in essence, it's momentum investing, because you're buying a market-cap-weighted index — the money flows to the largest companies, which keep growing and drag the index higher. There are really two indexes now: the Mag 7, and the "sloppy 493." Earnings expectations for the sloppy 493 this year show virtually no growth, while the Mag 7 keeps climbing. The danger — I'm not saying it will happen — is that if that reverses, whatever's been dragging the index higher will drag it lower with the same force, because they're the largest-cap names. If Microsoft's earnings growth were to slow, the stock falls, and we saw exactly that kind of drawdown in April, over a very short period.

That drawdown happened because Trump put together a tablet — came down from Mount Olympus with it, I use a picture of it in my presentations — showing the tariffs he was going to charge on every country. That created immediate fear: costs going up, transactions going down, revenues and margins hurt, stock prices hammered. But the second- and third-level thinking was: wait, these haven't been enacted, there's still time, maybe they don't happen — and if they don't, maybe the drawdown doesn't mean anything. It was an exogenous shock, not something the market fell on by itself.

What I think would cause a longer downturn, more like '08 or even the early 2000s — people forget the market was actually lower in 2003 than in 2000, everyone remembers it as "the 2000 crash," but it just began then and kept going for years — the financial crisis, by contrast, peaked in September '07 and bottomed in March '09, eighteen months of pain. If something longer were to happen, it would come from earnings slowing down — and because so many of today's earnings are interconnected, the way we've discussed, that would take longer to repair. It's not a band-aid you rip off, it's a slow reorientation. We've already seen meaningful changes — Lululemon trading at a much lower price today than a year ago.

Anthony Scilipoti

It's the same disparity as stock options, between economic reality and the accounting. When you buy back stock, the company is making an investment in a security it partially controls but doesn't fully control the value of. Whereas if it takes that cash and buys an operating asset that expands current production, and it's already generating a meaningful return, that return should continue and compound. To me, a buyback says: I have no investment inside my own business that would generate a return higher than my cost of capital, so I'm buying my own stock instead — and I think that's very risky.

Anthony Scilipoti

I'm not so concerned about the accounting of it as such —

Anthony Scilipoti

I think investors should look at earnings on a pre-EPS basis — the earnings a company generates before dividing by the share count — and see whether that number is actually growing relative to revenue, rather than just the share count shrinking. And if the company is taking on debt to fund the buyback, here's the classic trap: it borrows cheaply because the market perceives it as a high-value, cash-generative company, and invests that in its own stock, which has historically returned more than the cost of that debt. This works until it doesn't — if the business slows, which can just be the natural law of large numbers, the debt doesn't go away, and what looked like a very low cost becomes a meaningful one that won't leave. I look at Apple, and this is what concerns me: revenue growth is minimal, yet it generates meaningful cash because of the brand — people still pay $2,000 for a new phone. There's a lot of competition, and I'm not sure that continues forever at the same rate — it's already slowing. The debt taken on to buy back shares and generate EPS growth could become a problem. If instead they took that money and bought operating businesses that reinforced the network's sustainability — which they've done some of — imagine if they just held the cash, and a business they'd always wanted suffered a bad quarter, and they bought it then. It's very difficult when you have a lot of cash — cash is king, cash is power.

Going back to one of my rules — being negative sounds smart. When the market falls or suffers a setback, you shouldn't be scared. I did a trip to China earlier this year, practically life-changing, my first time. I met with analysts there and taught them our training process. On their screens, stocks that are down are shown in green, and stocks that are up are shown in red — that's how you should set up your own screen, and I've actually called FactSet and Bloomberg to ask if we can change that. Because if you wake up every day and everything's red, you start asking whether you've lived through this before — it went lower in '08, you thought "I'll buy some now," and it went lower again into the early 2000s, and lower still. You don't know what that feels like until you go through it. But imagine if every day it was green — you'd think, "this is interesting." And if every day it was going up but shown as red, you'd wonder if something was wrong. It's all a mindset, the same as building any habit — small things, like putting your shoes in one place so you remember to put them on, and the polish right beside them, so you shine them before you leave.

Anthony Scilipoti

He had cash.

Anthony Scilipoti

It goes back to the agency problem in money management. My investors give me their money so I can generate a better return than they'd get passively — if I don't, they take it away, and I have no money left. Buffett built a business that generates cash on its own — Geico, Fruit of the Loom, and the rest — and he invests that cash when and how he wants. The average portfolio manager can't do that, because they're measured daily. If you're invested in my fund, you can watch how I'm doing against the index every second. "Why are you down today?" My own partner, who started the business with me, will say, "I don't know, there were more sellers than buyers." Anyone who claims to know exactly why, absent a specific announcement, is guessing — and even with an announcement, it's the market's interpretation of it, not the announcement itself, that moves the price.

Anthony Scilipoti

Yes.

Anthony Scilipoti

Yes — that structure enables your style. I think structure is very underrated when we think about public companies, because there you have a structural mismatch. That's the first thing you look at: the structure and the control environment. Shareholder horizons have gone from years, to quarters, to seconds — whatever you want to call it now — and the average CEO tenure is very short.

Anthony Scilipoti

I think your analogy is fantastic. I played hockey and football, and I love hockey — big Leafs fan — but I watch more NFL, even teams I have zero interest in, not for the betting, but because it's one game: seventeen games a season, essentially one playoff elimination game, and if you lose, your career could be over, because an NFL career is so short. In hockey you've got seven games in a series — down five in the second period, it's game two, settle down, we play again in a couple of days. What I see happening is a new coach walking into a bad team will overspend on free agents, leverage the future, and put the team in a bad salary-cap position five years out — almost assuming they won't be the coach by then, but this will make things look immediately better, show tangible progress, even as they've compromised the team for years to come.

Anthony Scilipoti

What I think is the more meaningful shift today is the power of the retail investor. I watched that movie — Dumb Money, was it called? With the Hello Kitty phone case.

Anthony Scilipoti

These movies — I love the word "fantastic," we haven't said it yet — because it's something supernatural, both good and bad, that actually changed something. What it really exposed is the power of the retail investor. Today, retail is the largest share of total investment it's ever been. And it's interesting how easily retail investors can get the same information institutions have, maybe even better — technicals, charts, fundamentals, actual financial data, social media — at very low cost. When I started in the industry, in 1999, think of Buffett: he used to read the financial statements himself and pull the old paper charts, and no one else was doing that, not even institutional investors — retail was hardly paying attention at all. We were still learning on dial-up.

Anthony Scilipoti

Now you've got Interactive Brokers, an unbelievable platform, and all the comparable platforms that have followed, empowering the retail investor. That's created a significant short-term focus — day options traded constantly. Someone told me that in Tesla, there's more dollar value transacted in options in a single day than in the stock itself. The option market has subtleties most people don't know — when an option is sold, a broker, the market maker, has to sell it to someone, and if they can't find the other side, they're stuck holding it. Most options expire worthless — until they don't. If the price rises and you've bought calls, the broker needs to be able to pay you, so they start hedging by buying the underlying stock as the calls rise, which pushes the stock price higher still. That creates even more momentum, and I think it's part of why we're seeing such big swings — earnings-season moves that used to be one or two per cent are now twenty per cent in a day. Oracle moved almost forty per cent on a single print — that's the valuation of entire companies moving in a day.

And yet we're in a period of AI, of drones — maybe not useful for Oracle's business, but think of Lululemon: drones tracking what's being sold and where the traffic is. Credit card data, expert networks of people who used to work in an industry giving you inside-but-not-quite-inside information — with all of that available, Oracle's stock still moves forty per cent on news. We supposedly have better information than we've ever had. How does that make sense? If we really had better information, stock prices on news would hardly move at all — it would already be priced in.

Anthony Scilipoti

So there's the interesting tension: people think AI is going to beat us as investors. I say bring it — it's all good, it's just a tool, we're still human. It doesn't have judgement. It can't make decisions based on links it hasn't drawn — and you don't even know what link it drew.

Anthony Scilipoti

Maybe. We'll see.

Anthony Scilipoti

Success is achieving something I can share with those I love and care about — my family, my friends, my employees, my customers. I think that's success, whether in sport or anything else — achieving something I can share. Because if I can't share it — I learned this long ago — happiness can only be shared. That's from my late pastor, Father Paul Cusack, we'll give him a shout-out, he was awesome. If you can achieve something and share it, that's real success. And winning has to be everything — you have to be focused on achieving something, and let nothing else get in the way. Big shout-out to the book Winning, by Tim Grover — such a pivotal read.

Anthony Scilipoti

It's my pleasure, Shane.