Asian Financial Statement Analysis Detecting Financial Irregularities

Foreword xi

Genesis of This Book xiii

Acknowledgments xv

Introduction 1

Why Focus on Scandals in Asia? 2

How This Book is Organized 4

As You Begin 5

Notes 5

Chapter 1 A Framework for Evaluating Financial Irregularities 7

Articulation of Financial Statements 8

Accruals and Deferrals 12

Typical Accounting Games 13

Parting Comments 22

Note 22

References 22

Chapter 2 Detecting Overstated Earnings 23

Aggressive Revenue Recognition 24

Understatement or Deferral of Expenses 29

Classification of Non-Operating Income 31

Classification of Non-Operating Expenses 31

Parting Comments 32

Case Studies 33

Longtop Financial 33

Sino-Forest 37

Oriental Century 42

References 46

Chapter 3 Detecting Overstated Financial Position 47

Excluding Both Assets and Liabilities 49

Other Off-Balance-Sheet Financing/Liabilities 53

Overstating Assets 54

Parting Comments 59

Case Studies 60

RINO International Corp. 60

Olympus 66

Oceanus 69

Notes 72

References 72

Chapter 4 Detecting Earnings Management 73

Accruals and Deferrals Revisited 74

Accounts Receivable (Accrued Revenue) and the Allowance for Doubtful Accounts 75

Deferred (Unearned) Revenue 80

Accrued and Deferred (Prepaid) Expenses 80

Deferred Taxes 81

Contingencies and Reserves 86

Parting Comments 87

Case Studies 88

Harbin Electric 89

West China Cement 98

China Biotics 101

References 105

Chapter 5 Detecting Overstated Operating Cash Flows 107

Understanding the Cash Flow Statement 108

Using Cash Flow to Assess the Quality of Earnings 113

Cash Flow Games 116

Parting Comments 118

Case Studies 118

Renhe Commercial Holdings 118

Duoyuan Global Water 123

Winsway Coking Coal Holdings 131

References 136

Chapter 6 Evaluating Corporate Governance and Related-Party Issues 137

Board Governance and Independent Directors 138

Shareowner Rights 139

Interlocking Ownership or Directorships 140

Related-Party Transactions 140

Excessive Compensation 142

Personal Use or Expropriation of Assets 143

Lack of Transparency 143

Auditor Issues 143

Parting Comments 144

Case Studies 146

China Valves Tech 146

PUDA Coal 149

Sino-Environment Technology Group Limited 153

Note 157

References 157

Chapter 7 Summary and Guidance 159

Putting It All Together 160

A Recipe for Detecting Cooked Books 163

Parting Comments 168

Case Studies 168

Celltrion, Inc. 169

Real Gold Mining 170

Fibrechem Technologies Ltd. 175

References 177

About the Authors 179

Index 181

CHINHWEE TAN, CFA, CPA, is the founding partner in Asia for a leading global alternative investor, among the largest in the world. He is a pioneer in special situation investing in Asia and has a track record of investing in more than 100 deals. He was voted by The Hedge Fund Journal as one of the emerging top 40 absolute return investors globally and was also named as Best Asia Credit Hedge Fund manager by The Asset. He is the winner of the 2013 Distinguished Financial Industry Certified Professional (FICP) Award from the Singapore government.

ChinHwee is an Adjunct Professor in a number of top universities teaching private equity investing and forensic accounting. He is a CFA charterholder and is a registered CPA in both Singapore and Australia. Mr. Tan was honored as a World Economic Forum Young Global Leader and the World Cities Summit Young Leader. He enjoys spending time with his three young children.

THOMAS R. ROBINSON, CFA, CPA, is Managing Director of the Americas at CFA Institute. Previously, Tom served as Managing Director of Education at CFA Institute, providing vision and leadership for a 100-member global team producing and delivering educational content for candidates, members, and other investment professionals. Prior to joining the CFA Institute, Tom had a 25-year career in financial services and education. Tom has published regularly in academic and professional journals and has authored or coauthored many books on financial analysis valuation and wealth management. Tom is a CFA charterholder, a Certified Public Accountant (CPA) (Ohio), a Certified Financial Planner (CFP®), and a Chartered Alternative Investment Analyst (CAIA). He holds a bachelor's degree in economics from the University of Pennsylvania, and a master's and doctorate from Case Western Reserve University.