1. society
2. crime
3. property crime
4. fraud

ACCT004: Accounting Fraud in Asia
Week 01: Survival in the
Asian Capital Jungle
Week 1: Survival in the
Asian Capital Jungle
Week 2: Western tools to
catch an Asian Snake?
Week 6-9:
Market
manipulation
Market
Catalysts
Asian insiders Extract and expropriate wealth in artful
accounting tunneling methods as opposed to western-style
accruals-based earnings management.
We attempt to Extract them out in the Asian capital jungle.
The Lotus extracts mud out of its hollow stem and the stem
grows up with determination, enabling the Lotus flower to
blossom above the muddy water, rising above the defilement
and remaining unstained and pure.
Week 3:
Incentive
Wedge,
Pyramids
Asian
Extractor:
No Mud,
No Lotus
Week 4-5:
Opportunity:
RPT, Tunnel,
Structure,
Consolidation
Week 10:
Textual
analysis;
Beyond fraud
www.AsianExtractor.com
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
1
Ciccio’s 11th Value Investing Seminar (VIS)
July 2014, Trani, Italy
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
2
Background
Taught Management Accounting (ACCT102 and ACCT104) and Accounting Study
Mission (ASM) (ACCT001 – India, HK/China, Myanmar) in SMU.
Managing Editor and founder of The Moat Report Asia (www.moatreport.com)
MRA is a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia.
The MRA’s paid-subscribers from North America, Europe, the Oceania and Asia include professional
value investors with over $20 billion in asset under management in equities, some of the world’s biggest
secretive global hedge fund giants, and savvy private individual investor who are lifelong learners in the
art of value investing. Presented thought leadership on Bamboo Innovator framework as a keynote
speaker in global investing conferences.
Trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value
investing, macroeconomic and industry trends, and detecting accounting frauds in
Singapore, HK and China.
Formerly head of research and fund manager at a Singapore-based value investment
firm since 2002. As a member of the investment committee, he helped the firm’s Asiafocused equity funds significantly outperform the benchmark index. He was previously
the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company.
ASM Myanmar Dec 2014: At
the Singapore Embassy (top)
and Bagan, ancient capital of
thousand pagodas
Loves reading and watching movies...
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
3
Contact
Course Facilitator:
KEE Koon Boon
Email: [email protected]
Website: http://accountancy.smu.edu.sg/faculty/profile/108141/Kee%20Koon%20Boon
Teaching Assistants (TAs):
YEO Shan Rui
Email: [email protected]
Sebastian SEOW Wei Han
Email: [email protected]
Some feedback from students:
 “The instructor is very dedicated to his job… He also has great experience and insights into current issues and always tries to bring
them into context with what we are learning”,
 “… willing to share his insights into different subject matters and let us think deeper into what is taught to us”,
 “… a very caring and understanding professor who takes the effort to encourage students - concepts learnt can be readily applicable
to the working world”.
Some feedback from executives and sophisticated investors:
 “It has been an interesting and encouraging program. The program has encouraged me to continue to pursue what I want to do for
the company.” - Jismyl Teo Chor Khin, CEO of SGX-Listed DMX Technologies Limited
 “I enjoy your deep thinking approach to investing. It helps take some of the mystery out of Asia, when I read your perspective on
managements. I find your work fascinating and in-depth. One of the primary reason I hold you in such high esteem is the frauds that
perpetuate investing in Asia - it's not easy for a US investor like me. I love the stuff you are generating. I have been very happy with
the Moat Report and the weekly articles - you put so much work into them. The insights have been terrific and I look forward
to renewing.” – Michael Knipp, successful private value investor from Chicago
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
4
Prelude to Accounting Fraud in Asia:
A Story Told in Omaha May 2010 to a Group of Fund Managers
About Salamander Shoe, Owned By HK-Listed Company
Nikita Khrushchev's shoebanging incident allegedly
occurred in autumn 1960
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
Hans-Joerg SEEBERGER
Chairman and Chief Executive
EganaGoldpfeil (Holdings) Limited
and Egana Jewellery & Pearls Limited
www.AsianExtractor.com
5
Would You Invest in Egana Goldpfeil?
The Right Story – Charismatic Founder, Capable MNC Professional Hires
and Strategic Investor in Luxury Giant Richemont (Brand Owner of
Dunhill and Cartier with Market Value of $51.4 Billion)
Interest in Asia led Hans-Joerg Seeberger to board a freighter to India
and Hong Kong once he had completed his schooling. His trip around the
world climaxed in Japan where Seeberger, after having studied the
Japanese language and culture, took the steps that laid the foundation for
what is known as the EganaGoldpfeil Group. In 1991, Seeberger founded
EganaGoldpfeil (Holdings) Limited. It was listed on the Hong Kong Stock
Exchange in 1993.
The Right Brand Power and Durable Consumer Franchise
For Hans-Joerg Seeberger, the acquisition of Goldpfeil AG, Offenbach in
1998 as well as the 2000 takeover of the Junghans group, headquartered
in Schramberg and Germany's best-known watchmaker, were the next
milestones on the group's road to becoming a global lifestyle company.
The group's high-tech potential increased significantly with the acquisition
of Junghans, the world's largest maker of clocks and a pioneer in the area
of solar and radio-control technology for wrist watches.
From 1998-2005, Egana built a brand portfolio through a series of
acquisitions. Brands acquired included Goldpfeil, Madler, Pierre Cardin,
Carrera, Junghans, Comtesse, JOOP, Sioux, and Salamander.
The Right Financial Numbers – Wall Street Loves Egana! Strong BUY!
Egana has nice accounting numbers with high ROE, high profit margins,
high net-cash, high net current asset in balance sheet etc.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
6
Egana Goldpfeil (48 HK):
Nice Accounting Numbers, Durable Consumer Franchise & Value
Stock With Lotsa Cash in Balance Sheet?
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
7
Presentation in May 2010, Before the US Reverse Merger
Fraud in 2011 (Hm, Wait, Why is 2011 the Outbreak Year?
Contagion Effect?)
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
8
Egana Goldpfeil: Breakdown of Western-Style
Financial Statement Analysis of Asian Companies?
Like in warfare, we try to scrutinize the enemy, the fraud
perpetuator, for outward signs of what was going on within. A
strategist might count the cooking fires in the enemy camp and
the changes in that number over time, adapted into what we call
“financial analysis”.
Yet, the contextually-intelligent strategist also knew that just as
he was watching the other side, the other side was doing the
same with him. Why not deliberately distort the signs that you
are looking at? Why not mislead by playing with appearances? If
they are counting our cooking fires, why not light more fires to
create a false impression of our strength?
Egana has nice accounting numbers with high ROE, high profit
margins, high net-cash, high net current asset in balance sheet
etc. They know you like these numbers.
Accounting information may be used to Inform – or to Deceive.
Three Kingdom period: Military strategist
Zhuge Liang’s “Empty Castle” deception
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
9
Main Objectives of this Course Elective
To understand and feel the importance of bias in accounting
and financial information through the interdisciplinary lens.
the ways that conflicts of interest affect the financial
reporting process,
the institutional mechanisms that limit or exacerbate this
behavior,
the power held by the preparers and reporters of
information in the political, social and economic context of
the countries and companies that do not permit a
transparent flow of information.
This is NOT a course that tests you on the “technicals”…
(we leave that to the Accounting Core subjects)
This is a course elective.
But…
KEE
KB Kee
Koon Boon
Grandmaster accounting researcher Ray Ball boldly
argued that the East Asian countries of Hong Kong,
Malaysia, Singapore and Thailand have accounting
standards that are generally viewed as “high-quality”
as their standards derive from common law sources
that are viewed as higher quality than code law
standards, but they have institutional structures that
give preparers incentives to issue low-quality financial
reports. Thus, it is misleading to classify countries by
standards (the “form”), ignoring incentives (the
“substance”). Transparency ratings, such as PwC’s
“opacity index” (which ranks Singapore higher than US
and Britain), are largely based on standards.
Later, we will get to the
“foundation” in Nobel Laureate
Akerlof’s Lemon – Information
Asymmetry, Adverse Selection,
Moral Hazard, Agency Theory, Type
I Principal-Agent vs Type II PrincipalPrincipal governance problem ..
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
10
Egana Goldpfeil: Asian-Style “Tunneling”
(Some Basic “Technicals”)
Artificial cash equivalents:
Egana has HK$1.4 billion “cash and cash equivalents” in the balance sheet. HK$1 billion are
promissory notes due from related investment companies. Of the HK$1bn, $693.7m was rolled
over upon maturity for another one to three months. These promissory notes have been
building up for years. This begs the question of how many times some of these notes have been
rolled over, who the borrowers are, and what ability they have to repay.
Convert receivables that is due from Egana to distributor into goodwill via acquisition from
funds raised from investors:
On at least one occasion, Egana has acquired a distributor in exchange for cancelling accounts
receivable, and booking the set-off as goodwill.
Eg: Egana acquired a German distribution business which had net assets of $19.3m for $22.4m
in cash. It also set off $125.2m against accounts receivable and other receivable, booking
$128.2m of goodwill while reducing receivables by $125.2m.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
11
The Four Commonly-Used Asian Tunneling Opportunity
Used by Actual Syndicates and Insiders to Expropriate Assets
(1) Grand capex fraud
Asian Tunneling
Vs
Western Earnings
Management
(3) Deals potion –
Extinguishing fake
receivables in intangibles
and goodwill
(Egana’s artificial sales)
(2) Roll-aways and cash
equivalents – Other
receivables fraud
(Egana’s artificial cash)
(4) The big push and all-inthe-family asset shift
Note: This is a succinct summary after a decade plus in the Asian capital jungle observing and
interacting with the “insiders” and syndicates….
We will learn in greater depth the mechanics and intricacies about “Tunneling” in Week 4 to 5.
Be patient!...
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
12
You Can Never Out-Do the Devil in “Technicals”
Preparer --------------------------------------------------- User
The Devil Will Be Faster, More Sophisticated, More Resourceful. But…
This course
Undergrad
accounting
core courses
Descriptive
Content and
Technicals
KEE
KB Kee
Koon Boon
Decision-Making, Analysis, Critical
Thinking, Op-Ed Communication,
Perspective, Framing, Contextual
Intelligence, Systems Thinker-Doer
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
13
Egana Goldpfeil: Generating Critical Thinking
Questions to Out-think the Fraud Perpetuator…
(1) Western-based earnings management (EM) Vs Asian accounting tunneling and fraud
Western-based EM = Abnormal accruals = Accruals reversal typically in Year +1 to 3
Asian tunneling effects stay hidden for many years – until blowup! But why? How is this done? We
will learn more about tunneling from Week 4 onwards
The pitfalls of mechanical applications in western-based financial statement analysis
Boost inventory
accruals
Period T
Accruals reversal
e.g. inventory
writedown
Period T+1
Earnings-Fixation Hypothesis:
Investors cannot “see through” transitory nature of accruals; surprised when
accruals turn out to be less persistent than cash flow
Dominant view ever after.. ?
“Accruals anomaly” 8/10, “pervasive” (Fama & French), $60 billion HF capital
Sloan (1996), Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting Review 71 (3): 289–315
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
14
Egana Goldpfeil: Generating Critical Thinking
Questions to Out-think the Fraud Perpetuator…
(2) Dispels the myth that accounting fraud occur typically in IPOs Vs companies with long listing
“track record”
IPO companies typically undergo financially packaging (财务包装) to artificially pump up accounting
earnings before listing to get a higher valuation and raise more capital, a collaborative work between
the financial intermediaries (eg sponsors/investment bankers, analysts etc) and the Asian
management. We will learn more about this in Week 3 under “Incentives”, including the market
manipulations around events (IPO moratorium expiration) (Week 9) and tunneling opportunities to
expropriate the assets out of the firm (Week 4-5)
Aberdeen Asset: “We do not invest in IPOs.”
Egana has been listed for over a decade since 1993 before the accounting implosion
Post IPO expiration, share prices decline in the short-term for US
companies on average.
In Asia, share price may continue to rise in the short-term after the
IPO expiration date to allow the insiders and blockholders to exit in
stages as Asian markets are less liquid.
However, if the “shells” are able to utilize the IPO funds raised to find
viable customers, the game is reset
Field (2001), The Expiration of IPO Share
Lockups, Journal of Finance 56 (2): 471-500
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
15
Egana Goldpfeil: Generating Critical Thinking
Questions to Out-think the Fraud Perpetuator…
(3) Accounting fraud can occur in famous consumer-related companies with “brands”
Why do you find it hard to name a top-of-mind accounting fraud in a Western consumer-related
company (other than say Parmalat and recently, Tesco) and why the probability of fraud for consumer
companies is much higher in the Asian capital jungles?
Knowing this will be important in detecting accounting fraud in Asia ahead of the curve… We will
learn more about this in the coming weeks.
(4) Does “corporate structure” matter as an “opportunity” and signals a breakdown in corporate
governance in perpetuating accounting fraud? Egana was structured as an offshore holding company
Egana was structured as an offshore holding company. Why does this seem to perpetuate fraud?
We will learn more about this in Week 5.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
16
Egana Goldpfeil: Generating Critical Thinking
Questions to Out-think the Fraud Perpetuator…
(5) Think like a murderer? – Beware: Touch darkness, and darkness touches you back
We don’t discover the “murderer” or fraud perpetuators by separating ourselves from them or just
following clues.
Do overconfident CEOs lead to accounting fraud? How about those who are low-profile and quiet?
Predictive clues from character traits i.e. follow the “person”, not the “numbers”??
Discussion: What other knowledge to distill and transfer which can be applied in other cases?
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
17
Charlie Munger: Have a Framework
The problem with cases: We need an analytical framework to hang the “descriptive”
cases to generate the critical thinking questions and contextual intelligence
Have a Mental Model…
You can’t learn those one hundred big ideas
you really need the way many students do –
where you learn them well enough to bang
them back to the professor and get your
grade, and then you empty them out as
though you were emptying a bathtub so you
can take in more water next time. If that’s the
way you learn the one hundred big models
you’re going to need, you’ll be an “also-ran” in
the game of life. You have to learn the models
so that they become part of your ever-used
repertoire.
KEE
KB Kee
Koon Boon
The first rule is that you can’t really know
anything if you just remember isolated facts
and try and bang them back. If the facts don’t
hang together on a latticework of theory, you
don’t have them in a usable form
– Charles Munger, co-Chairman at
Berkshire Hathaway with Buffett
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
18
A Broader I-O (Incentive-Opportunity) Framework
Pre-Fraud State
Post-Fraud State
Opportunity
Incentive or
Pressure
Conversion
Anti-Fraud
Measures
Rationalization
Concealment
The Act
Anti-fraud measures:
Organizational interventions: Internal controls and internal audit, COSO (Committee of Sponsoring
Organizations of the Treadway Commission) framework, corporate governance, board of directors
(independence, expertise etc) – We will focus less on the internal controls perspective and more on the capital
markets perspective which is neglected, overlooked and misunderstood
Societal interventions: Legal, extra-legal, regulatory environment
Post-fraud state:
Asset tracing investigation, document examination, account reconciliation, finding evidence to litigate,
persecute and to barrel the cat – we will leave this to the Forensic Accounting and Internal Audit courses
Adapted from Dorminey et al (2012), The Evolution of Fraud Theory, Issues in Accounting Education 27(2): 555-579 and Trompeter et al (2014), Insights for
Research and Practice: What We Learn about Fraud from Other Disciplines, Accounting Horizons 28(4): 769-804
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
19
Some Carefully Selected Harvard-Type Asian Cases
That We Will Dissect and Discuss Briefly
We will be having the following 5 or 6 case studies for brief discussion in the course:
1)
2)
3)
4)
5)
6)
Lantian: The 600-Word Spell on a Transformed State-Owned Enterprise in China
Yinguangxia: An Epitome of Corporate Governance Flaws in China
Kanebo: IFRS and Consolidation Accounting
The Tale of Two Peregrines
Procomp Informatic: Stepping on Ethical Landmines in Asia
New Oriental Education and VIEs
Course pack is available from the Library.
Other cases (available on SMU eLearn) include:
New Oriental, 21Vianet, Qihoo, NQ Mobile, Focus Media, Prince Frog, Lumena,
Shenguan, Tianhe, Asia Plastic Recycling, Sino Grandness, Sino-Forest etc.
India’s Satyam, Japan’s Olympus, Korea’s Daewoo, Indonesia’s Bakrie and APP,
Taiwan’s Rebar, Australia’s Alan Bond empire etc.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
20
Some Carefully Selected Harvard-Type Asian Cases
That We Will Dissect and Discuss Briefly
Lantian (Week 1-4)
First SOE in China’s agricultural industry to go through corporate reform in
mid 90s
Media write-up expose accounting fraud – media as watchdog?
Audit firm to bear losses – first of its kind in China
Some Discussion Questions
What did the journalist see ahead of others? Other Receivables risk, Grand
Capex scheme etc..
How did companies, namely SOEs, abuse the reform process to perpetuate
accounting fraud? Relationship of Lantian stock with parent Lantian Group and
the local government?
How can individual shareholders be better protected? Is the ST treatment
status useful and effective?
Possible to restore trust after fraud? Can Qu brothers rebuild the company?
Kanebo (Week 1-5)
Role of ChuoAoyama-PwC in accounting fraud of Kanebo
Convergence in J-GAAP with international standards IFRS; the intersection of
accounting standards and business culture
Some Discussion Questions
Assess Japan’s adoption of IFRS from J-GAAP – will things get worse? How
and why?
Understand more about the consolidation accounting trickery
Identify some red flags; know that the whole story is not just in the financials
Peregrine (Week 1-2)
Collapse of Asia’s only indigenous investment bank which received support
from business elites that include Li Ka-Shing, Gordon Wu, Larry Yung
Collapse of Indonesia’s Steady Safe (association with Suharto’s daughter)
during Asian Financial Crisis with the sharp devaluation of rupiah against dollar
triggered Peregrine’s demise
Some Discussion Questions
Compare the US and HK Peregrine and the two Peregrines with Lehman in
governance and risk management
Role of liquidity in fraud; Role of regulator
KEE
KB Kee
Koon Boon
Yinguangxia (Week 1-5)
Modernize TCM (Traditional Chinese Medicine); stock darling
Media write-up expose accounting fraud – misrepresent overseas export
sales
CEO and CFO jailed; auditor license revoked; investors seek private
indemnification against investment losses
Some Discussion Questions
Inconsistencies in tax rebates and custom records – how to better make use
of such data to uncover fraud?
The role of shell companies and holding vehicles?
Chinese auditing standards vs international standards – consolidation
accounting and off balance-sheet treatment?
What are the governance flaws that can be identified? Recommendations to
improve the problem at YGX and in China?
Regulatory efforts in private enterprises vs SOEs?
Today’s context: “High-tech” firms abusing subsidies?
Procomp Informatic (Week 9)
Formerly Taiwan’s “king of stocks”, Taiwan’s first GaAs wafer foundry;
defaulted on bond payment despite cash; Taiwan’s Enron and $213m
embezzlement
Creative accounting practices around IPO
Some Discussion Questions
Governance flaws? Family nepotism; voting shareholder rights
Insider trading?
Toxic convertible bonds and credit-linked notes?
Why was there no whistle-blower?
New Oriental (Week 5)
The link between VIE and accounting fraud
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
21
Course Plan – Our Roadmap Ahead
Pre-Fraud State
Post-Fraud State
Opportunity
Incentive or
Pressure
Conversion
Anti-Fraud
Measures
Rationalization
Concealment
The Act
Week 02: Western Tools to Catch an Asian Snake
Accruals (earnings, revenue, cashflow), Real activities management, smoothing-kinks, restatements
Classification shifting, cost allocation, non-financial measures (NFM), M-score, SIR-IVS, tax-book difference
Week 03: The Asian I-O Framework - Incentives
Wedge, Pyramid & Cross, Family, Politics-Biz Nexus
Week 04-05: The Asian I-O Framework - Opportunity
RPT, Propping & Tunneling, Structure/VIE, Consol.
Week 06, 07, 09: Fireflies Before the Fraud Storm
Market catalysts: Grey zone between I and O
Market manipulations
Week 10: The Accounting of Words + Beyond Fraud
Textual analysis, Unstructured data
Restoring trust + Future of audit and regulation
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
22
“Murder (earnings management) is easy, it’s the
disposal of the body that’s a bit more difficult.”
The incentive part (earnings management, real activity
management) is easy, it’s the opportunity in “disposal”
(the selling of shares by manipulators, the expropriation
of cash and assets by insiders) that’s a bit more difficult…
“Kill” first, ride along with the “murderers” for the
momentum and insider gains, and think about “disposal”
later? Can always exit faster than the rest before the
crash?
Sometimes (oftentimes!), the entrepreneurs get demotivated after seeing the share price of their companies
crash and they simply give up since they have many other
private business interests… and they start to expropriate
cash and assets out of the listed vehicles.
Value investors in Asia need an I-O (IncentiveOpportunity) accounting framework! (Week 3-5)
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
23
The Spectrum of Accounting Misdeeds (Week 2)
Earnings
Smoothing
Restatements
Earnings
Management (EM)*
Fraud;
AAER;
Tunneling
Going
Concern;
Bankruptcy
* Includes revenue management, cashflow management and real activities management (RAM)
Managerial discretion and flexibility in reporting accounting
accruals relative to the underlying cashflow to signal or convey
information about the firm
Do managers exercise accounting discretion in an opportunistic or
efficient manner (Healy, 1996; Bowen et al 2008)? Financial
accounting information is an output by managers who presumably
have superior information about their firms’ cash generating ability.
Discretion is expressed through accruals:
Dechow, Sloan and Sweeney (1996), Causes and
Consequences of Earnings Manipulation: An Analysis of
Firms Subject to Enforcement Actions by the SEC,
Contemporary Accounting Research 13(1): 1-36
Choice 1: Make reported earnings a precise private signal of firm value (Efficient Contracting Hypothesis)
Choice 2: Earnings management to conceal poor performance or exaggerate good performance either for career
concerns or compensation reasons (Opportunistic Hypothesis)
Crossing the Rubicon: When does the appropriate exercise of managerial discretion become earnings
management and a nefarious act? We will cover the western-based concepts in Week 2 and their limitations in the
Asian context from Week 3 onwards. Notice that we have yet to have “definitions” about EM and fraud. Be patient!
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
24
Market Manipulation, Market “Catalysts” & Accounting Fraud
Why Understanding “Catalysts” With the Capital Markets Perspective Are Important in
Detecting Accounting Fraud (Week 6, 7 and 9)
The Internal Controls
perspective misses out
critical information from
the Capital Markets
perspective…
Market
Manipulation &
Market Catalysts
Earnings
Management
Raise External
Capital or/and
M&A
Pump Up Share
Price
Tunnel Out –
Accounting Fraud
Abusing the Capital Markets to Perpetuate Accounting Fraud
Share-Linked
Bonus Incentives
“Water enough money into any company, even
a fake one could become real some day.”
– Confessions of a S-Chip CEO
http://singapore-ipos.blogspot.sg/2009/04/confessions-of-s-chip-ceo.html
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
25
Forms of Market Manipulation (Week 6, 7, 9)
Painting the tape
Wash sales
Trade-based
Matched orders
Pools
Runs (Pumpand-Dump,
Bear raids)
Hype and dump
Info-based
Action-based
Market
Manipulation
Contractbased
manipulations
Trade-based
Market power
techniques
Trade-based
Slur and dump
Marking the
close/ open
Capping/ pegging
Corner
Squeeze
Adapted from Putnins (2012), Market Manipulation: A Survey, Journey of Economic Surveys 26(5): 952-67
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
26
Market Catalysts: Fireflies Before the Accounting
Fraud Storm? (Week 6, 7, and 9)
Financial
1) Accruals
Non-Financial
1)
PEAD (Post-Earnings Announcement Drift)
2)
3)
Capital management
Bonus, Rights, Share buyback, Share split,
Warrants
Capital reduction program
Equity or debt placement (IPO, SEO –
secondary equity offering, CB, MTN etc)
Financial structure changes (commitment
plan on debt equity ratio)
4)
2)
3)
6)
Industry, intra-industry or contagion effect
Customers, suppliers, stakeholders, partners
Subsidiaries, associates, affiliates
Revenue and Cost driver shock: “If it’s raining
in Brazil/Vietnam, Buy Starbucks/Super”
Significant corporate events
M&A, Spinoff, Reverse merger, Takeover
JV, Partnership, Strategic alliance, Licensing
agreements, MoU
Asset injection/transfer/disposal
Restructuring
MBO/LBO
Ownership changes
Insider buy/sell
Strategic shareholder
4)
Corporate news
Contract or project updates, Orderbook,
Operating results
Investments in R&D, capex, capacity, deal
New or lost of product/service, market,
customer, supplier, partner
ASP increase or decrease
Patents, Research trial completion
RPT (related-party transactions)
Credit rating changes
Litigation, Contingent liabilities event
KAH (key appointment holder) changes
Turnover of management, director, ID, board
governance committee, auditor, banker, adviser
Management compensation (incentive plan,
bonus, share options, share awards)
Sudden CEO or founder death
Others
Restatement
Change in accounting policy
Change in fiscal year
5)
Initiation of coverage, stopping coverage,
changes in recommendation and target prices,
forecast revisions, commentary
NDR (Non-deal roadshow), Conference
Dividends
Initiation, Changes, Omission, Resumption,
One-off special
Analyst
7)
Special events
Index inclusion or deletion
Expiry of moratorium or lock-up period
Dual-listing
Regulatory shock
Considerations:
What is disclosed: Categorize by “good” and “bad” news? Overreaction to “good” news, underreaction to “bad” news? Buy on “bad” news, Sell on “good” news?
How it’s disclosed: Categorize by sentiment/tone/confidence? Voluntary or mandatory?
When it’s disclosed: Scheduled or unscheduled? Bunching, sequencing or spread out?
Why it’s disclosed: Why will management disclose “bad” news?
Is the info content transitory or persistent? Do false news have persistent effects? Are investors desensitized by catalysts?
In what situation are positive catalysts misleading noise e.g. insider purchase can be negative
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
27
Beyond Accounting Fraud: The Accounting of Words
Linguistic/Textual Analysis, Unstructured Data (Week 10)
“以冰为镜，能查秋毫。”
“宁可不识字，
不可不识人.”
“邪正看眼鼻，真假看
嘴唇；功名看气概，富
贵看精神；主意看指爪
，风波看脚筋；若要看
条理，全在语言中。”
“I would rather not be able
to read words than not be
able to read people.”
- Zeng Guofan, Qing statesman, in “Icy
Discernment”, a book ranked alongside
“Three Kingdoms”, “Sun Tzu: Art of War”
and “Water Margins”.
梁启超：“五千年历史立德立言立功者只有
两个人：范仲淹，曾国藩。五千年历史中事
业有继衣钵得传者只有一个人：曾国藩。”
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
Buffett: “Rittenhouse is still
on the side of the angels.”
www.AsianExtractor.com
28
Beyond Accounting Fraud:
Future of Securities Regulation & Audit (Week 10)
Widjojo Nitisastro, the legendary architect of Suharto’s New Order economy.
Widjojo first became influential in government circles in Indonesia in the late
1960s. In the wake of the transition from governance under President Sukarno
to the “New Order” under President Suharto, Indonesia faced urgent economic
problems. And as is well-known, a small group of legendary economic advisers
who became known as the “Berkeley Mafia,” stepped in. Widjojo, the dean of
the economics faculty at the University of Indonesia, was acknowledged as the
leader of the group. Over the next three decades, Widjojo and his colleagues
guided the Indonesian economy with extraordinary skill.
Indonesia’s Financial
Services Authority OJK
What if Jokowi ask for your opinion on
improving the system, or to head OJK
one day? What do you say?
Presentation to Universitas Gadjah Mada on Jan 14, 2015
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
29
Who Knows What When in the Asian Capital Jungle?
Know The Players: The Muddy Waters Phenomenon
“There are going to be people who say, well, I caused this. In one
sense, yes, had I not published on that date, then the money would
not have been lost. But on the other hand, I really feel that this
company is a cancer on the financial system, because it just keeps
sucking in more money every year.”
“I’ve started to think of investment banks and the investment banking
industry as just manufacturers of financial products. They have to keep
bringing new product to market, and in a situation where there’s so
much pressure to do that, you’re definitely going to have poor financial
product that gets brought to market.”
“It is important to recognize that shorts and bloggers have their own
agendas and that you have to take their allegations with a grain of salt.
I have seen a lot of exaggeration and inaccuracies in short seller
promulgations.”
“Why did it take a guy like Carson Block to reveal this?” said
Robert Lawton, managing partner of Catoosa Fund LP, a Los
Angeles-based hedge fund which lost money on China
MediaExpress. “You have people like Paulson and Greenberg,
who you would believe did their research before they took a
position in these stocks. What did they miss in advance of
buying stocks that it took Block a couple of months and a staff
of 10 to uncover? If I had been invested with Paulson and
Greenberg I would be furious.”
KEE
KB Kee
Koon Boon
“A year ago, I was worried about whether a guy would pay his $80-amonth rent on his self-storage unit in Shanghai, and now I’m worried
about whether I’m going to be hit with $100 million lawsuits,” he said.
“That’s a big change.”
Source: http://www.bloomberg.com/news/2011-06-06/muddy-waters-blocktakes-down-giants-paulson-greenberg-with-china-shorts.html
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
30
Alibaba – Accounting Fraud?
VIEs and “Structure” – Week 5
“I’ve gotten death threats. I often joked with my wife
that it’s one of my key performance indicators.”
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
31
Short Sellers On their Lessons: Jim Chanos,
Carson Block, Whitney Tilson
Read them on SMU eLearn
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
32
What Do Short-Sellers Know?
Short Interest Position for Enron
Richardson (2003), Earnings Quality and Short Sellers, Accounting Horizons, Supplement 49-61
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
33
What Do Short-Sellers Know?
Short Interest Position for WorldCom
Richardson (2003), Earnings Quality and Short Sellers, Accounting Horizons, Supplement 49-61
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
34
What Do Short-Sellers Know?
We will come back to this later on “Who Knows What When”
Discussion:
Do short-sellers have special insights in detecting accounting fraud?
Is it as simple as shorting firms with high abnormal accruals or/and
low book-to-market ratio? Desai et al (2006, RAS) find that short
sellers initiate short selling positions several months in advance of
restatement.
Limits to arbitrage and constraints to short-selling? Short selling
restrictions tend to inflate prices (Miller, 1977, Chen et al 2002). Eg
China CSRC permitted margin trading and securities lending for the
first time on 31 Mar 2010 – impact (see figure on right)?
Is the short-seller interest ratio (SIR) informative and predictive?
Read Cassell et al (2011), Short Interest as a Signal of Audit Risk,
Contemporary Accounting Research
Implied volatility smirks (IVS)*: More advanced predictive signal?
Read Kim and Zhang (2014), Financial Reporting Opacity and Expected
Crash Risk: Evidence from Implied Volatility Smirks, CAR
Are the SIR and IVS useless in the Asian context? Lack of
information, development and depth in the derivative market which is
cornered/manipulated by a few market makers?
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
Sharif et al (2014), Against the Tide: The Commencement
of Short-Selling and Margin Trading in Mainland China,
Accounting and Finance 54: 1319-55
* IVS refers to the fact that for the same underlying
instrument, the implied volatility of low strike price options
(esp out-of-the-money OTM put options) is higher than that
of high strike price options (esp. at-the-money ATM call
options). The fact is puzzling because Black-Scholes (1973)
option pricing theory suggests that every option should
have the same volatility for the same underlying instrument.
The volatility smirk indicates that OTM put options are
more expensive than ATM call options. Investor aversion to
expected negative jumps or crashes in the prices of
underlying instruments could be the driving force. Financial
opacity hides bad news. Thus, there is a potential
relationship between IVS and accounting fraud.
www.AsianExtractor.com
35
Left Side In, Right Side Out!
 First, the controlling shareholders will engage in
'propping' activities to artificially inflate the sales
and assets of the listed firms through related-party
transactions (RPTs) to entice the funds of investors
who did their 'fundamental analysis' of the firms.
Artificial accrued sales are booked under 'other
receivables', while the bogus cash-based sales stay
hidden in the 'cash & cash equivalents‘.
 After propping, tunnelling or expropriation of
these assets out of the listed firm follows,
engineered through related-lending and transfer
activities which are rarely paid back by the
controlling shareholders. These cash transfers are
done artfully, often in short-term transactions in
order to be qualified as 'cash equivalents'. That
explains why most of the artificial cash balances in
these firms typically earn low average interest rates,
at below one per cent, when the typical bank rate in
China varies between 5 and 10 per cent.
 In other words, there is left-side in via propping,
and right-side out via tunnelling.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
36
The Case of Sino-Environment
 Take the case of the high-profile and 'highly profitable' S-chip SinoEnvironment. Footnote 12 of their 2008 Annual Report revealed that the
average interest rate earned from their 728 million yuan (S$143 million) cash
in the balance sheet is merely 0.56 per cent. In Footnote 13, the amount due
and dividend receivable from its subsidiaries in the company accounts is 282
million yuan. In their group accounts, the amount of non-trade receivables is
240 million yuan out of the 276.5 million yuan in total receivables.
 From Footnote 12, Sino-Environment possibly made dubious related-party
acquisitions, financed by the IPO and secondary equity offerings, to cancel
the artificial receivables that were created in collusion with the related
parties, and booking the set-off as goodwill and intangible assets which
stood at 228 million yuan.
 In a Raju-deja vu fashion, property was involved. According to news articles
reporting about the firm's situation, its chairman Sun Jiangrong reportedly
tried to siphon away a 100 per cent stake in Chongqing Daqing Property,
which owned properties in China worth 10 billion yuan, to his Hong Kong
private firm called Top One Property Group, and later to a Chinese firm
owned by his brother, Sun Shaofeng, the chairman of HK-listed China Green.
 Wrote and submitted the article in Apr 2010. Published on 25 Nov 2010
in Business Times Singapore
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
37
Left Side In, Right Side Out!
Sino-Environment-China Green 蛇鼠一窝！
Published article
China Green
 Wrote and submitted the article in Apr 2010. Published on 25 Nov 2010 in Business Times Singapore
 Nope, no death threats to boast of! Thankfully..
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
38
Up Close & Personal With ABC Learning’s “Fast Eddy”
Peak Market Cap A$4.1 Billion
1
2
9
Fast Eddy: Education is a real sexy business in Australia and globally. Our govt supports education and especially us. There are also many cheap and good M&A
targets lined up everywhere. Many of these centres are not well-run and the owners are not financially-savvy. But if they become part of our magic ABC brand
and unique business system, they will be much more profitable. Also, after designing/ developing and refurbishing the centres (inc the acquired old haggard ones),
they will be bright and sparkling, and parents will queue up for ABC – where else can they go? We have one-quarter of the market and that number can only go up
and up., with or without your help, but together we can go faster and stronger.
Bankers and investors buy the story and
lend/ invest billions of dollars in ABC via
massive loans (many with market-based
covenant terms) and new shares. ABC raised
AUD 3.5b over 3.5 years
Bankers,
Investors
Questionable property owners,
“special purpose vehicles” and trust
fund eg AET
M&As,
via 123
Lease
cost
After “some time” when payments run into
problems, the panicky bankers and investors
cry: Where is our money?? ABC runs into
cashflow problems in its periodic payments,
and its going-concern status is threatened
6
7
5
Regional Management Companies (RMC) are
“independent” entities employed by ABC to
run the child care centres, inc collecting the
fees from parents and government, and
paying off the wages and other costs. RMC
then pays back ABC license fees which ABC
books as revenue.
Until FY07, ABC submitted accounts that
were net of RMC expenses. Things became
shaky for Eddy after reporting standards
changed and ABC reports gross revenue and
breaks out the costs incurred by RMCs –
Eddy sweats, a bit
Parents are not enrolling their kids in ABC
due to poor service as costs are cut
KEE
KB Kee
Koon Boon
Developers eg
123, QMC
Billions of dollars from
bankers and investors go to
paying “developers” (largely
related-party) for
questionable contracts in
designing/ developing and
refurbishing the centres, and
to fund M&As
8
Developers pay back quietly
the funds to ABC and the
RMCs to boost their revenue
Wages & other costs. and profits and help them to
Eddy says “Cut, cut, cut achieve their “budgeted”
– we need to show numbers
them we make money
fast”
3
R
M
C
4
Parents
ACCT004 Accounting Fraud in Asia
Govt
Day care fees is AUD 62 a day. Childcare
rebate on family’s put-of-pocket expenses is
50% up to AUD 7,500 a year which will be
paid quarterly in arrears
www.AsianExtractor.com
39
Accounting 101: Segmental Breakdown in “Net Sales”?
Bamboo Innovator: “So Eddy, half of your 1000 centres are making money
and generating cashflow mainly from the government’s subsidies?”
Eddy: “No, no, no, only about a-third!” (Freudian slip)
May 2007: Singapore’s Temasek invested AUD 401.5 million (SGD 502m) into
ABC Learning, supposedly the world’s largest listed childcare centre. Feb 2008:
Temasek further invested AUD 25 million. Nov 2008: ABC went into receivership
As many as 430 out of its 1,075 Australian centres are found to be operating
below the breakeven level. Child-care industry insiders were not surprised by the
high number of ABC centres that were found to be unprofitable, saying ABC’s
strategy had been to buy centres and then cut costs, causing parents to leave
because of declining standards.
One child-care operator estimated any child-care centre needed to have
occupancy of at least 80% to breakeven. Before its collapse, ABC claimed that its
average occupancy rate is more than 90%, and its centres have higher-thanindustry-average profit and EBITDA margin due to its strong brand value and
economies of scale.
On 26 Nov 2008, the receivers gave a clean bill of health to 656 centres (80,000
children, or 122 children per centre), but placed 386 centres (30,000 children, or
78 children per centre) in the “critical list”, meaning they would not stay open
beyond the end of the year. If the average capacity of each centre is 150 children,
these 386 centres had only occupancy rate of around 50%, below the probable
breakeven level of 80%. The number of unprofitable centres is close to the
Freudian slip by then-billionaire Eddy during 4Q2007.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
40
The Power of Observation?
Touch Darkness, and Darkness Also Touches You Back…
The accounting fraud of ABC Learning illustrate the interdisciplinary
connections to psychology, government-business nexus, business
model analysis, and the type of accounting transactions and risks
prevalent in the Asian business context.
ABC is one of the many real-world Asia-focused case studies used in
the course Accounting Fraud in Asia to inject practical realism, sharpen
the students’ critical thinking skills, and hone their skill-set in applying
what is learnt into the messy world of reality.
One might think that this type of probing “technique” to detect
accounting frauds and avoid millions in losses is “clever”. Such
“technique” couldn’t be more foolish.
Why? Because each time we touch Darkness, Darkness also touches
us back; each time we touch Accounting Fraud, Accounting Fraud also
touches us back.
It is easy to be devoured by Darkness, to descend into Darkness,
when one is overconfident and succumbs to temptations. You lose
your Authenticity as a person.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
41
Sir Ernest Shackleton’s Advertisement
– Men Wanted for Hazardous Journey to Mt Everest
Still Want to Touch Darkness?!
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
42
The Motivation…
The instructor’s motivation in launching this course has been driven by disappointment from observing up close and personal the hardearned assets of many investors, including friends and their families, burnt badly by the popular mantra: "Ride the Asian Growth Story!"
He witnessed firsthand the emotional upheavals that they go through when they invest their hard-earned money - and their family's - in
these "Ride The Asian Growth Story" stocks either by themselves or through money managers, and these stocks turned out to be the
subject of some exciting "theme" but which are inherently sick and prey to economic vicissitudes. They may seem to grow faster initially
but the sustainable harvest of their returns is far too uncertain to be the focus of a wise program in investment. Worse still, the
companies turned out to be involved in accounting frauds. Their financial numbers were "propped up" artificially to lure in funds from
investors and the studiously-assessed asset value has already been "tunnelled out" or expropriated. And western-based fraud detection
tools and techniques have not been adapted to the Asian context to avoid these traps.
After a decade-plus journey in the Asian capital jungles, it has been somewhat disheartening as the instructor observed many fraud
perpetrators go away scot-free and live a life of super luxury on minority investors' hard-earned money. And these perpetrators, the
Darkness, make tempting offers to various parties in the financial community to go along with their schemes.
When we have knowledge in our hands, we have a choice to stay away from these people and away from temptations and do the
things that we think are right.
Also, one may get overconfident in the use of “tools” and “techniques” which can be dangerous without a framework adapted to the
context of the Asian capital jungle.
We need Icy Discernment to detect the accounting fraud in the Asian context; and we need a Warm Heart, an inner compass and
framework, to help us not lose our way in difficult and uncertain times as we journey together in the dangerous Asian capital jungles.
Your output from the Accounting Fraud in Asia course: Cold Eyes and Warm Heart.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
43
Picture of Dorian Gray
Sherlock Holmes Vs Father Brown
It is the task of the Bamboo Innovator to support fellow value investors to understand
and appreciate the early signs of potential problems and red flags in Asian companies
ahead of the market, to see the real attic portrait of the companies’ financial health and
economic worth. Yet, searching for the accounting grains of sand can be tricky given
that confirmation bias can distort the view of focusing on the trees or “chess pieces”
but missing the forest or the “chess board” and the “rules of the game” in the jungle,
particularly when the rules run out or there are no rules in the first place. Investors
need to keep away from the emotion of having to be right.
Yes, we don’t discover the “murderer” or fraud perpetuators by separating ourselves
from them or just following clues. As shown in the wisdom of Father Brown, the unlikely
anti-hero detective in GK Chesterton’s novel that’s ranked alongside Sherlock Holmes
for its remarkable insights in solving crimes, we need to delve deep into the
psychological state where we can most easily identify with the “murderer”. The reason
other characters in Chesterton’s mysteries don’t figure out who the murderer is that
they are not willing to lower themselves into the world of the criminal.
Yet, this can be very harmful for the investor as they lower too deep into the dark side
and fail to extricate themselves out of the situation to identify the positive side – the
resilient compounders. For instance, one would not invest in Google or IBM because of
the accounting treatment in stock-based compensation. Having the inner compass of
the Bamboo Innovator in our hearts can help investors not lose their way.
Supply- and Demand-side Moat Economics in Europe and Asia, July 10, 2013 (BeyondProxy)
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
44
Planet of the Apes: Caesar Vs Koba?
“It isn't just that Caesar is a better ape than Koba, but that both of them, tragically,
embody a dual nature that is all too recognizably human.”
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
45
A Small-Built Shandong Entrepreneur (山东大汉?)
And the only S-chip not tainted in accounting scandal
A story about overcoming adversities…
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
46
Luye Pharma: $70m to $400m (Delist in SGX)
to $4bn (Relist in HK)
“My childhood dream was to be a doctor and save
lives,” said the billionaire Liu Dianbo, who speaks with
a slight Shandong accent. “Probably because of that I
was never content to just make generic drugs.
Innovation is the future.”
Detecting accounting fraud becomes detecting goodness!..
However, good is not the absence of evil…
Another topic (got moat?), another course!
Source: http://www.bloomberg.com/news/2014-08-25/luye-pharma-sliu-becomes-billionaire-as-stock-hits-high.html
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
47
No Mud, No Lotus
www.AsianExtractor.com
Asian insiders Extract and expropriate
wealth in artful accounting tunneling
methods as opposed to western-style
accruals-based earnings management.
We attempt to Extract them out in the
Asian capital jungle.
The Lotus extracts mud out of its hollow
stem and the stem grows up with
determination, enabling the Lotus flower
to blossom above the muddy water, rising
above the defilement and remaining
unstained and pure.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
48
Even the Best Are Not Invulnerable to
Accounting Fraud: Tesco’s £250m Fraud
Buffett’s Tesco stake has lost over $750 million
The accounting practices in question involved the early booking
of commercial income — or promotional money, discounts and
rebates from suppliers — and delayed booking of costs. Those
“volume rebates” are the payments Tesco and the UK’s other
major retailers have been reaping from major suppliers for selling
large numbers of their products, and promoting them in
prominent position. As cost-cutters like Aldi and Lidl grow,
suppliers are unlikely to be so deferential to Tesco. Managers possibly under pressure to improve earnings - might have brought
forward promotions and the right to book supplier rebates.
“With Tesco, we definitely made a mistake. I
made a mistake on that one more than
anybody else made a mistake ... That was a
huge mistake by me.” - Buffett
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
49
Bill Gates Is Obsessed With A New
Interdisciplinary Way Of Teaching History
Stars and Cosmos (Astronomy)
Planet Earth (Geology)
Cities, Churches, and Human
Civilization (Anthropology/History)
Water, Where Life Evolved
(Chemistry/Biology)
Electric Lights = Modernity
(Science/Technology)
You and me trying to figure out our
place in the Universe!
http://www.businessinsider.sg/bill-gates-big-history-2014-10/
http://www.businessinsider.sg/bill-gates-is-trying-to-change-how-we-teach-history-2014-9/#.VJ1frV4AKw
http://www.nytimes.com/2014/09/07/magazine/so-bill-gates-has-this-idea-for-a-history-class.html?_r=1
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
50
Acquire An Interdisciplinary Accounting Perspective
– Clever Technician Vs Craftsman-Seer
With Perspective, we can discover leverage we didn’t know we had. Perspective gas two definitions:
Context: A sense of the larger picture of the world, not just what is immediately in front of us
Framing: An individual’s unique way of looking at the world, a way that interprets its events
Clever Technician
Craftsman-Seer
Methodically clever and committed to incremental
progress
Pragmatic and aggressive
Localized/micro problem solvers, not long-ranger
thinkers
Usually the “best” students (GPA) in high school,
college, and graduate school
Follow the crowd
Favor virtuosity in calculating over reflection on
hard conceptual problems
Often aggressively myopic, with little tolerance for
ideas outside their mainstream mindset
Committed to “good” careers
Dreamers (may have become artists or writers
under different circumstances)
Independent and self-motivated
Foundational thinkers (account for both historical
and context of a problem) and macro problem-solvers
Often passionate and charismatic teachers
Have the ability to be alone
Are oft-times technically unimpressive
Need time and the freedom to think
Often impatient and hard to get along with (mad at
being marginalized)
Committed to ideas, not careers
Adapted from McCarthy (2012), Accounting Craftspeople versus Accounting Seers: Exploring the Relevance and Innovation Gaps in Academic Accounting Research,
Accounting Horizons 26(4): 833-43 and Smolin (2006), The Trouble with Physics: The Rise of String Theory, the Fall of a Science, and What Comes Next
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
51
Accounting Fraud and Strategies for Deception
Strategies for Explanation
Deception
Masking

Deleting from the environment attributes
that suggest the correct representation
Dazzling

Modifying attributes in the environment to
obscure or blur these attributes whose
interpretation suggests the correct
representation and to emphasize these
attributes whose interpretation suggest the
incorrect one
Inventing

Adding new attributes to the environment
to suggest the incorrect representation
Double Play

Mimicking

Repackaging

Decoying

Manipulating attributes in the environment
to weakly suggest the correct
representation so as to reinforce the
incorrect representation
Modifying attributes in the environment to
suggest the incorrect representation
Examples of Tactics for Creating Deception

Failing to record or disclose an expense or a liability

Emphasizing issues whose interpretation support
the inflated sales figures
Deemphasizing issues by reporting them in the
notes to the financial statements rather than
reporting them on the financial statement



Creating fictitious transactions or transactions
without substance
Creating external factors justifying attributes that
deviates from the misleading representation

Improperly applying accounting principles and
standards where an item is not individually material


Adding a misleading narrative of the company
Spreading the extent of the fraud into small
manipulations, individually not material
Modifying attributes in the environment to 
hinder the generation of the correct
representation. Repackaging is weaker than 
Mimicking since it is based on justification
and distortion rather than replication of
attributes
Adding new attributes to the environment

to hinder the generation of the correct
representation. Decoying is weaker than
Inventing since the decoys simply direct
attention away from the correct one
Two types of strategies for
detecting a deception:
Strategies based on finding
evidence suggestive of the process
of perpetuating the deception i.e.
the process of perpetuating the
deception
(1) Motivation based
(2) Process based
Strategies based on processing
information contained in the
manipulated environment
(1) Recognition based
(2) Conservative based
(3) Preemption based
(4) Intentionality based
(reasoning about an
adversary’s goals and actions
Changing the labels that characterize attributes in
the financial statements
Reframing issues to maliciously justify attributes
that deviate from the target representation
Creating blind alleys, anomalies that after a close
examination turn out to be consistent with the
misleading representation
Adapted from Johnson and Graziou (1993), Fraud Detection: Intentionality and Deception in Cognition, Accounting, Organizations & Society 18(5): 467-88
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
52
Strategies Devised in a Tent Get Victory 1,000 Miles Away
Founding Emperor of Han Dynasty (2nd Longest Dynasty in China’s History)
Knife: Up close and personal guerilla
street fights: Interviews, management
access, factory visits
(Limited time and energy, confirmation
bias, undue influences, apprehension in
offending host, etc)
Vs
Arrow: Quant and Technicals to invest
from afar
(Garbage-in-Garbage-out, pursuit of
similar strategy that results in correlated
returns and destabilizing price impact in
deleveraging situations, etc)
运筹帷幄之中 决胜千里之外
Vs
Qi & Heart: Strategy and Framework
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
53
Performance Evaluation Criteria
%
Final Exam
0
Tests
0
Remarks
Research Project – Group
(Case Writing + Presentation)
30
• Dissect and discuss an Actual accounting fraud in Asia
• Groups of 5
• 20 min presentation and 5-10 min Q&A
• Presentation (10%), Case Writing (20%)
Research Project – Individual
(Report + Slides)
30
• Dissect and discuss a Potential accounting fraud in Asia
• Report (15%), Slides (15%)
Critique: Presentation & Op-Ed
20
Do a critique on just one research paper by weekly topic:
• 10 min presentation and 3-5 min Q&A (10%)
• A one or two-page Op-Ed article (10%)
• Content: 50% on research paper, 30% on Asian example(s),
20% on some original or unique insights
Participation – Web
20
• www.AsianExtractor.com
Total
100
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
54
Research Project: Purpose & Meaning
“Strive not to be a success, but rather to be of value.”
- Albert Einstein
Materials from the textbook are visibly and woefully inadequate and it is critical
to stay abreast – and hopefully ahead - of the curve in the business frontier.
Formal lectures aid comprehension; tutorial systems and tests/exams may help to
evoke (lower-level) analytical skills; and hopefully doing a research project may
best stimulate the higher order activities of synthesis and judgment and one can
then pick up the torch that has kindled.
Having the intrinsically-motivated mindset of a 20-year old Warren Buffett to
strive to be of value with knowledge that can benefit others through crafting a
piece of work with dedication, such as his 1951 article “The Security I Like Best”,
can prove instrumental in the years ahead. Buffett is now the one of the world’s
most admired and revered business leader and investor and has built his firm
Berkshire Hathaway into a $300-billion conglomerate, as valuable as the GDP
output of Singapore.
Thus, through this unique platform and opportunity, you get to cultivate the
portable lifelong skill-set of critical thinking ability and the higher order of
synthesis and judgment to apply what is learnt into the messy world of reality by
forming quality analytical output that has timely relevance and usefulness to the
wider business community.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
55
Research Project General Guidelines
(1) Have an interesting Title that encapsulates the central Theme you are exploring
(2) Aim not to be “descriptive” but rather to be “analytical” in your approach
(3) What do you understand and find important and interesting about your research
questions and key ideas? Why are they important and interesting? (e.g. must have
“tension” – if we already know the outcome, or if the alternative outcome is
improbable, why study it in the first place?)
(4) What are the key important and interesting results that you agree/ disagree with
and why?
(5) What are the inadequacies/limitations/problems of the study? What are your
suggested improvements?
In other words, aim for:
Originality and creativity of your discussion, analysis and ideas
Clarity and organization in your thinking and analysis in the writing
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
56
Case Writing (60% - 30% Group, 30% Individual)
The case study approach is essentially a framework to bring alive the story of the
company to understand situations of dynamism, uncertainty and uniqueness to
generate new learning insights and knowledge.
Expect to be frustrated with case writing. It is part of learning. There is no right
answer to most of the cases.
Aim to get it publish!
The case study structure covers:
(1) Tension/Dilemma/Crossroad faced
(2) Setting/Background/Context
(3) Major Problem/Challenge Identified
(4) Key Characters and Their Thinking
(5) Key Findings (Data, Tables, Charts, Figures)
(6) Resolution/Recommendations
(7) Generating Case Questions/Lessons Learned
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
57
Critique (20%)
From Week 3 onwards
10 min presentation (with slides) and 3-5 min Q&A (10%).
A one or two-page Op-Ed article (10%) – Aim to get it publish in newspaper!
Content: 50% on research paper (Points 3 to 4 in earlier slide), 30% on Asian
example(s), 20% on some original or unique insights.
Difference from other courses: Your piece of work, that you have carefully crafted,
will be posted on AsianExtractor.com. AsianExtractor is a visible global platform to
showcase your talent and intrinsic worth beyond GPA number + Contribute your
findings and add value to the global business and investment community!
Everyone has a chance to Shine if he or she is willing. EVERYONE.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
58
Web Participation (20%)
(1) Respond and reply to the discussion questions
http://asianextractor.com/2014/12/20/sec-fines-baker-tilly-hong-kong-for-missing-red-flags-in-china/
SEC Fines Baker Tilly Hong Kong for Missing Red Flags in China
Discussion Questions:
(1) Are companies audited by Baker Tilly HK more prone to accounting fraud? What are the firm characteristics e.g. state-owned
companies vs privately-owned enterprises? Are they from certain industries? Are they structured as offshore holding
companies? Generate the list of Baker Tilly audit clients and do some analysis..
(2) Do different audit firms have different policy in their audit of related-party transactions of Asian/ Chinese companies?
(3) Why has US SEC struggled for years to obtain information for dozens of accounting fraud investigations at China-based companies?
http://asianextractor.com/2014/12/20/us-sec-cautions-companies-on-consolidation-analyses-using-vie-variable-interest-entity/
SEC Cautions Companies on Consolidation Analyses Using VIE (Variable Interest Entity)
Discussion Questions:
(1) Chinese ecommerce giant Alibaba uses the VIE structure. Given the “success” of Alibaba’s IPO, are VIEs necessarily bad i.e. are
companies with VIE structure more prone to accounting fraud? What kind of companies tend to use the VIE structure? Generate a list of
companies with VIE structure in different exchanges in US and Asia and do some analysis…
(2) How can the management abuse their application of “shared power” in consolidating VIE? What is the accounting policy take on
discretionary changes in the exercise of this power?
(2) Generate your own discussion questions
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
59
Web Participation (20%)
(3) Post relevant and interesting articles
(4) Write your own articles
Eg Shan Rui wrote: Vincent Tan – The history and IPO of 7-Eleven Malaysia
Brief Profile - Shan Rui started his investment journey in September 2011 and has been a steadfast believer of the
philosophy of value investing. Over the past 3 years, he has witnessed and experienced the danger of investing in
Asia's capital market. As a passionate investor, he hopes to improve the awareness and understanding of the
public, so that they can better navigate through the smoke and mirrors . He is currently a third-year economics
student at Singapore Management University (SMU) and the President of SMU-Student Managed Investment Fund
(SMU-SMIF).
The biggest difference with SMU’s eLearn forum: AsianExtractor is a visible global
platform to showcase your talent and intrinsic worth beyond GPA number + Contribute
your findings and add value to the global business and investment community!
Send your articles to both the TAs (either Shan Rui or Sebastian) and myself.
Everyone has a chance to Shine if he or she is willing. EVERYONE.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
60
Who Knows What When: The Jungle Players
Founder, Controlling
Owner
Investment Banker,
Sponsor, Underwriter
Syndicates, “Insiders”
The Company
CEO
Sell-Side Analyst,
Broker
CFO
Short-Seller
“Independent” Credit
Rating Agency
Auditor
Independent Director
“Independent”
Market Research Firm
Regulator, Legal &
Extra-Legal Institution
Audit Committee,
Internal Auditor
Abused Minority
Shareholders
Internal
Private Role
Media
“Attention and discussion on corporate governance reforms
in minimising managerial agency costs and to align
managerial interests with the shareholders had centred,
perhaps narrowly, on the 'agents' or the 'chess pieces',
some of which include the independence and quality of the
independent directors in their monitoring efforts.
Public Role
Corporate Banker
External
We need to step back and look instead at the 'chess board',
the rules of the game in Asia that influences ownership
behaviour and the accounting mechanism, in order to avoid
the plight of Phineus with managers or controlling owners
leaving defiled returns for the minority shareholders and an
awful mess for the authorities to clean up.”
- KB Kee (2010), Reforming Corporate Governance,
Business Times Singapore, Nov 25, 2010
KEE
KB Kee
Koon Boon
Institutional Investor
Financial Intermediary (FI)
ACCT004 Accounting Fraud in Asia
Management
Monitors, Verifiers
www.AsianExtractor.com
61
Money Not Enough: It All Starts with the Want for Money…
Function of Financial Markets & Middle-Man (Financial
Intermediaries/ Financial Institutions)
Mishkin and Eakins
(2012), Financial
Markets and
Institutions
Allows transfers of funds from person or business without investment opportunities to one who has them
Improves economic efficiency by producing an efficient allocation of capital, which increases production
Financial intermediaries/ institutions (middle-men) exists because of transaction costs and asymmetric info
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
62
Who Knows What When? FIs = Informational Failures in
Free Markets!
Nobel Laureate Akerlof’s Lemon to the “Rescue”?!
Informational asymmetry – George Akerlof’s Lemon (1970)
Incomplete info vs Asymmetric info: Lacking crucial info to make rational decisions vs one party
having more info than the other
Model predicated on Agency theory: Act in self-interest to maximize utility function
Agency theory analyses how asymmetric information problems affect economic behavior
A lemon is a dodgy defective second-hand car (or fraudulent financial reports)
Quality (high or low) is undistinguishable by looking at the second-hand car (insurance, property,
equity, labor etc). Willing to pay for an “average” value – so what happens? High quality goods leave
the market and cease to be sold; low-quality ones are increasingly sold.. Iteration of “bad driving out
the good” until the market collapses
Problems: Adverse selection and Moral hazard… and Insider trading
Adverse selection: Parties with superior info may strategically select to participate in or abstain from
a given market; does not disclose product quality to buyer. Pre-contractual. More likely to select risky
borrower.
Moral hazard: Parties with superior info alters behavior that benefits himself or herself while
imposing costs on others. Actions of the seller are hidden from buyer. Post-contractual. Less likely
borrower will repay.
Resolutions to restore trust and market functioning?
(1) Signaling (Spence) and screening (Stiglitz)
(2) Third-party independent monitors and verifiers Vs Conflict of interest (esp. sell-side IBs, analysts)
Eg audit reports, credit rating agencies, market research firms, certifications to give legitimacy
Sino-Forest (Frost & Sullivan), NQ and Tianhe (Frost & Sullivan)
(3) Regulation eg transparency and disclosures (sunshine), restrictions (insider trading) etc
Sarbanes-Oxley 2002 (Public Accounting Return and Investor Protection Act): Supervisory oversight
to prevent conflicts of interest, PCAOB, non-audit services, CEO-CFO to certify, independent audit com.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
63
Principal-Agent (PA) Type I Problem
Moral hazard in equity contracts called the Principal-Agent problem
Separation of ownership and control of the firm: Owners vs
Managers with shareholder dispersion which creates substantial
managerial discretion, which can be abused (Berle and Means, 1932)
Difficult and costly to engage someone to (1) act in one’s behalf and
best interests, (2) design their contractual compensation, and (3)
monitor their performance (Jensen & Meckling, 1976, Fama, 1980)
Managers: Shirk, take inefficient or excessive risks, max earnings in
short-term, empire-building, self-dealing (eg perquisites consumption,
generating private benefits), misrepresent performance with
fraudulent financial statements, entrenchment strategies
Align incentives to encourage desirable behavior and discourage
undesirable behavior (eg equity, share options, debt covenants,
collateral)
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
64
Principal-Agent (PA) Type I Problem
Generic fixes: (1) Bonding-Signaling, (2) Monitoring-Screening
(1) Bonding: Forces the agent whose behavior matters to bear the costs of a bad outcome, and it must be
directly related to any incentive that they may have to “cheat” eg downpayment, skin-in-the-game. The
signal bonds the agent. The party with the info advantage sends the signal.
(2) Monitoring: Principals watch carefully the behavior of the agent after the contract and also structure the
contract, in advance, to require disclosure. The party with the info disadvantage decides what info it will use
to make distinctions eg employers (principals) screen candidates (agents) on grades, internships etc and
impose the cost on candidates. Who monitors the monitors?
Q: How to screen borrowers? A: Charge them more.
(1) Implies bad types are able to be sorted from the good types in the first place
(2) Why charging bad types more doesn’t work… Junk yields and defaults…
Q: NINJA loans: Adverse selection or moral hazard? Adverse selection occurs when the selection of unfavorable
counterparties (risky borrowers) is accidental from a larger pool. Deliberately seeking out and lending to risky
borrowers because of regulatory pressures or an expectation that home prices would continue to tise may not
qualify. Moral hazard that GSEs will be failed out when there is trouble in the housing markets.
Moral hazard is an effect of contracts, rather than an underlying characteristic of individuals
Outsource the PA problem to the free-market? Market for corporate controls to protect shareholders interests?
Poorly performing firms with high agency costs will be subjected to takeovers and the self-serving or incompetent
managers are replaced. Concomitantly, even the threat of a takeover can function as a mechanism to discipline
managers. ATP (anti-takeover provisions) as governance measure?
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
65
Principal-Principal (PP) Type II Problem
Concentrated ownership creates the PP problem: Studies have shown that ownership concentration is the
dominant form amongst publicly listed firms in most economies and the nature of the main agency conflict is
between controlling and minority shareholders (Shleifer and Vishny, 1986; La Porta et al, 1999; Faccio and Lang,
2002), or what is termed as Type II agency problem, as compared to the traditional Type I conflict between
managers and shareholders. Controlling shareholders may expropriate the minorities and tunnel away resources
especially when they have excess control rights relative to their cashflow rights due to the use of dual-class stock,
corporate pyramids, or cross-holdings.
Young et al (2008), Corporate Governance in Emerging Economies: A Review of the
Principal-Principal Perspective, Journal of Management Studies 45(1): 196-220
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
66
Principal-Principal (PP) Type II Problem
Young et al (2008), Corporate Governance in Emerging Economies: A Review of the
Principal-Principal Perspective, Journal of Management Studies 45(1): 196-220
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
67
Principal-Principal (PP) Type II Problem
Young et al (2008), Corporate Governance in Emerging Economies: A Review of the
Principal-Principal Perspective, Journal of Management Studies 45(1): 196-220
Institutional conditions in emerging economies create a climate that increases the costs of monitoring and
enforcing contracts
The role of controlling shareholders in (1) family firms and (2) business groups. We will discuss more in Week 3.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
68
Principal-Principal (PP) Type II Problem
Substantial measurement errors in governance: In companies with a controlling shareholder, a hostile takeover
is not feasible even in the absence of ATPs (anti-takeover provisions) impediments such as the poison pill. Thus,
even though ATPs are consequential for outside investors in widely-held firms, they are unimportant in controlled
companies and the ATP-focused GIM indices will not be relevant in measuring governance quality at the firmlevel in these economies where the market for corporate control is not active. Firms without ATPs or have
arrangements facilitating control contests may be interpreted at having good governance in the U.S. but to make
the same interpretation for companies in these economies will be inaccurate and uninformative and introduce
substantial noise..
Fraud and mischief mechanism and channels are different: The channels through which the minority
shareholders’ value is diverted out are also different between widely-held and controlled firm. Professional
managers have fewer opportunities to engage in large-scale related-party transactions (RPTs), but controlling
shareholders do, especially those that are part of a business group or a holding company structure. This is why
we have corporate scandals such as Satyam or the S-chips where cash holdings as reflected in the balance sheet
is high but they may be non-existent because they are subjected to expropriation risks through channels such as
RPTs facilitated by the use of cross-holdings, pyramids, organizational structures that are less common for widelyheld U.S. firms.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
69
Principal-Principal (PP) Type II Problem
Young et al (2008), Corporate Governance in Emerging Economies: A Review of the
Principal-Principal Perspective, Journal of Management Studies 45(1): 196-220
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
70
Detecting Accounting Fraud in West Vs Asia
and the Critical Thinking Gap
West
East/Asia
Fraud &
Governance Focus
Dispersed shareholders
Focus on Principal-Agency (PA) problem: Abuse by greedy
and power-hungry executives, managers and director abuse
against the principal
Controlling shareholders, concentrated ownership, family
ownership
Focus on Principal-Principal (PP) problem: Abuse by
controlling shareholders against minority shareholders
What’s Wrong?
“How to Murder”
Managerial discretion and signaling (”posturing”, wayang)
in accounting eg accruals (earnings management, income
smoothing) to boost performance- or EPS-linked salary and
bonus
Excessive remuneration, perks
Internal and external monitoring breakdown by ID,
committee, auditor, institutional investors as checks-andbalances
“How to Dispose of Murdered Bodies” or Expropriation
(Bodies Disappeared)
Propping and tunneling via related-party transactions
(RPTs), loans, transfer pricing, deals
“All-in-the-family” asset shifting
“Undisposed Murdered Body Resurfaces Later”
Reversal in accruals effects from earnings, revenue and
real activities management
Poor subsequent operating performance (but managers
have moved on)
“Think Like a Murderer – How to Dispose of Bodies”
Group shareholding structure and ultimate ownership
analysis
Group (listed and unlisted) biz structure analysis
RPT, propping-tunneling, asset-shifting analysis
Detection
Most research and
books focus on
Western-based PA
problems and fraud
detection techniques
- not adapted to the
Asian context.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
71
East: How To Catch An Asian Snake 打蛇打七寸
清·吴敬梓《儒林外史》第十四回
Snake Head:
Propping &
Tunnelling,
RPT, Assetshifting
Snake Body: Abnormal accruals (reversal) and
cashflow analysis in earnings management,
classification and timing of financial numbers
(“posturing”), remuneration analysis
Most research and books focus on the Snake Body – not adapted
to Asian Jungle. Easy to die from venomous bite of Asian Snake!
Snake Tail: board
of director/ ID/
committee/
auditor
Fraud detection
power (Stronger)
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
72
The Useless Tail…
Chen et al (2011), Are OECD-Prescribed “Good Corporate Governance Practices”
Really Good in an Emerging Economy? Asia Pac J Management 28: 115-138
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
73
Back to Audit Failure! The Case of Kanebo & ChuoAoyama;
Contagion Effect of Accounting Fraud?
Numata and Takeda (2010), Stock Market Reaction s to Audit Failure in Japan: The Case of Kanebo and ChuoAoyama, Int J of Acc 45: 179-199
Skinner and Srinivasan (2012), Audit Quality and Auditor Reputation: Evidence from Japan, Accounting Review 87(5): 1737-65
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
74
The Role of the Investment Banker:
Peregrine’s $215M Accounting Fraud
“It’s crazy that he duped us with a P.O. Box and Photoshop.”
- Commissioner Bart Chilton, Commodity Futures Trading Commission
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
75
Asia’s Peregrine – Francis Leung, Father of the Red Chips.
$260m Still Missing - Why No Accounting Fraud? Discuss
“The collapse of Peregrine Investments Holdings in January
1998 is perhaps the single most memorable result of Asia's
financial crisis. When it filed for liquidation, the Hang Seng
Index fell almost 9%.
Peregrine's demise is also notable for the absence of any fraud
or malfeasance unlike most of Asia's corporate failures. The
bank collapsed because management bet its balance sheet on
increasingly leveraged and risky investments within its
fledgling fixed income business, culminating in a US$260
million bridge loan to an Indonesian taxi company with the
improbable, yet perversely ironic name of Steady Safe… at the
time that the loan to Steady Safe was made, that asset
represented about one third of the bank's entire capital base
and some senior management claimed they were unaware of
the advance. When the Indonesian Rupiah plummeted from
2,500 to the US dollar to more than 8,000, the game was up. A
last ditch attempt to save the firm through a recapitalization
failed when the supporting banks got cold feet as the Rupiah
continued its slide.”
- Leahy (2004), Asia's corporate horrors -- are lessons from the
crisis already forgotten? Asia Money
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
76
So, You Wanna Be a CFO in Asia?
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
77
The Power of Briloff and Media (Financial
Investigation) as Watchdog?
“Mr. Briloff practiced accounting and taught the
subject as a professor at Baruch College in
Manhattan. But it was the articles he wrote for
Barron’s that turned him into something of a
celebrity, revered by investors and vilified but also
respected by companies and their accounting
firms. He was legally blind and relied on graduate
students and his daughter Leonore to read
financial statements to him.”
“Despite his blindness, the ole master clearly sees
the key issues in any accounting situation. Asked to
explain his working process, Briloff answers: "It
begins with some sensitivity as to where the
problem might be. Somehow, there's a serendipity
where I know that there's an issue out there."
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
78
The Power of Briloff and Media (Financial
Investigation) as Watchdog? Write. “Simply”.
Foster (1979), Briloff and the Capital Market, Journal of Accounting Research 17(1): 262-274
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
79
Summary and Key Takeaways
Lemons! Informational asymmetry, Adverse selection, Moral hazard
Agency Theory, Principal-Agent (PA) Type I Vs Principal-Principal-Principal (PP) Type II
The Jungle Players: Who Knows What When
- Controlling shareholders, management, abused minority shareholders, financial intermediaries (investment banker, sell-side
analyst), internal monitors (internal auditors, independent directors, audit committee), external monitors (institutional investor,
corporate banker), public role (auditor, regulator, media), private role (credit rating agency, market research firm), short-seller,
syndicates and “insiders”
Acquire an inter-disciplinary accounting perspective
The Framework and Compass to survive in and navigate the Asian Capital Jungle
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
80
www.youtube.com/watch?v=Xby6N8jV3pc
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
81
Remember, the Devil Will Always Be Faster, More Technically
Competent… So How to Beat the Devil?...
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
82
“The illiterate of the 21st century will not be those who cannot read
and write, but those who cannot learn, unlearn and relearn.”
– Alvin Toffler, author of Future Shock, The Third Wave, Powershift etc
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
83
3 Idiots: Pursue Excellence, and Success Will Follow
https://www.youtube.com/watch?v=alutFnRefos
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
84
Read
Warren Buffett says, “I just sit in my office and read all day.”
Munger: “In my whole life, I have known no wise people
who didn't read all the time -- none, zero. You'd be amazed
at how much Warren (Buffett) reads -- at how much I read.
My children laugh at me. They think I'm a book with a
couple of legs sticking out”.
Munger: “The best thing a human being can do is to help another human being know more.”
Munger: “Develop into a lifelong self-learner through voracious reading;
cultivate curiosity and strive to become a little wiser every day.”
Charlie, as a very young lawyer, was probably getting $20 an hour. He
thought to himself, ‘Who’s my most valuable client?’ And he decided it was
himself. So he decided to sell himself an hour each day. He did it early in the
morning, working on these construction projects and real estate deals.
Everybody should do this, be the client, and then work for other people, too,
and sell yourself an hour a day.
“Neither Warren nor I is smart enough to make the decisions with no time to
think,” Munger once told a reporter. “We make actual decisions very rapidly,
but that’s because we’ve spent so much time preparing ourselves by quietly
sitting and reading and thinking.”
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
85
Video Interview with Manual of Ideas
Beware of "Other Receivables" Accounting at Asian Companies,
with Singapore-Based Investor KB Kee
https://www.youtube.com/watch?v=WGSlDFTAflA
http://greatinvestors.tv/video/beware-of-other-receivables-accounting-at-asian-companies-wi.html
http://www.frequency.com/video/insights-into-accounting-pitfalls-at/85354333/-/5-1707
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
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Some Publications…
Research Paper
Why ‘Democracy’ and ‘Drifter’ Firms Can Have Abnormal Returns: The Joint Importance of Corporate Governance and Abnormal Accruals in
Separating Winners from Losers
- Published in the Special Issue of Istanbul Stock Exchange 25th Year Anniversary Best Paper Competition of the Boğaziçi Journal, Review of Social,
Economic and Administrative Studies, Vol. 25(1): 3-55.
- Presented in the 23rd Australasian Finance and Banking Conference in Sydney, 15-17 Dec 2010
Stock Return Synchronicity and Technical Trading Rules
- Presented in the 2010 Global Development Finance Conference in Cape Town, 24-26 Nov 2010.
SSRN (SMU SOA): http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=1174940
Printed Media
Education 2.0 In Indonesia: Inspiring Bamboo Innovators, Jakarta Post, May 11, 2013
The secret to business resiliency: Be like the bamboo, not the oak tree, TODAY, 8 April 2013
Creating ‘bamboo innovators’ in S’pore, Straits Times, 1 April 2013
Lion Infrastructure is the way to go with TAN Seng Hock, Business Times, 30 December 2013
Reforming Corporate Governance, Business Times, 25 November 2010
管理狮城的狮子企业家 with TAN Seng Hock, Lianhe Zaobao, 9 August 2010
Lion Infrastructure and Value Investing with TAN Seng Hock, Business Times, 10 June 2010
The Power of Vision” with TAN Seng Hock, Business Times, 15 May 2010
Online Publication
Featured:
Mental Models: Bamboo Innovator, April 4, 2013 (BeyondProxy)
The Bamboo Innovator Approach to Investing in Asia, April 4, 2013 (Youtube by BeyondProxy)
Six Common Accounting Pitfalls at Asian Companies, March 20, 2013 (BeyondProxy)
Insights into Accounting Pitfalls at Asian Companies, March 21, 2013 (Greatinvestors.TV and Frequency.com)
Beware of “Other Receivables” Accounting at Asian Companies, March 26, 2013 (Greatinvestors.TV)
Detecting Fraud by Scrutinizing the “How” Rather than the “What” of Management Disclosures, March 22, 2013 (BeyondProxy)
Authorship (Over 60 long-form research articles):
BeyondProxy: http://www.beyondproxy.com/author/koon-boon-kee/
Moat Report Asia: http://www.moatreport.com/updates/
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
87
Guest Speakers, Industry Experts, Thought Leaders
We might be inviting some guest speakers, industry experts and thought leaders
whom we respect and admire to share their knowledge and wisdom.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
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SMU: Journey to the “East”
– Self-Discovery & Teamwork
“Tripitaka”
 Philosopher,
Visionary, “TruthSeeker” (真善美)
“Monkey”
“Pigsy”
“Sandy”
 “Just Do It”,
Competitive &
Competent Do-er who
gets things done
 Fun To Be With, High
EQ, Jovial, Creative
 Dependable, Quiet,
Uncomplaining, Patient,
Relationship-Builder
“Journey to the West” is one of the most profound
books in philosophy and psychoanalysis ever!
- Carl Jung (1875 – 1961), founding Chairman of
International Psychoanalytical Association
“What would you save in a fire?”
- Former NUS vice-chancellor Professor Lim Pin
exclaimed: “My book ‘Journey to the West’!”
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
89
Appendix
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
90
Learning “Criteria” (Part 1)
Equanimity, Temperament
Encourage One Another (“结善缘”)
In the early nineteenth century, a young man in London aspired to be a writer.
神秀：身是菩提树，心为明镜台。时时勤拂拭，勿使惹尘埃。
But everything seemed to be against him.
He had never been able to attend school more than four years. His father had
been flung in jail because he could not pay his debts, and this young man
often knew the pangs of hunger.
Finally, he got a job pasting labels on bottles of blacking in a rat-infested
warehouse, and he slept at night in a dismal attic room with two other boys –
guttersnipes from the slums of London.
He had so little confidence in his ability to write that he sneaked out and
mailed his first manuscript in the dead of night so nobody would laugh at him.
惠能：菩提本无树，明镜亦非台。 本来无一物，何处惹尘埃。
Wisdom has never been a tree,
And the bright mirror has no stand.
There has never been anything,
So whereupon can the dust land?
… “Best” grades, but cannot make key decisions at critical
moments in life and business?
Story after story was refused.
Finally the great day came when one was accepted. True, he was not paid a
shilling for it, but one editor had encouraged and recognized him.
No “A” Grade? Failure? Perseverance…
He was so thrilled that he wandered aimlessly around the streets with tears
rolling down his cheeks.
The encouragement, the recognition that he received through getting one story
in print, changed his whole life, for if it had not been that encouragement, he
might have spent his entire life working in rat-infested factories.
You may have heard of that writer. His name was Charles Dickens.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
91
Learning “Criteria” (Part 2)
Moths & Struggles
A man found a cocoon of an emperor moth. He took it home so that he could watch
the moth come out of the cocoon. On the day a small opening appeared, he sat and
watched the moth for several hours as the moth struggled to force the body through
that little hole.
The moth seemed to be stuck and appeared to have stopped making progress. It
seemed as if it had gotten as far as it could and it could go no farther. The man, in his
kindness, decided to help the moth; so he took a pair of scissors and snipped off the
remaining bit of the cocoon. The moth then emerged easily. But its body was swollen
and small, its wings wrinkled and shrivelled.
The man continued to watch the moth because he expected that, at any moment, the
wings would enlarge and expand to and able to support the body, which would
contract in time. Neither happened! In fact, the little moth spent the rest of its life
crawling around with a small, swollen body and shrivelled wings. It never was able to
fly.
The man in his kindness and haste did not understand that the struggle required for
the moth to get through the tiny opening was necessary to force fluid from the body
of the moth into its wings so that it would be ready for flight upon achieving its
freedom from the cocoon. Freedom and flight would only come after the struggle. By
depriving the moth of a struggle, he deprived the moth of health.
Sometimes struggles are exactly what we need in our life. If we were to go through
our life without any obstacles, we would be crippled. We would not be as strong as
what we could have been. Give every opportunity a chance, leave no room for
regrets, and don't forget the power in the struggle.
KEE
KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
There Is A Reason For Everything…
Give everything you've got to what you are doing. Your
effort and dedication will uplift you and give you greater
daily satisfaction. By diligently performing your duty, life
will quickly reveal your next stage of progress. Create
movement in your life that will lead you to the next level.
Do not get discouraged. Know that everything you have
learnt is not wasted. There is a reason for everything,
even if it is not clear at that time
Never take anything, especially kindness, for granted –
Benjamin Disraeli
范仲淹《岳阳楼记》: 后其身而身先；外其身而身存
Do not aim at success – the more you aim at it and make
it a target, the more you are going to miss it. For success,
like happiness, cannot be pursued; it must ensue, and it
only does so as the unintended side-effect of one’s
dedication to a cause greater than oneself or as the byproduct of one’s surrender to a person other than
oneself. You have to let it happen by not caring about it.
Success will follow you precisely you had forgotten to
think of it.
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The Conditions to Learn X
Much Learning Occurred Outside the Classroom
“I never teach my pupils.
I only attempt to provide the
conditions in which they can learn.”
“I see in retrospect that our professors left
most of our education to us. They
expected us to teach ourselves and learn
from each other, and we did. They treated
us as adult partners in scholarly
endeavour, not as apprentices. I am afraid
our graduate programs today try too hard
to convey a definite and vast body of
material and to test how well students
master what we know.”
James Tobin, Nobel Laureate
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KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
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Pay Attention Vs Be Absorbed, The Quest for Truth
“If all you ask people to do is pay attention, they will almost inevitably rebel. Attention
is an imprisoning of the mind. If you don’t put attention to a higher purpose—one
associated with absorption—the mind will rebel and so will the heart. In our culture, I
believe we ask too many people to pay attention too much of the time—and give them
nothing back for it but sustenance. If you have to sit at a computer as a worker or a
student from one end of the day to the other, doing tasks you take to be boring, you
are likely to have a hard time paying attention. Your mind will wander; your fantasies
will roam. Man cannot live on the bread and water of attention alone. Sent to the
computer, the student must complete one boring task after the next, his mind locked
into a tiny rectangular space. His attention will in time become deficient. Unless, of
course, you juice him with drugs that lock him inside the mental prison from which he
longs to escape. Later, he will take a job that strongly resembles his schooling: all
attention, no absorption. His mind will wander. His boss and his teachers and maybe
even his spouse will tell you that he has a flaw. He has a problem. He has a deficit. Not
enough of us quest for the truth.”
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KB Kee
Koon Boon
ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
94
Rage to Mastery
"People who have the rage to master are completely obsessed beyond any
sense of balance, beyond any reason, with mastering their chosen craft.
For these people, hard work usually doesn’t seem like work. They are
motivated by the end goal, yes, but perhaps even more so by the process of
learning and the process of getting better.“
- Ellen Winner and Jennifer Drake
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ACCT004 Accounting Fraud in Asia
www.AsianExtractor.com
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The Spectacular Rise & Fall of Hu Xue Yan (胡雪岩)
55
Entrepreneurship 创业
40
27
Apprenticeship 就业 13
Hu Xue Yan (胡雪岩), Richest Businessman
In China’s History (“Red Capitalist”)
• Hu Xue Yan is a cow herder in the Qing dynasty who became his
own banking entrepreneur at age 27. He works very hard and he has
more than sufficient intelligence to earn the trust of his banking
boss who passed away, leaving Xue Yan his entire bank. Xue Yan has
the knowledge to scale up the small business to become, at age 55,
the richest man ever in China’s history.
• However, as the business grew immensely big, his intelligence and
knowledge, which all along helped him to grow the business, had
fallen short in coordinating the vast empire, which was one of the
factors that led to his demise at age 62
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败业 Death
General Zuo Zong Tang (左宗棠)
Xue Yan, for your own sake, go read more
books. Learning is to know how to be a
better person (读书是为了学会做人).
- General Zuo Zong Tang (左宗棠) to Hu Xue
Yan (胡雪岩)
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The Power and Practicality of Ideas
“The ideas of … philosophers, both when they are right and
when they are wrong, are more powerful than is commonly
understood. Indeed, the world is ruled by little else.
Practical men, who believe themselves quite exempt from
any intellectual influences, are usually the slaves of some
defunct economist. Madmen in authority, who hear voices
in the air, are distilling their frenzy from some academic
scribbler of a few years back.”
Keynes (1936), The General Theory of Employment,
Interest and Money
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