{ "docId": "019dd923-622c-750b-8b96-0238cb402647", "docSlug": "0900eea60013", "documentTitle": "New Oriental Education & Technology Group (EDU)", "authorId": "51_Muddy_Waters", "authorName": "Carson Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2012-07-18 00:00:00", "orientation": "portrait", "aspectRatio": 0.7070758, "pageNumber": 14, "pageCount": 97, "prevPage": 13, "nextPage": 15, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 33, "notes": "The slide highlights a discrepancy between the reported 'Other Expenses' (which should be 25% for EIT) and the actual reported figures (less than 1%), implying the entity is falsely claiming tax-exempt status.", "elementsJson": [ "data_table", "paragraph", "footnote" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-0238cb402647/14", "deckHref": "/decks/019dd923-622c-750b-8b96-0238cb402647", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-0238cb402647.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-0238cb402647#slide-14", "components": [ { "bbox": null, "kind": "callout", "text": "A Slight but Telling Internal Inconsistency Supports the Conclusion that the BJ Operation's Financials are Fraudulent", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd952-e6ec-7186-b7c7-8c8e8b25209a", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "Other expenses: 0.48%", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd952-e6ec-7186-b7c7-90496736cd0d", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.82, "x": 0.09, "y": 0.75 }, "kind": "paragraph", "text": "We believe that the fraud in the BJ Operation's financial statements has contaminated EDU's U.S. GAAP accounts. BJ Operation's revenue numbers accord with EDU's U.S. filing disclosures. EDU's 20-F includes statements that indicate the BJ Operation has an EIT exemption. Finally, if EDU did not prepare these accounts for U.S. filings, then for whom did EDU prepare them?", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0563d740-4140-4178-b95d-43c4e8dc0084", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.12, "w": 0.82, "x": 0.09, "y": 0.56 }, "kind": "paragraph", "text": "There is an internal inconsistency in the CAB financials that supports the conclusion the BJ Operation filings are fraudulent by virtue of not having an EIT exemption, and thus should be paying EIT. On page five, there is a field asking whether the filer enjoys any tax preference. The BJ Operation (correctly) responded that there is no such preference (See the Appendix). The absence of a tax preference wholly contradicts the income statement, which further shows that BJ Operation paid no EIT.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "474c99a2-bf9a-4592-ad83-9e9618358bee", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.82, "x": 0.09, "y": 0.84 }, "kind": "paragraph", "text": "The BJ Operation's revenue in the CAB financials (approximately 30 – 35% of EDU's consolidated revenue) roughly accords with EDU's disclosures regarding the percentage of the revenue that EDU reports comes from Beijing. EDU's FY2011 20-F states that Beijing, Shanghai, Guangzhou, and Wuhan collectively accounted for approximately 50% of revenue.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "6e959b03-bd59-4748-bf2e-2a69d962c37b", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.82, "x": 0.09, "y": 0.4 }, "kind": "paragraph", "text": "The Other Expenses account should be at least 25% of income before Other Expenses. The statutory EIT rate applicable to BJ Operation is 25%. Because BJ Operation recorded less than 1% of income before Other Expenses in the Other Expenses account, it is clear that the income statement purports to be that of an entity with EIT exempt income.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "89a4c62b-468f-4413-906a-3fada6a277a6", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.2, "x": 0.09, "y": 0.91 }, "kind": "source-note", "text": "17 EDU FY 2011 20-F, p. 12.", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "17fd6991-d40f-4cee-b181-a3bdc1977123", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.25, "w": 0.52, "x": 0.24, "y": 0.15 }, "kind": "table", "text": "Income statement table showing Service Revenue, Other revenue, Total revenue, Cost of sales, G&A exp, Fund raising exp, Other expenses, % of Income before other exper, Total costs and expenses, Changes in net assets for 2009-2011.", "attrs": null, "subkind": "data", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "7e83def7-778a-4f59-8d18-ca2865550022", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.82, "x": 0.09, "y": 0.5 }, "kind": "title", "text": "A Slight but Telling Internal Inconsistency Supports the Conclusion that the BJ Operation's Financials are Fraudulent", "attrs": null, "subkind": "action-title", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a48523d0-3557-4a64-9386-ea805557b0f6", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.82, "x": 0.09, "y": 0.69 }, "kind": "title", "text": "It is Likely that EDU's Auditor, Deloitte, Relied on the BJ Operation's Financials in its Audit, and thus the Fraudulent Financials Have Contaminated US Filings", "attrs": null, "subkind": "action-title", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "deff0313-6fc8-4da6-95ac-fd76fb568f20", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.52, "x": 0.24, "y": 0.08 }, "kind": "title", "text": "EDU Beijing Haidian School Income Statement", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "d04af3cc-f086-4b68-bb62-4960d36b4616", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [ { "name": "fraud-exposure", "slug": null, "matchId": "a5430289-602c-4caf-a088-06d86dd69ed9", "evidence": "The slide explicitly argues that internal inconsistencies in financial statements are evidence of fraud.", "confidence": 0.9 } ], "arcBeats": [ { "to": 20, "from": 5, "beatId": "e3846e8e-4c09-4695-9dc4-32ebd1a71686", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "The Alleged Fraud", "beatSlug": "overcoming-monster-the-monster", "evidence": "The report presents evidence of alleged financial misreporting and fraud", "position": 1, "confidence": 0.8, "parentBeatName": "Hook", "parentBeatSlug": "hook" } ], "loops": [ { "to": 15, "from": 5, "name": "Pattern Hunter", "slug": "02-pattern-hunter", "bestFor": "Time-pressed audiences, building consensus, when data is strong", "matchId": "f9d9d6a5-d4d5-419d-a67e-2765be94ba81", "evidence": "The report searches for and finds patterns of alleged financial misreporting", "position": 0, "objective": "To identify patterns of financial misreporting", "structure": "Evidence A -> Evidence B -> Evidence C -> Pattern/Conclusion", "confidence": 0.7, "description": "Group multiple pieces of evidence that together point to a pattern or conclusion" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }