{ "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": 20, "pageCount": 97, "prevPage": 19, "nextPage": 21, "slideType": "villain_critique", "function": "name_villain", "density": "overcrowded", "nDataPoints": 0, "notes": "The slide uses specific case studies (CCME, DGWIY) to illustrate the ease of defrauding auditors in the Chinese market.", "elementsJson": [ "headline_text", "paragraph", "bullet_list", "quote_block", "footnote" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-0238cb402647/20", "deckHref": "/decks/019dd923-622c-750b-8b96-0238cb402647", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-0238cb402647.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-0238cb402647#slide-20", "components": [ { "bbox": null, "kind": "callout", "text": "There is an argument that companies in China are un-auditable because it is so easy to defraud the auditors.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd952-e6ec-7186-b7c8-240e0bbd3048", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.8, "x": 0.1, "y": 0.16 }, "kind": "list", "text": "It is currently adverse to the SEC in litigations; There are likely a number of problem audit clients at other Big Four firms to be unearthed.", "attrs": null, "subkind": "bullet", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "3b9bafa4-d9e5-4c98-b1e7-58f7637a3240", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.1, "w": 0.8, "x": 0.1, "y": 0.35 }, "kind": "paragraph", "text": "The crux of the anti-fraud portion of a typical audit is the cash balance confirmation process. In China, auditors will often attempt to verify the balances with individual employees of banks. However, China’s banking system makes it shockingly easy for companies to defraud auditors regarding cash balances.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "0a878315-33c9-4bd2-8f73-b1765db15f48", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.8, "x": 0.1, "y": 0.26 }, "kind": "paragraph", "text": "There is an argument that companies in China are un-auditable because it is so easy to defraud the auditors. Investors typically misunderstand auditors' role – auditors are generally not attempting to ensure that financial statements are free of fraud.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "4ee43408-a3ea-4877-af9f-3a1e593e38c3", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.8, "x": 0.1, "y": 0.63 }, "kind": "paragraph", "text": "The letter also points to another large problem with China cash balance confirmations: it is relatively easy to rent balances for cash confirmation purposes. The ease with which companies can generate fake bank balances is possibly best illustrated by Duoyuan Global Water.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "8fd4f4ae-2422-40c5-8f96-f8cb1c21cf4c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.8, "x": 0.1, "y": 0.11 }, "kind": "paragraph", "text": "EDU's auditor since it went public is the troubled Deloitte Touche Tohmatsu Shanghai (“Deloitte”). Deloitte has had a number of high profile audit failures in recent years.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "a3430a4d-ba1a-4495-a172-a89b138304d3", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.06, "w": 0.7, "x": 0.15, "y": 0.77 }, "kind": "quote", "text": "…Once the Audit Committee commenced its work, progress was hampered because among other things, management: failed to meet requested deadlines to provide all the requested documents to the review team;", "attrs": null, "subkind": "pull-quote", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b1a1e309-826b-452a-91fa-125c5f496c82", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.7, "x": 0.15, "y": 0.51 }, "kind": "quote", "text": "Prior to its resignation, DTT raised the following issues... issues related to the authenticity of bank statements; a loss of confidence in bank confirmation procedures...", "attrs": null, "subkind": "pull-quote", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "e1b17cc5-825b-4f75-abbf-5261c0c118bd", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "Prior to its resignation, DTT raised the following issues (some of which may be considered to be disagreements) encountered during the audit, including: issues related to the authenticity of bank statements; a loss of confidence in bank confirmation procedures carried out under circumstances which DTT believed to be suspicious;...concerns over possible undisclosed bank accounts and bank loans;... — Deloitte (regarding China MediaExpress Holdings Inc.)", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd952-e6ec-7186-b7c8-2862ae531709", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.8, "x": 0.1, "y": 0.88 }, "kind": "source-note", "text": "28 For a good discussion of traditional ways of exploiting audit confirmation weaknesses... 29 China MediaExpress Form 8-K filed March 29, 2011.", "attrs": null, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "5575d039-4062-4c1b-af5f-a51ec3774fd9", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.03, "w": 0.5, "x": 0.25, "y": 0.07 }, "kind": "title", "text": "EDU's Audit: You Don't Get What You Don't Pay For.", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "8f7b08d4-973e-4c2d-90c1-2a7650283614", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [], "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": 30, "from": 20, "name": "Cost Of Inaction", "slug": "27-cost-of-inaction", "bestFor": "Urgent budget requests, compliance, risk mitigation", "matchId": "c2df6111-657b-4623-b7c6-41376768f274", "evidence": "The report implies that not acting on the alleged fraud could have serious consequences", "position": 1, "objective": "To highlight the consequences of not acting on the alleged fraud", "structure": "The Status Quo -> The Hidden Costs Accumulating -> The Future State of Inaction -> The Tipping Point", "confidence": 0.6, "description": "Quantify what happens if the audience does nothing" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }