{ "docId": "019dd923-622c-750b-8b96-aa4b5c012f2a", "docSlug": "aa7e6c3950ac", "documentTitle": "TAL Education Group (TAL)", "authorId": "51_Muddy_Waters", "authorName": "Carson C. Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2018-06-13 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 22, "pageCount": 71, "prevPage": 21, "nextPage": 23, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "overcrowded", "nDataPoints": 2, "notes": "The slide uses a forensic accounting argument, citing SAIC filings and historical patterns of Chinese corporate fraud to build a case for financial manipulation.", "elementsJson": [ "headline_text", "paragraph", "footnote" ], "metadataConfidence": 0.95, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-aa4b5c012f2a/22", "deckHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a#slide-22", "components": [ { "bbox": null, "kind": "callout", "text": "We believe that most – to all – of that deferred revenue fell to the pretax income line. We also believe that most – to all – it – is fraudulent.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-25b2-736e-8e67-3742dd1408ca", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "metric", "text": "deferred revenue: $24.8 million", "attrs": null, "subkind": "primary", "toolName": "Quantification", "toolSlug": "quantification", "confidence": null, "componentId": "019dd953-25b2-736e-8e67-3e147189ce5a", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.1, "w": 0.8, "x": 0.1, "y": 0.3 }, "kind": "paragraph", "text": "Deferred revenue is a liability that results when a student prepays a fee, and remains on the balance sheet until the service has been delivered, which, in the case of Shunshun / DFRL, is placement at an overseas school and receipt of visa. When the service is delivered, the deferred revenue is recognized as revenue on the income statement.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "1293e928-9677-4b2c-93f8-875513d1d276", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.8, "x": 0.1, "y": 0.4 }, "kind": "paragraph", "text": "There are generally costs to deliver the service that are matched to the deferred revenue as it is recognized. By consolidating Shunshun in July, TAL likely maximized the (real) deferred revenue and profit because the students admitted to study overseas should have been about to receive their visas, allowing TAL to recognize the deferred revenue. (Also, TAL's costs were largely already incurred). Regardless, we assume that fraudulent deferred revenue would have no matching costs – fraudulently creating marginally profitable revenue would not seem to be worth the risk of exposure.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "3fa24b86-3742-48ff-a085-a1bd8268c5e2", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.8, "x": 0.1, "y": 0.55 }, "kind": "paragraph", "text": "At least $19.7 million of Shunshun / DFRL's $24.5 million deferred revenue balance appears purely fraudulent. PRC law requires that each corporate entity file financial statements with SAIC (the State Administration of Industry and Commerce) each year along with copious amounts of other data provided as part of the annual inspection. SAIC financials in our experience are often prepared by a relatively low-level accounting or finance department functionary who is essentially copying the financials provided to the tax bureau. Therefore, unless there is intervention by someone at the top of a company, we believe SAIC financials are usually going to present a pretty clear picture of the company's financials.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "6a54f362-dc8a-48da-8faa-3ee9345b63fd", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.8, "x": 0.1, "y": 0.7 }, "kind": "paragraph", "text": "In the early days of exposing China frauds (2010-2011), firms such as MW often caught companies with their pants down by finding SAIC financials that completely contradicted their SEC filings. In early 2011, the frauds became attuned to this vulnerability, and almost certainly at the behest of top management, began filing fraudulent SAIC financials on a go forward basis as well as trying to amend their historical financials. There is no penalty in China for filing fraudulent financials with SAIC. (Tax fraud on the other hand is a serious crime.) It is therefore now rare to find a China fraud that is too lazy or stupid to file fraudulent financials with SAIC.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "6fff9343-49ca-4d4a-a0ec-91f43388d525", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.8, "x": 0.1, "y": 0.85 }, "kind": "paragraph", "text": "As a result, we look for indicia that the SAIC accounts are fraudulent – often these take the form of internal inconsistencies (e.g., balance sheet to income statement), inconsistencies with other group entities' financials, or significant amendments. There are two indicia of fraud in Shunshun", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "9b758bf0-e3ed-4285-b62c-64a29c6df966", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.8, "x": 0.1, "y": 0.15 }, "kind": "paragraph", "text": "When TAL acquired enough Shunshun / DFRL to begin consolidating the business, TAL reported Shunshun / DFRL purportedly had a deferred revenue balance of $24.8 million. The timing of TAL's consolidating investment suggests that maximizing deferred revenue was an important goal of the re-acquisition. We believe that most – to all – of that deferred revenue fell to the pretax income line. We also believe that most – to all of it – is fraudulent.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "e7a00c8c-7f46-4ec0-995e-956d771ee4a4", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "Actually, the revenue recognition of the Shunshun business is based on they need to get an offer and they need to get a visa. So I think in general, most of them will come to recognize maybe in Q3 or Q4 next fiscal quarter. — TAL FY17 Q1, FY17 Q3 Earnings Calls", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd953-25b2-736e-8e67-39008d0af0bf", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.8, "x": 0.1, "y": 0.9 }, "kind": "source-note", "text": "61 TAL FY2017 20-F, p. F-48\n62 TAL FY17 Q1, FY17 Q3 Earnings Calls, for example: \"Actually, the revenue recognition of the Shunshun business is based on they need to get an offer and they need to get a visa. So I think in general, most of them will come to recognize maybe in Q3 or Q4 next fiscal quarter.\"", "attrs": { "numbered": true }, "subkind": null, "toolName": null, "toolSlug": null, "confidence": null, "componentId": "00d532fb-2489-4606-9d54-bc0ff3caa2ab", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.8, "x": 0.1, "y": 0.09 }, "kind": "title", "text": "DFRL's Financials Appear to be Falsified, Giving TAL up to $24.8 Million of Fraudulent Profit in FY 2018", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "60ae5325-e6a8-447d-96ed-b1145b882684", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [ { "name": "fraud-exposure", "slug": null, "matchId": "ff081084-c3e7-4661-bc5f-7263b29a8044", "evidence": "The slide explicitly outlines a methodology for identifying financial fraud in Chinese companies by comparing SAIC filings to SEC filings.", "confidence": 0.9 } ], "arcBeats": [ { "to": 71, "from": 3, "beatId": "9de0976e-28e1-420f-a107-b337349d49c9", "arcName": "Problem-Agitate-Solution", "arcSlug": "problem-agitate-solution", "beatName": "Expose Contradiction", "beatSlug": null, "evidence": "The document is primarily composed of slides that expose contradictions in TAL Education's financial reports", "position": 0, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null }, { "to": 28, "from": 5, "beatId": "11c13b7b-b36c-475f-9c6c-e855711d459e", "arcName": "Problem-Agitate-Solution", "arcSlug": "problem-agitate-solution", "beatName": "Preempt Rebuttal", "beatSlug": null, "evidence": "The document anticipates potential rebuttals to its claims", "position": 1, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null } ], "loops": [ { "to": 71, "from": 2, "name": "Cost Of Inaction", "slug": "27-cost-of-inaction", "bestFor": "Urgent budget requests, compliance, risk mitigation", "matchId": "173d833e-f506-46f1-a81b-f0c40e490cd2", "evidence": "The document implies that investors who fail to address these discrepancies may suffer significant financial losses", "position": 2, "objective": "What is the cost of not addressing TAL Education's financial discrepancies?", "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 }