{
  "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": 27,
  "pageCount": 71,
  "prevPage": 26,
  "nextPage": 28,
  "slideType": "expose_contradiction",
  "function": "expose_contradiction",
  "density": "overcrowded",
  "nDataPoints": 4,
  "notes": "Includes specific references to footnotes 67 and 68.",
  "elementsJson": [
    "paragraph",
    "callout_box",
    "footnote"
  ],
  "metadataConfidence": 1,
  "imagePath": null,
  "slideHref": "/slides/019dd923-622c-750b-8b96-aa4b5c012f2a/27",
  "deckHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a",
  "deckJsonHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a.json",
  "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-aa4b5c012f2a#slide-27",
  "components": [
    {
      "bbox": {
        "h": 0.02,
        "w": 0.15,
        "x": 0.13,
        "y": 0.21
      },
      "kind": "callout",
      "text": "Fraud Indicator #2",
      "attrs": null,
      "subkind": "primary",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "f9e5099e-7c54-4fa6-97ba-cc6dae2b203b",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": null,
      "kind": "callout",
      "text": "The SAIC financial changes show a sloppy book cooking mistake – messing up the purported amount of cash in the bank.",
      "attrs": null,
      "subkind": null,
      "toolName": "Visual emphasis",
      "toolSlug": "visual-emphasis",
      "confidence": null,
      "componentId": "019dd953-25b2-736e-8e66-eb7a70690319",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.03,
        "w": 0.35,
        "x": 0.13,
        "y": 0.61
      },
      "kind": "framework",
      "text": "Book Cooking 101: Count Your Cash",
      "attrs": null,
      "subkind": "instance",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "e39d20be-714b-41b1-9d66-fb576083ba52",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": null,
      "kind": "metric",
      "text": "deferred revenue: Rmb 199.6 million",
      "attrs": null,
      "subkind": "primary",
      "toolName": "Quantification",
      "toolSlug": "quantification",
      "confidence": null,
      "componentId": "019dd953-25b2-736e-8e66-f1128ab165ed",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.04,
        "w": 0.75,
        "x": 0.13,
        "y": 0.13
      },
      "kind": "paragraph",
      "text": "Was Deloitte aware of the May 30, 2016 changes to DFRL's SAIC financials that added $19.7 million in deferred revenue?",
      "attrs": null,
      "subkind": "paragraph",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "7d15b98b-8654-4e88-a568-fecce2e866b1",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.35,
        "w": 0.75,
        "x": 0.13,
        "y": 0.24
      },
      "kind": "paragraph",
      "text": "Shunshun and DFRL's SAIC financials show a CY2016 deferred revenue to CY2017 recognized revenue conversion ratio that makes the changes to deferred revenue seem implausible. We expected to see a very high percentage of year-end deferred revenues be recognized the following year. CFO Rong Luo explained on multiple occasions that a unique aspect of Shunshun's model is that revenue recognition can take up a full year, or longer. Further, our interviews with two former Shunshun / DFRL employees indicated that substantially all consulting customers earn placements (and therefore Shunshun / DFRL is recognizing revenue). If we look at DFRL on a standalone basis, we see that DFRL's CY2017 revenue totaled only Rmb 53.4 million. That is only 26.8% of the post-change deferred revenue of the Rmb 199.6 million as at the year-end of CY2016, which is an implausibly low conversion percentage. The pre-change conversion rate would have been 72.2% of the Rmb 68.9 million as at the year-end of CY2016, which is only a little lower than we would have expected. This comparison solidifies our opinion that the bulk of the reported deferred revenue TAL acquired is fraudulent. The most reasonable explanation is a simple top-down manipulation that required corresponding changes at a lower-level subsidiary.",
      "attrs": null,
      "subkind": "paragraph",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "c8e2ffa2-6dad-4921-acaf-c2209afe2243",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.08,
        "w": 0.75,
        "x": 0.13,
        "y": 0.65
      },
      "kind": "paragraph",
      "text": "The SAIC financial changes show a sloppy book cooking mistake – messing up the purported amount of cash in the bank. As shown below, the cash balance after the changes exceeds the pre-change total assets! Cash balances require little skill to check, therefore the odds that someone made such a mistake in preparing year-end financials are low.",
      "attrs": null,
      "subkind": "paragraph",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "e8a37c56-a1e8-4120-ab8c-588a2402a445",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": null,
      "kind": "quote",
      "text": "CFO Rong Luo explained on multiple occasions that a unique aspect of Shunshun’s model is that revenue recognition can take up a full year, or longer. — TAL FY17 Q1 earnings call",
      "attrs": null,
      "subkind": null,
      "toolName": "Authority citation",
      "toolSlug": "authority-citation",
      "confidence": null,
      "componentId": "019dd953-25b2-736e-8e66-ef95eec6feb7",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.06,
        "w": 0.75,
        "x": 0.13,
        "y": 0.87
      },
      "kind": "source-note",
      "text": "67 The CY2015-CY2017 SAIC financials for Shunshun and DFRL are presented in the section below.\n68 TAL FY17 Q1 earnings call. As described by CFO Rong Luo, the process to complete the application, obtain an acceptance into the overseas school, and obtain the visa is long and therefore the revenue recognition is often delayed 10 to 12 months.",
      "attrs": {
        "numbered": true
      },
      "subkind": null,
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "a7035f0d-5714-4a30-9c90-1a6d37d10e3d",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.05,
        "w": 0.45,
        "x": 0.27,
        "y": 0.74
      },
      "kind": "table",
      "text": "Total Assets – Before Changes: Rmb 15.1 million\nCash Balance – After Changes: Rmb 15.3 million",
      "attrs": null,
      "subkind": "data",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "cb5cf8fe-29ce-4811-8676-9d583d1b4a0b",
      "frameworkName": null,
      "frameworkSlug": null
    },
    {
      "bbox": {
        "h": 0.02,
        "w": 0.15,
        "x": 0.13,
        "y": 0.1
      },
      "kind": "title",
      "text": "Audit Question",
      "attrs": null,
      "subkind": "headline",
      "toolName": null,
      "toolSlug": null,
      "confidence": null,
      "componentId": "818eca5e-4b83-4952-8adc-683b08906171",
      "frameworkName": null,
      "frameworkSlug": null
    }
  ],
  "metrics": [],
  "tools": [],
  "frameworks": [
    {
      "name": "fraud-exposure",
      "slug": null,
      "matchId": "4e81effa-1ea8-4a18-9ebe-97d3ca50b213",
      "evidence": "The slide explicitly identifies 'Fraud Indicator #2' and 'Book Cooking 101' to expose financial manipulation.",
      "confidence": 0.95
    }
  ],
  "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
    },
    {
      "to": 71,
      "from": 24,
      "beatId": "f1a1059e-e779-4948-a18b-bd7e979146da",
      "arcName": "Problem-Agitate-Solution",
      "arcSlug": "problem-agitate-solution",
      "beatName": "Appendix Data",
      "beatSlug": null,
      "evidence": "The document includes extensive data and financial reports to support its claims",
      "position": 2,
      "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
}