Case studies of companies which have been accused – but not necessarily ascertained guilty – of manipulating their financial statements provide timeless lessons to an investor.
Longtop Financial
Longtop provides a range of software solutions and services to financial institutions in China. On 26th April 2011, Citron Research released a report which alleged the following:
- Margins far in excess of competitors. Peers reported much lower gross margins of between 15%-50% and operating margins of 10%-25%. This was highly suspicious in cost-competitive China.
- Unconventional staffing model. Staffing model allowed the company to transfer the majority of its cost structure off balance sheet to another unconsolidated, affiliated company.
- Key management background misdeeds. Before founding Longtop, the Chairman and CEO were sued by their previous company for unfair business practices.
- Non-transparent management transactions. Longtop’s Chairman transferred 70% of stock holdings to employees and friends in the first four years of the company ...