Forensics and the art of triangulation

Sharing my analysis of Geodesic Ltd done in late 2012

Some time back I analyzed a listed firm called Geodesic, which if I recall correctly, once touched a valuation of $ 750 million. In mid 2012 I thought the shares seemed undervalued and I tried to understand its accounts.

I prepared a privately shared report concluding that about Rs 300 crores was irreconcilable from accounts and spoke to a few saying that it is likely to bounce its FCCB redemptions due in Jan 2013.

I thought I can share this report and hope it adds to the knowledge supplied above. The report was published on Nov 2012 when the price was around 60 and a follow-up on April 2013.

Please note that these reports are meant only for academic purposes.

Warm regards,
April 2013 Update to findings.pdf (18.8 KB) 26Nov2012 report1.pdf (32.7 KB) Invstmnts in subs.pdf (13.6 KB) Cash balance recon.pdf (16.5 KB)


Can some one find the latest annual reports of Amtek group companies and list which banks have exposures to them. Group debt is 23000 cr so I guess there will be many bankers at this funeral.

The AR are not there on BSE / company website. In fact, company website doesnt even have q42015 results…vigilant people got 3 months advance notice that shit is going to hit the ceiling !!


Hi Diffsoft,

How to identify vendor over invoicing ?. please educate me. wish to learn.

The same i heard in Ester ind, they are doing OI.


I am sharing a lazy check list that i gathered from various source like dr vijay malik, jana, bakshi sir, investment check list book, pat dorsey book (5 rules), creative cash flow book, quality of earnings book, from some of seniors prof. neeraj ji(as we know :-)), brijesh(top forensic guy), value-pick(good business analysis) , capital market website etc.

varadharaj effort and others drag me to pull this check list to valupickr.

hope you guys may find use full. no credit to me. credit to all those mentioned investors.

have been @ valupickr since from 2010 as they had good info and screener.

CheckList.xlsx (131.6 KB)



Hi Mahesh,

There is no sure shot way of finding out vendor overinvoicing I know of. There maybe some rules of thumb. Earlier, until 2011, you would get quantity of raw materials used and you can find per unit costs to see if it is in line with market. But then what is to stop them from taking it out via rent and ‘other misc. expenses’. So you may want to see longitudinally if there is any line item out of line over time, in relation to sales.

Ultimately these show up in Return on Equity computed as Net Profits divided by Opening Net Worth for the year, and see it over time, esp in businesses that make and sell products, for over say two business cycles.

Warm regards,



There is no one single silver bullet answer. The best way to find out is to compare it against peers and check for oneself as to how reasonable the numbers are.

I am attaching a link to glaucus which has a short thesis on rolta :smile:

Some of the most common sensical things that one looks for are

  • materially large items in BS or PL that make a big impact. For eg., say cash in satyam’s case that was a big chunk of the overall BS or huge capital expenditure. triangulate this with things like “other income” or 'cash flows from operations".

  • in case of over invoicing, check the receivables as a % of revenues and see if they are increasing or decreasing and their impact on cash flow from operations.

  • check RM/labour cost as a % of sales for the company and other competitors in the industry. if significantly different, it’s something to dig into.

The most important thing is to induct - keep progressing from one point to another using common sense and inference. For eg., disproportionately high receivables - >lower operating cash flows - > higher WC - >check impact on actual cash taxes paid - > if low, investigate further and clarify.

others can add in as we go along.


Two broad concepts I wanted to share that I have found useful in thinking about these things:

Concept #1: Know the type of error you will be comfortable with.

Statisticians have a very useful concept of errors called Type 1 error and Type 2 error. It basically means you either err on the side of caution or on the side of aggression; a false negative or a false positive. Let us say you are not so sure about, after all analysis, whether management mis-appropriates funds that is generally expected to be minority shareholders’. You either drop the firm however cheap it may be or you go ahead with putting it in the consideration set. Now if it turns out that you dropped them and management was really “clean” then you have made a Type 1 error. If you give a green signal and you find they are mis-appropriating, then you are committing Type 2 error. Maybe you can ask yourself if you are OK with Type 1 error or Type 2 error. As for myself, in areas of integrity towards minority shareholders, I err on the side of extreme caution (or at least tell myself so :smile:) however cheap the stock maybe.

Concept #2: Promoters’ may be divided into 3 groups based on their “ethical nature”. - this concept is raw in my mind but I find it useful to apply.

I find there are really 3 groups of people.

Group #1 are those who will wilfully violate the law irrespective of enforcement. They will not let law come in the way of their desires or ambitions. If an employee comes and tells them that this will violate this rule, the promoter will say, where is your value-add for the salary you take?

Group #2 are those who will violate the law depending how strongly or lightly it is enforced. To give you an idea recall many years ago a lot of employees were sacked at Intel in Bangalore because they ‘fudged their LTC’. Now when I was an employee in a company considered highly ethical (about 22 years ago) I was just told to fill it up to get maximum tax benefit irrespective of whether I took a holiday or not. The general thinking was this is strictly incorrect, but who looks. But once enforcement increases or at least the threat of enforcement, compliance goes up. So the moment Related Party Transactions need to be disclosed, Group #2 promoter will call up his finance guy and ask him how to manage while complying.

Group #3 are those who do not need any law to make them ethical. They are by nature ethical and actively ‘seek to know their duties and obligations’. They certainly err on the side of caution while interpreting the law in spirit and comply irrespective of costs. The real good news is that many such people exist, irrespective of whether they are rich or poor. An extract from a letter by Abraham Lincoln to his son’s teacher captures this well: “…But teach him also that for every scoundrel there is a hero, that for every crooked politician, there is a dedicated leader.” The bad news is that they may be running really poor businesses!

In my own assessment or rather theory, bulk of Indian promoters are in Group #2, some are in Group #1 and some in Group #3. In my view Group #3 is slimmer than Group #1. And more often than not our first impression of these promoters of which group they fall in turns out to be true.

Warm regards,


There were rumours that Vasan Eye Care was a front, and so were rumours of another firm for which the Veritas analyst got arrested - Negative stock report lands analyst in jail

I once met the MD of a claimed 100 cr Hyderabad based software firm to sell my software product. He asked me to come over to his office. These were the days of STPI and 100% tax exemption on software exports. I went up a shady building in Ameerpet and lo and behold, I found a 5000 sq ft large room dimly lit, arranged like a classroom, with about 100 people. The MD’s room was the only cubicle; and even to my naive self something just did not add up. He told me he generates 100 crores with just that room. You either had to think he had some terrific business or that he was looking for a sucker.

Later a friend told me that many ‘software’ firms generate fake export invoices to bring back unaccounted money sent abroad, legitimately and free from tax :smiley: . These offices are just ‘show baazi’.

I also recall going to Satyam’s accounts department on business through someone close to Ramalinga Raju in early 2002. The department looked like a very small Govt office with files stacked up the ceiling. I was of course in awe of the firm and Ramalinga Raju and just thought this is how business is done :smile:

In any case I think the SEBI order on Satyam dated July 15 2014 is very useful for forensic buffs (Sebi orders are generally useful) to learn the inner workings. I am attaching the same here.

Satyam order by sebi.pdf (1.1 MB)


Delivery data as the source is what these guys attempt through interview questions to look at a giant like Alibaba. Interesting read…

Testing the hypothesis and drawing conclusions are however two different things. There can be no easy answers.

Here’s another alleged swindler - R Subramanian of Subhiksha fame - arrested in a different capacity.

His namesake - Sundaresha Subramanian has a nice report here - Viswapriya case. R Subramanian had luminaries on the Board - R Narayanan, former chairman of Life Insurance Corporation; Raghavan, Retd chairman, Indian Bank, Rajaratnam, Retd Commissioner, Appellate Tribunal, High Court of Madras.This was the case in Satyam (prior to fraud disclosure) as well - the Board among other great greats was one Mr Krishna Palepu - a Professor at Harvard.

Mr Palepu’s CV on his Harvard wall then read as follows:

Professor Palepu’s work focuses on how to make corporate boards more effective, and on improving corporate disclosure. Professor Palepu teaches these topics in several HBS executive educationprograms aimed at members of corporate boards: “Making Corporate Boards More Effective,” “Audit Committees in a New Era of Governance,” and “Compensation Committees: New Challenges, New Solutions.” He also co-led Harvard Business School’s Corporate Governance, Leadership, and Values initiative, launched in response to the recent wave of corporate scandals and governance failures.” (Italics mine)

I wrote an email to him but quite expectedly got no response! It was sheer irony of the highest order that a Professor of Corporate Governance be sitting on the Board of the largest fraud firm, and in the Audit Committee :smiley:

Warm regards,


This is what Charlie Munger had to say on the board of directors.

Finally the institution of the board of directors of the major American company. Well, the
top guy is sitting there, he’s an authority figure. He’s doing asinine things, you look
around the board, nobody else is objecting, social proof, it’s okay? Reciprocation
tendency, he’s raising the directors fees every year, he’s flying you around in the corporate
airplane to look at interesting plants, or whatever in hell they do, and you go and you really
get extreme dysfunction as a corrective decision-making body in the typical American
board of directors. They only act, again the power of incentives, they only act when it gets
so bad it starts making them look foolish, or threatening legal liability to them. That’s
Munger’s rule. I mean there are occasional things that don’t follow Munger’s rule, but by
and large the board of directors is a very ineffective corrector if the top guy is a little nuts,
which, of course, frequently happens.


Skeletons from Satyam cupboard can be disturbing. As you mentioned Prof Palepu on its board is one of the corporate irony.

  1. Incidentally, he was on board of another Indian company (Dr Reddy’s Lab) upto that time and quit after 2009. DRL got land in 2003 through a deal where they bought satyam institute of e business, subsidiary of sify, which in turn was subsidiary of satyam.
  2. Among the directors on board of satyam who approved Maytas deal were Krishna Palepu, professor at Harvard, it was reported by WSJ same time.
  3. SFIO charged & argued that Krishna Palepu should pay back professional charges of Rs 2.66 crore stating it was paid to him by satyam illegally.

Lesson is names on the board of directors do not give any additional comfort when the going gets tough.


It is commonly believed that the best forensic guys are the short sellers. You may know that Bill Ackman, the legendary hedge fund manager short sold Herbalife with a $ 1 billion position in 2012. It has not yet worked for him, even as he spends $ 100 million annually just to maintain his shorts.

Bill made a 2.5 hr, 524 slide presentation in 2012 and kept a dedicated website -

Fortune has a very instructive essay / article Bill’s attempted siege of Herbalife and Herbalife’s counter-attack. It is long but written in an engaging manner. It can be found here - BIll Ackman vs Herbalife. Unlike Bill’s earlier shorts, this one seems to be a longer battle; and with many fund managers taking a long position.


Have been on and off on value pickr. Find attached a report by ambit - which I think is quite good on forensic accounting.

I will also share a report by ACFE in the next post as the file size is too big to be posted in one post.


Hi @varadharajanr

The report does not seem to be available - can you point us to the link?

Separately, I just read about the Olympus Scandal ( Wikipedia on Olympus Scandal) along with the book by the CEO; who infact became a whistle blower - Exposure - the story behind Olympus.

In a nutshell a fraud was carried for 23 years to hide losses as the Japanese bubble burst. Initial losses were attempted to be recovered by speculative investments; and such investments were doubled downed when losses increased. The Japanese had a nice sounding word for it called the ‘tobashi’. However hiding ever increasing losses became more and more difficult as accounting rules changed. The fraud was perpetrated institutionally as the outgoing chiefs passed out the fraud baton to incoming ones.

Ultimately it became too difficult to hide and one incoming CEO, a gaijin (or foreigner in Japanese), a Brit, who was an Olympus lifer climbing the rungs from a salesperson blew it up.

The book talks more about the cultural turmoil, but an investigative report ( Official Investigative Report Summary ) lays out in some broad detail how the fraud was supposed to be hushed up in the books. At its core the idea was to smoothen losses - via amortising goodwill.

But as the amounts got larger, auditors balked, red flags were raised and the organized fraud was exposed and taken to completion by a dogged CEO.


Another interesting way to boost earnings by massaging accounts, courtesy Valeant.

Suppose you have Company A that has to incur heavy R&D expenses for drug discovery purposes. GAAP requires these to be expensed in earnings. But suppose the same company does not do any R&D and acquires another company that does exactly the R&D it wants and pays up for it by exactly the amount spent. In such a case the amount will be shown as an intangible assets and amortised over a long period of time which period would be far longer than the expense period. This is allowed as per GAAP.

The net effect is that you take a far lower amortisation every year and thus smoothen earnings.

This tactic was learnt in a fantastic article in WSJ link behind a pay wall - Valeant an accounting pioneer too.

It says " Valeant’s approach to research and development also leads to favorable accounting treatment.

When drug companies spend on research in-house, they record quarterly expenses that eat into profits. But research gained through acquisitions is treated as an intangible asset that can sit on companies’ balance sheets indefinitely at full value.

That means that by buying, rather than creating, most of its drugs, Valeant can avoid recording big quarterly R&D expenses, thus lifting its earnings."



Great insights @diffsoft. Is there any way to access this article without paying for subscription.


WSJ articles can be accessed through Google Search/News for free. Search by the headline of the article (“Valeant: An Accounting Pioneer, Too”) on google. Click on the WSJ link. As Google and WSJ have a tie-up, this allows you to read the entire article.


case of ess dee aluminium

Jury is still out on ess dee but let me try to put some thoughts together hope entire picture emerges with collaboration.

I have no position in ess dee and not looking at investment , but primary purpose is to learn from it.

  • start with amount of actual tax paid

poor charlie’s almanack page :365

  • provision of tax does not mean tax payment

ess dee Ar 2015 page 21

  • auditors remark

page 26

page 70

page 71

page 72

page 76

  • real tax paid come here cash flow statement (according to me if some one has better place to look please guide me)

hope to learn from situation . views welcome



you may want to dissect the detailed cash flow statement to see if they paid taxes - trouble is, a lot of indian companies start with PBT and not PAT plus actual taxes paid out in cash. A combination of

  1. IT raids plus auditor’s notes on tax liability issues
  2. high borrowings of Rs. 485 Cr. plus an EBITDA loss

can wreck the best of companies. one thumb rule I have learnt to live with is that if the EBITDA for a year is less than 20 % of the debt outstanding (assuming principal plus debt rrepayment) in most cases, it leads to severe stress - unless the debt terms are very lenient or if there is a moratorium.

I recently looked at such a stressed asset and passed it and the thesis was true - until the company decided to sell another part of the business off to reduce the debt. And it helped the company recover.