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The red flags of financial Financial

statement
statement fraud: a case study fraud
Elda du Toit
Department of Financial Management, University of Pretoria, Pretoria, South Africa
311

Abstract
Purpose – According to the Association of Certified Fraud Examiners, financial statement fraud represents
the smallest amount of fraud cases but results in the greatest monetary loss. The researcher previously
investigated the characteristics of financial statement fraud and determined the presence of 16 fraud
indicators. The purpose of this study is to establish whether investors and other stakeholders can detect and
identify financial statement fraud using these characteristics in an analysis of a company’s annual report.
Design/methodology/approach – This study analyses a financial statement fraud case, using the same
techniques that were previously applied, including horizontal, vertical and ratio analysis. These are preferred
because stakeholders have relatively easy access to them.
Findings – The findings show several fraud characteristics, with a few additional ones not previously
found prevalent. Financial statement fraud thus tends to differ between cases. It is also easier to detect and
identify fraud indicators ex post facto.
Originality/value – This study is a practical case showing that financial statement fraud can be detected
and identified in the financial statements of companies that commit fraud.
Keywords Financial statement fraud, Management fraud, Red flags, Fraud indicators,
Fraud characteristics
Paper type Case study

1. Introduction
The losses from financial statement fraud do not only lie with the company but also with
investors who lose share value and employees who lose jobs. A recent financial statement
fraud case happened in a company with a primary listing on the Frankfurt Stock Exchange,
Germany, and a secondary listing on the Johannesburg Stock Exchange (JSE), South Africa.
Apart from regular investors, third-party investors in the form of Government Pension Fund
contributors collectively lost millions. However, there is speculation that the irregularities in
the company’s financial statements were easy to recognise and that those losses could have
been prevented if non-financial personnel and laypeople investors understood the basics of
financial statements [1].
Even though financial statement fraud represented the smallest amount of fraud cases
(10% from a sample of 2,690 occupational fraud cases investigated worldwide between
January 2016 and October 2017), it resulted in the greatest aggregate loss of US$800,000 per
case, compared to US&250,000 and US$114,000 per case for corruption and asset
misappropriation, respectively (ACFE, 2018). This 10% represents only the cases where

© Elda du Toit. Published by Emerald Publishing Limited. This article is published under the
Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and Journal of Financial Crime
Vol. 31 No. 2, 2024
create derivative works of this article (for both commercial and non-commercial purposes), subject to pp. 311-321
full attribution to the original publication and authors. The full terms of this licence may be seen at Emerald Publishing Limited
1359-0790
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JFC financial statement fraud has been successfully detected and identified, which means many
31,2 more went undetected (Dechow et al., 2011).
The downfall of the case study company (hereafter referred to as Company X) wiped out
the market value equivalent to 8% of South Africa’s gross domestic product. However,
proper analysis of a company’s financial statements and market data could potentially have
diminished this effect. Preventing the damage caused by financial statement fraud can lead
312 to more efficient capital markets, ensure better returns for investors, reduce litigation costs
for auditors and keep intact the reputation of analysts (Dechow et al., 2011).
Previous research has investigated the characteristics of financial statement fraud. The
allegations of financial statement fraud made against Company X present an opportunity to
test the characteristics of financial statement fraud from previous findings. The aim of this
paper is thus to apply the financial statement fraud characteristics, as previously identified,
on the annual reports of Company X to establish whether they are true indicators of
financial statement fraud.
Financial statement fraud allegations and the effect on the market value of a firm can
have dire consequences for employees, investors (individual and institutional), and analysts.
This study sets out to establish whether stakeholders, through a relatively easy analysis
and evaluation of a few years’ market and financial data from the publicly available
financial statements of Company X, would have been able to detect fraudulent activities and
thus could have saved their investments. Positive findings in this regard have the potential
not only to benefit investors but hopefully also as a deterrent that will prevent companies
from engaging in fraudulent actions. Even though there are more sophisticated techniques
available to analyse financial statements for financial statement fraud, this paper aims to
investigate specifically those techniques that are available to financial statement readers
who do not have access to complex and expensive software or techniques and can only
access publicly available data.

2. Literature review
Financial statement fraud is generally committed by executive decision-makers on behalf of
the company and involves the falsification of the company’s financial statements (Wells,
1997) to mislead users (Rezaee, 2005). The most common techniques to commit this fraud
include overstatement of revenues, understatement of expenses and inflation of asset values.
Many studies have been conducted to investigate the detection and identification of
financial statement fraud. See, for example, Bell and Carcello (2000), Beneish (1999);
Herawati (2015), Kamal et al. (2016); Kaminski et al. (2004); Kanapickiene_ and Grundiene_
(2015); Lee et al. (1999); and Malgwi and Morgan (2017), to name but a few. However, many
of the studies investigate fraud indicators or use methods outside the realm of what the
average investor or other stakeholders can observe or measure, such as the more
complicated Beneish M-score model or data mining techniques (Beneish, 1999; Beneish et al.,
2013; Herawati, 2015; Kamal et al., 2016; Malgwi and Morgan, 2017; Ravisankar et al., 2011).
Investors appear to be interested in red flags associated with financial statement fraud but
tend to focus on those easier to observe, such as stock exchange investigations, pending
legal cases, violations of debt agreements and high management turnover (Brazel et al.,
2015).

2.1 Fraud characteristics

In previous studies, the author identified 18 characteristics of financial statement fraud from
the literature, which were further investigated and refined, using five South African case
study companies with allegations of financial statement fraud against them. The
quantitative analyses used horizontal and vertical financial statement analyses, Financial
supplemented with ratio analyses and structural break analyses of the companies’ share statement
price over each company’s “fraud period”. A qualitative content analysis was performed of
the narrative reports of the companies, as well as an event study of news reports about the
fraud
companies. These analyses confirmed 9 of the original 18 characteristics, together with a
further 7 that were significant in the case study companies specifically.
Financial statement fraud instances in South Africa appear to share several traits. Firstly,
irregular accounting practices frequently result from bad cash flow patterns. Secondly, due to 313
the drive to keep ahead of the competition, younger companies are more likely to experience
accounting problems. Thirdly, a company’s culture, such as a lack of process documentation or
a competitive attitude, may point to a higher risk for accounting irregularities. A larger
probability of accounting irregularities is also influenced by high debt levels and financial
difficulty. In addition, businesses that have no audit committee and fewer outside directors on
the board of directors are more vulnerable. Decentralised businesses that have corporate
operations located far from headquarters are likewise more likely to experience accounting
errors. Furthermore, businesses with autocratic management staff are more likely to experience
accounting irregularities. Finally, businesses that engage in accounting irregularities
frequently have unexpected increases in inventories and receivables.
Other traits that are common in financial statement fraud instances in South Africa
include a company’s size and organisational changes, such as mergers and acquisitions,
which have been proven to enhance the chance of accounting problems. Companies with
financial statement fraud also exhibit changes in some financial statement line items that
are different from those in the industry, as well as a leading or lagging effect when
compared to the industry. Research has indicated that price/earnings ratio (P/E) ratios with
a falling trend are an indicator of a period in which accounting irregularities occurred, and a
lack of dividend payments is frequently an indicator that a company is facing troubles. In
addition, it has been discovered that most irregularities are found and identified within two
years of their occurrence. And finally, when compared to statistics provided by other
businesses in the same industry, organisations who engage in financial statement fraud
frequently only report tiny values for tax charges or tax liabilities.

2.2 The case of Company X

Company X was established more than 50 years ago as a retailer of a variety of goods and is
the world’s third-largest integrated household goods retailer as measured by turnover. It
holds 40 brands and 12,000 retail stores in more than 30 countries.
The company was investigated by German authorities in 2015 for accounting irregularities.
It then faced a dispute with a joint venture partner relating to the September 2016 accounts,
which were to be heard in the Amsterdam Court of Appeal in September 2017. The outcome of
the hearing was an order for Company X to restate their 2016 accounts. On 5 December 2017,
allegations of financial statement fraud in Company X became known. A report by Viceroy
Research has published on the same day that the company admitted to wrongdoing and the
chief executive officer (CEO) resigned [2]. The report pointed to so-called “financial
engineering” to hide losses and increase earnings (e.g. ZAR 13.5bn spent on investments, but
failing to improve profitability). Some techniques they used include loans to off-balance-sheet-
related party entities; disguising losses; and tax and depreciation manipulation. Another
alleged fraud was the sale of a loss-making company to boost the share price, even though it
later transpired that the company was never really sold. The fraud shock was further
exacerbated when it was made known that not only the 2017 but also the 2016 financials had to
be restated because of accounting irregularities.
JFC Later reports indicate that internal emails from 2014 were uncovered, where revenue
31,2 figures were moved around subsidiaries to boost the balance sheet. This means that the
financials had to be restated from 2014.
The signs of irregularities, especially in board oversight, were recognisable and various
parties, such as market analysts and investors, claim that they issued warnings that
something was amiss. A South African asset manager called on the Company X advisory
314 board to resign months before a case for financial statement fraud could be made.
Even though trading Company X shares was not suspended, as many suspected would
be the case, the company did lose more than 84% of its market value in three days before the
news officially broke. Even though the share price shows some improvement, it is still far
removed from its all-time high of R74.01 on 19 May 2017 (see Figure 1). The demise of
Company X also affected other companies of which Company X is a shareholder, as well as
those who extensively invested in Company X. In addition to a reduction in market value
(see Figure 1), the credit ratings agency Moody’s downgraded Company X in Europe from
B1 to Baa3 and Company X in South Africa from Aa1.za to Baa3.za.

3. Research method
This research is conducted in the form of a case study to investigate whether the previously
identified financial statement fraud red flags apply to Company X. Financial statement data
are often used in analyses to detect and identify manipulation or financial statement fraud
(Beneish et al., 2013). The study includes quantitative and qualitative analyses of Company
X from 2010 to 2016. These methods are chosen mainly for the ease with which any
stakeholder, without access to sophisticated techniques or inside information, can perform
such analyses. Financial statements of companies are publicly available, and many ratios
are presented in the statements and financial magazines or newspapers.

Figure 1.
Share price
movement
The horizontal analysis investigates how financial statement line items change from one Financial
year to the next while vertical analysis is where financial statement line items are expressed statement
as a percentage of total assets in the statement of financial position or as a percentage of
turnover in the statement of comprehensive income. For ratio analysis, one investigates
fraud
exceptional changes from year to year and compares ratios to those of other companies in
the industry [3]. The quantitative horizontal, vertical and ratio analyses are complemented
with t-tests to investigate whether any of the observations made from the horizontal, vertical
and ratio analyses are statistically significant:
315

ð M  mÞ
t¼ (1)
s=pnffi

Observations of qualitative financial statement fraud characteristics such as company

culture and insider trading provide insights into possible risks that could potentially have
been identified.
The analyses of the financial statements are supplemented by a structural break analysis
of the share prices of the company over the alleged period of financial statement fraud. The
Bai–Perron structural break test is a commonly used method to test for structural breaks in
time series data. The test statistic is calculated as follows:
2rffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 3
n o  fX Tk g 
 
tn ¼ nð2Þ maxð1 # k # K Þ4
n=
Tk   Xt  Xk   dk 5
1
(2)
ft51Þ

where:
n = is the sample size;
K = is the number of possible break points in the data;
Tk = is the number of observations in the kth segment of the data;
Xt = is the value of the time series at time t;
X k = is the sample mean of the kth segment of the data; and
dk = is a bias correction term that depends on the number of breakpoints and the
properties of the time series.
The structural break analysis is conducted in conjunction with a qualitative investigation of
the news items that could be observed around the time that structural breaks occurred in the
share price of the company. This analysis aims to establish whether certain news items or
unexpected changes in share prices may be indicators of something more significant.
All analyses are also performed for the three companies in the same Johannesburg stock
exchange industry, namely, personal and household goods, which had no allegations of
financial statement fraud over the same period. Even though this does not mean no financial
statement fraud occurred in those companies, any possible fraud was not detected and
identified. However, if all the companies in the analyses show the same trends (e.g. increased
inventory levels), it is less likely that the character is a result of fraudulent action but could
rather be thought of as an industry-related occurrence.

4. Results
The results of the analyses are discussed in terms of quantitative factors, qualitative factors
and structural break analyses. In the interest of space, only those items where significant
results were found are discussed in the sections that follow.
JFC 4.1 Quantitative factors
31,2 Table 1 presents a summary of the most significant quantitative factors that were identified
through t-tests performed on the horizontal, vertical and ratio analyses. Most of the
significance occurred in the horizontal analysis. A brief discussion of each characteristic as
identified earlier, as well as added items, follows.
Company X showed a sharp increase in cash and cash equivalents, as opposed to an
316 expected poor cash flow status. An analysis of the cash flow patterns of the control
companies shows significant fluctuations, negative and positive, albeit not statistically
significant. Financial statement fraud is often disguised through the manipulation of current
assets, especially accounts receivable and inventory. The receivables and inventory values
of Company X saw significant changes over the period. The changes in current assets did
not reflect similarly in the statements of the three control companies. In addition, turnover,
cost of sales, gross profit and other profit figures increased significantly, not in line with the
increases shown by the other companies. With cases of financial statement fraud, significant
increases in turnover, gross profit and other profit figures are often seen in conjunction with
unexpected increases in inventory and receivables.
High debt levels and significant fluctuations in the use of debt can be an indication of
irregularities. In terms of liabilities, Company X showed significant increases in both long-
term and current liabilities in comparison to the other companies. Apart from the increased
liabilities that Company X incurred, their financial distress score was also significantly low
(a low score indicative of financial distress). The other companies in the industry also

Analysis Line item or ratio Mean SD t Sig. (two-tailed)

Horizontal Cash and cash equivalents 38.365 41.523 2.772 0.024

Ratio Cash flow dividend cover 25.053 12.716 3.413 0.076
Horizontal Cost of sales 29.341 35.614 2.472 0.039
Horizontal Current assets 30.417 24.216 3.768 0.005
Horizontal Earnings before interest and tax 29.432 23.592 3.743 0.006
Horizontal Earnings before interest, tax, depreciation 29.182 24.562 3.564 0.007
and amortisation
Ratio Earnings/Share 14.007 20.656 2.034 0.076
Horizontal Financial distress 0.063 0.364 6.952 0.000
Horizontal Fixed assets 35.010 32.723 3.210 0.012
Horizontal Goodwill 58.671 63.577 2.769 0.024
Horizontal Gross profit 31.571 31.340 3.022 0.017
Vertical Headline earnings per share 10.354 7.864 3.950 0.004
Horizontal Headline earnings per share 15.279 23.767 1.929 0.090
Horizontal Intangible assets 53.538 53.251 3.016 0.017
Horizontal Inventory 38.969 38.966 3.000 0.017
Horizontal Ordinary shareholders interest 39.675 32.128 3.705 0.006
Horizontal Patents; trademarks 51.992 61.214 2.548 0.034
Horizontal Profit after interest and tax 29.600 23.941 3.709 0.006
Horizontal Profit attributable to ordinary shareholders 29.576 28.456 3.118 0.014
Horizontal Profit before tax 30.573 26.559 3.453 0.009
Horizontal Total headline earnings 32.752 39.254 2.503 0.037
Horizontal Trade receivables 24.142 31.193 2.322 0.049
Horizontal Turnover 30.330 34.899 2.607 0.031
Table 1.
Summary of t-test Notes: n 5 9; df 5 8
results for Company X Source: Author’s own analyses using publicly available data
experienced distress, which may have been an aftereffect of the financial crisis and is thus Financial
not necessarily an indicator of financial statement fraud. statement
Company X did not pay any dividends from 2007 to 2012. Thereafter, dividend payments
increased significantly every year, but were not in line with cash flow, as can be seen by the
fraud
cash flow dividend cover. Previous research has indicated that the non-payment of
dividends may be an indicator of an increased likelihood that irregularities may occur,
however, the non-payment of dividends happened a significant period before the alleged
irregularities. The P/E ratio did not show significant decreases, as expected and the tax 317
values for the company over the period were not unexpectedly low.
There were significant changes in items that were not previously identified as financial
statement fraud characteristics. The analyses showed that intangible assets, with goodwill
and patents/trademarks specifically, increased significantly over the period, not in line with
the other companies. Company X obtained significant amounts of share capital throughout
the period under investigation. The other companies investigated also showed increases in
total ordinary shareholders’ capital, but this was mostly a result of increases in distributable
reserves, whereas the increase in total ordinary shareholders’ interest in Company X was the
result of significant changes in ordinary share capital. It is also noticeable that the company
held significant amounts of fixed assets compared to other companies.

4.2 Qualitative factors

This section considers qualitative characteristics that are indicators of financial statement
fraud.
Company X has been operating for more than 50 years. In terms of previous findings, it is
more likely for younger companies to engage in fraudulent activities, while trying to
establish a foothold in the market. The age of Company X, therefore, did not play a specific
role in financial statement fraud activities if younger companies are considered to be more
likely candidates to be at risk.
An outside stakeholder cannot gauge the “culture” of a company. However, researchers
recommend that one investigates whether the company has policy documents in place that
formalises processes (e.g. codes of conduct, ethics policies). A review of Company X’s
website has shown that the company has detailed policies and documents available. These
documents can be considered fairly recent, with the latest being updated in 2015
(observation made on 27 July 2019). It, therefore, does not appear, as far as an outsider can
observe, that the company’s culture was conducive to an environment that approves of
irregular behaviour.
Previous research has found that, even though challenging to observe, directors can have
a predisposition towards irregularities. If a company does not comply with the requirements
of a stock exchange or other codes in terms of director requirements, it may be that they are
intentionally disregarding such stipulations. The Company X board planned to release
unaudited financial statements, which were communicated through Stock Exchange News
Service (SENS) on 4 December 2017. This shows a concerning lack of corporate governance.
South Africa’s Public Investment Corporation, which was the second-largest shareholder at
10%, questioned the board’s independence and hinted at the chairperson having conflicts of
interest. The board dominance of specific families was also brought into question. Apart
from the above, one can speculate about the profile of the Company X board, being mostly
older white males. This does not necessarily point towards white males being a problem but
rather shows a lack of diversity, which creates an environment conducive to unethical
behaviour. It is also noticeable that the chairperson of the board was a large shareholder. In
the case of Company X, there has also been a significant amount of speculation about the
JFC profile of executive management, especially after the “disappearance” of the CEO. However,
31,2 it can only ever be speculation. There is also no information available about management
shareholding in the firm.
A geographically dispersed company with divisions or subsidiary companies in remote
locations is more likely to experience accounting fraud. This is due to the difficulty to
provide sufficient board and top management oversight at a distant location. Because the
318 fraud occurrences took place at a high level at the head office of the company, geographic
location is unlikely to have increased the likelihood of financial statement fraud in Company X.
Company X has been on an aggressive acquisition streak over the six years before
irregularities became known. In 2016 alone, the company acquired four companies. These
acquisitions showed poor profitability, despite ZAR 13.5bn spent on these investments. It
appears that the company may also have overpaid for certain acquisitions. The acquisitions
are public knowledge and can be considered a red flag, but there is no concrete proof
regarding overpaying for acquisitions.
Financial statement line items with a tendency to have changes contrary to those of the
industry could not be readily confirmed. Because of the financial crisis from 2007 to about
2009 and its aftermath, all the firms showed fluctuations in financial statement line items
and ratios. A leading or lagging effect concerning significant changes in the financial
statements of the company and the industry could also not be readily confirmed due to
various fluctuations in the line items and ratios of the companies, likely due to the effect of
the financial crisis and its aftermath.
Previous research has found that irregularities occurred for two or fewer years before the
irregularities were detected and identified. Speculation about the occurrence of accounting
and tax irregularities in the 2016 financial statements first became known in August 2017, at
which time the board first denied, but acknowledged two weeks later. Four months before
the news of the accounting irregularities broke, German prosecutors have reportedly been
suspecting accounting statement fraud in Company X and started investigations. Their
investigation stretched back to 2015. Sources claim that the Company X CEO was in email
contact in 2014 with German managers about misrepresenting financial data. It thus
appears as if this characteristic held for Company X and that the fraud was detected and
identified approximately within two years of its first occurrence.
In the case of Company X, it appears that complex accounting and related-party
transactions were one of the company’s major irregular practices. According to Intellidex,
the Portsea Asset Management report found a significant number of off-balance-sheet-
related party entities and transactions that were never properly disclosed (Theobald et al.,
2018). These transactions were mainly used to remove unprofitable entities off the books,
give loans to the purchasers of its unprofitable entities, improve sales figures through
overstatement of revenue and profit and hide impairment losses.
Significant shareholding by board members is a known red flag for corporate fraud. Even
though it was not shown to be significant in the cases originally investigated by the author,
significant shareholding appears to have had an impact on Company X. According to reports,
the Public Investment Corporation questioned the amount of board member shareholding.
During the conducting of the analyses, a few additional fraud characteristics, not
previously mentioned in the literature, were observed. The average life span of Company X’s
assets was 24 years, compared to an average life span of 14 years for similar companies
(Theobald et al., 2018). This may have been part of an attempt to artificially reduce expenses
and inflate income. An announcement was further made that a loss-making company within
the Company X group was sold, which boosted the share price. However, the company was
never really sold, meaning that insider trading took place. This is unfortunately a Financial
characteristic or red flag that is difficult to detect and identify. statement
fraud
4.3 Structural break analysis
The Bai–Perron tests of L þ 1 vs L sequentially determined breaks resulted in three dates
within the 2010 to 2016 period where significant breaks in the share price pattern occurred.
The structural break analysis showed nothing significantly out of the ordinary in terms of
share price movements or SENS news items in the period from 2010 to 2016 and no further
319
discussion is thus warranted.

5. Conclusions
Stewardship theory places managers and directors in charge of wealth maximisation for
shareholders (Davis et al., 1997; Donaldson and Davis, 1991). However, managers and
directors seek wealth maximisation, their own included, as per agency theory (Donaldson
and Davis, 1991; Jensen and Meckling, 1976). The financial statement fraud as it occurred in
Company X may have had its origin in both these theories.
The study made use of quantitative and qualitative analyses of financial statement
information to test the characteristics of financial statement fraud. The aim of an analysis of
publicly available financial statement line items and ratios is to establish whether it is
possible to use information and measures, which are relatively easy to obtain and use, for
fraud detection and identification. If this is possible, it will allow individual shareholders
and analysts to benefit from published financial information to protect their interests. Even
though several characteristics have been identified in previous research as being more likely
to be present in financial statement fraud cases, this study does not focus on those alone but
does evaluate all financial statement line items and all ratios. This allows for possible new
insights.
From horizontal, vertical and ratio analyses of Company X, it appears that the predictive
ability of financial statement fraud in the annual financial statements of a company is
limited at best. The following traits were determined to be indicators of financial statement
fraud based on the analysis of Company X: sizable acquisitions, complicated accounting and
related-party transactions, a dominated board structure, dispersed geographic location,
irregularities occurring for two or fewer years before detection, sizable increases in current
assets, sizable shareholding by board members and lower tax charges/liabilities compared
to the industry average.
The analysis revealed potential indicators of accounting irregularities in addition to the
characteristics that had already been confirmed: a lower depreciation rate than the industry
average, statistically significant changes in fixed assets with higher values than
competitors, a lower gross profit margin than peers, significant increases in intangible
assets, statistically significant increases in ordinary share capital and a significant increase
in turnover.
An important observation from this study is how fraud characteristics can differ from
case to case. The author initially identified from the literature 18 characteristics of financial
statement fraud. Thereafter, through the analyses of five case study companies with
allegations of financial statement fraud, it was narrowed down to 9 characteristics. The
author also found another 7 characteristics that were not previously identified. These 16
characteristics formed the basis of the study conducted here. However, not all 16 were
indicators in Company X and some of the 9 that were not found to be characteristics of fraud
did feature as risk factors in the case of Company X. There were also a few additional red
flags that has not before been formally identified as fraud characteristics. This provides
JFC evidence that each case is different and that the concerned investor or stakeholder should
31,2 take note of all aspects of a firm. Industries differ in nature, bringing forth extra challenges.
The diversity of items that showed up as suspicious ex post facto is a clear indication that
the detection and identification of financial statement fraud are not straightforward, or easy.
The real value that financial statements offer to the readers thereof is questionable.
As with any study, this one also presents some limitations. In the first instance, it is a
320 challenge to find companies with financial statement fraud allegations against them. There
has thus been a significant delay between the previous study and this one. In addition, the
analysis of a sole case study is a rather obvious limitation. It is impossible to generalise the
results presented here to other companies or financial statement fraud cases. The usual
recommendation of a larger sample is not necessarily feasible. This research is thus rather a
means to create awareness. The findings, albeit to some extent inconclusive, are of value to
investors, employees, managers, credit rating agencies and any other stakeholder with a
vested interest in a company. Interested parties need to be vigilant for any transactions or
dealings in a company that appears to be out of the ordinary:
As the saying goes, “When something feels wrong, it probably is”. – Anonymous

Notes
1. Note that all sources for such statements had to be omitted to ensure the company in question
remains anonymous.
2. Even though Viceroy Research Group was the first to formally reveal the presence of irregularities in
the dealings and financial statements of Company X, the report has been plagiarised from an
unavailable report by Portsea Asset Management, a London-based hedge fund. Intellidex, a leading
South African capital markets and financial services research house, revealed this in June 2018. In the
interest of sound research practices, only sections from the Portsea Report, as disclosed with
permission by Intellidex, will be used in this article. The Viceroy Report is only mentioned as being
the vehicle that first made the irregularities formally known to the public.
3. In the interest of space, the tables containing the horizontal, vertical and ratio analyses are not
reproduced in the text, but only discussed.

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Corresponding author
Elda du Toit can be contacted at: [email protected]

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