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Step 7 - Accounting Juggernauts
This step is the toughest part of management analysis because none of these pain points will be visible to the naked eye in the first instance. A person has to spend a lot of time going through the fine-print only to avoid that investment in the end. The other alternative pre-requisites a heart of steel-outright short selling.
In the past few years, financial engineering has become really pristine & sophisticated. Innocent Retail investors are taken for a toss by mischievous promoters who have absolute control over the affairs of the company. And of course, it is seldom a one-man show. The entire charade is well-knit & may involve the company's board members, key managerial persons, chartered accountants, department heads, regulators, etc.
Over the years, the management of a number of market stalwarts has resorted to manipulating the books of accounts to dupe investors. And these instances are not limited to any particular geography, religion, race, or culture. Be it Wirecard AG (Germany), Satyam Computers (India), Enron & Worldcom (USA), Luckin Coffee (China), or Toshiba (Japan), each market has had its own share of accounting scandals.
It is possible to some extent for an investor to spot "manufactured" balance sheets. We shall discuss this step elaborately in another module.