Forensic Analyst

Jason Yap, CFA

Forensic Accounting

In the past 4 decades, there is no lack of hedge funds focused on short-selling strategies that incorporate forensic research into their investment process. Often, the forensic research is focused on uncovering companies' vulnerabilities and betting that their stock price will fall.  
More recently, large funds have increasingly incorporated forensic accounting and investigative research techniques into their investment process, hiring former forensic accountants and investigative journalists.  The massive frauds in 2020 such as Wirecard and Luckin have brought such application of forensic accounting to the fore.
When it comes to investing, knowing what to buy is just half the equation. However, over time, facts change and/or the investment hypothesis may be wrong, which leads investors to consider resizing or exiting the existing position. In this context, the use of forensic accounting and investigative tools and techniques can be a more illuminating source of information compared to reading sell-side reports or industry research reports. 
In this Insight, we discuss how investors can incorporate forensic accounting into the investment process and bridge existing knowledge gaps of traditional fundamental analysis, with the aim of maximising portfolio returns.

In the past 4 decades, there is no lack of hedge funds focused on short-selling strategies that incorporate forensic research into their investment process. Often, the forensic research is focused on uncovering companies' vulnerabilities and betting that their stock price will fall.  
More recently, large funds have increasingly incorporated forensic accounting and investigative research techniques into their investment process, hiring former forensic accountants and investigative journalists.  The massive frauds in 2020 such as Wirecard and Luckin have brought such application of forensic accounting to the fore.
When it comes to investing, knowing what to buy is just half the equation. However, over time, facts change and/or the investment hypothesis may be wrong, which leads investors to consider resizing or exiting the existing position. In this context, the use of forensic accounting and investigative tools and techniques can be a more illuminating source of information compared to reading sell-side reports or industry research reports. 
In this Insight, we discuss how investors can incorporate forensic accounting into the investment process and bridge existing knowledge gaps of traditional fundamental analysis, with the aim of maximising portfolio returns. 

Forensics 101: Incorporating Forensic Accounting into the Investment Process

China Forestry Holdings Co / Forensic Accounting

If you asked anyone whether they think stealing is wrong, most of them would answer “Yes”.  Yet, the Association of Certified Fraud Examiners’ recent report highlighted that organisations globally lost an estimated total of USD4.5 trillion to fraud in 2020 and the truth is, this was not the work of an exceptional few.  Why does fraud happen?  This article explores the use of the Fraud Triangle framework to evaluate and detect fraud risks in a capital markets context.

If you asked anyone whether they think stealing is wrong, most of them would answer “Yes”.  Yet, the Association of Certified Fraud Examiners’ recent report highlighted that organisations globally lost an estimated total of USD4.5 trillion to fraud in 2020 and the truth is, this was not the work of an exceptional few.  Why does fraud happen?  This article explores the use of the Fraud Triangle framework to evaluate and detect fraud risks in a capital markets context. 

Forensics 101: Using the Fraud Triangle Framework to Detect Fraud Risks

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*No Stranger To Losses: As initially discussed in our “Credit Suisse Group – Hit Parade Continues” note dated March 30, 2021, we expressed our concerns related to various high profile screw-ups at Credit Suisse Group (CSGN.VX) [Credit Suisse]. Credit Suisse’ high profile challenges still include: Archegos Capital Management; Greensill Capital; Wirecard, and Luckin Coffee; and   *Adding Insult To Injury: According to Bloomberg, construction start-up, Katerra, has burned through over USD 2.0 bn and is now being shut down.  Credit Suisse initially indicated losses of between USD 1.0-USD 1.5 bn on its Greensill-related exposures.  Well, this figure appears to increase those losses closer to USD 2.0 bn.

*No Stranger To Losses: As initially discussed in our “Credit Suisse Group – Hit Parade Continues” note dated March 30, 2021, we expressed our concerns related to various high profile screw-ups at Credit Suisse Group (CSGN.VX) [Credit Suisse]. Credit Suisse’ high profile challenges still include: Archegos Capital Management; Greensill Capital; Wirecard, and Luckin Coffee; and   *Adding Insult To Injury: According to Bloomberg, construction start-up, Katerra, has burned through over USD 2.0 bn and is now being shut down.  Credit Suisse initially indicated losses of between USD 1.0-USD 1.5 bn on its Greensill-related exposures.  Well, this figure appears to increase those losses closer to USD 2.0 bn.  

*Archegos Charges Higher, 1Q21 Results Reduce Capital Raise Risk: The immediate financial impact from Archegos is larger than expected (USD 4.7 bn). The combination of stellar 1Q21 results plus the decision to manage 1H21 capital charges has allowed Credit Suisse Group (CSGN.VX) [Credit Suisse] to preserve its a 2020 dividend. Fortunately, the big profit beat has cushioned the blow from poor risk management allowing CET1 to remain above 12%. The fear of an equity capital raise seems to have abated for the moment; and *Outclassed By US Counterparts: Goldman Sachs &amp; Co. (GS.US) [Goldman], in typically fashion, always to seems to have the best information at the earliest possible instance, and as a result were able to act early and decisively – coming through the Archegos liquidations thus far relatively unscathed.  Other prime brokers, including Credit Suisse which didn’t have close to the full Archegos picture, were caught with their pants down in what was supposed to be an orderly unwind descended into chaos.

*Archegos Charges Higher, 1Q21 Results Reduce Capital Raise Risk: The immediate financial impact from Archegos is larger than expected (USD 4.7 bn). The combination of stellar 1Q21 results plus the decision to manage 1H21 capital charges has allowed Credit Suisse Group (CSGN.VX) [Credit Suisse] to preserve its a 2020 dividend. Fortunately, the big profit beat has cushioned the blow from poor risk management allowing CET1 to remain above 12%. The fear of an equity capital raise seems to have abated for the moment; and *Outclassed By US Counterparts: Goldman Sachs &amp; Co. (GS.US) [Goldman], in typically fashion, always to seems to have the best information at the earliest possible instance, and as a result were able to act early and decisively – coming through the Archegos liquidations thus far relatively unscathed.  Other prime brokers, including Credit Suisse which didn’t have close to the full Archegos picture, were caught with their pants down in what was supposed to be an orderly unwind descended into chaos.

*Outclassed By US Counterparts:Goldman Sachs &amp; Co. (GS.US) [Goldman], in typically fashion, always to seems to have the best information at the earliest possible instance, and as a result were able to act early and decisively – coming through the Archegos liquidations thus far relatively unscathed.  Other prime brokers, including Credit Suisse Group (CSGN.VX) [Credit Suisse] which didn’t have close to the full Archegos Capital Management picture, were caught with their pants down in what was supposed to be an orderly unwind descended into chaos; and  *Capital Implications Are Significant At Credit Suisse:The problem for Credit Suisse is the potential peak level of losses that likely will cause it to breach regulatory triggers. Several factors must still be adjusted from consensus forecasts: CHF 2.0 bn from Greensill (not including Sanjeev Gupta/GFG’ Liberty Commodities insolvency filing); CHF 2.0 bn Mozambique debt scandal; and the potential CHF 7.0 bn Archegos exposure.  In addition, operational risk weightings/capital requirements are likely to increase. In aggregate, we find that Credit Suisse’s CET1 would decline to 10.8% against the likely increased CET1 target and intimates a potential capital raise, dividend cut, and share buyback suspension.

*Outclassed By US Counterparts:Goldman Sachs &amp; Co. (GS.US) [Goldman], in typically fashion, always to seems to have the best information at the earliest possible instance, and as a result were able to act early and decisively – coming through the Archegos liquidations thus far relatively unscathed.  Other prime brokers, including Credit Suisse Group (CSGN.VX) [Credit Suisse] which didn’t have close to the full Archegos Capital Management picture, were caught with their pants down in what was supposed to be an orderly unwind descended into chaos; and  *Capital Implications Are Significant At Credit Suisse:The problem for Credit Suisse is the potential peak level of losses that likely will cause it to breach regulatory triggers. Several factors must still be adjusted from consensus forecasts: CHF 2.0 bn from Greensill (not including Sanjeev Gupta/GFG’ Liberty Commodities insolvency filing); CHF 2.0 bn Mozambique debt scandal; and the potential CHF 7.0 bn Archegos exposure.  In addition, operational risk weightings/capital requirements are likely to increase. In aggregate, we find that Credit Suisse’s CET1 would decline to 10.8% against the likely increased CET1 target and intimates a potential capital raise, dividend cut, and share buyback suspension.

Credit Suisse Group – Capital Raise Likely Coming

Germany

Wirecard AG offers Internet payment and processing services.  The Company provides software and systems for online payment, electronic funds transfer, fraud protection and enterprise solutions.  Wirecard also offers call center services.

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Wirecard AG (WDI GR)

Forensics 101: Incorporating Forensic Accounting into the Investment Process

Large funds have incorporated forensic accounting and investigative techniques into their investment process, hiring forensic accountants and...

Jason Yap, CFA

Forensics 101: Using the Fraud Triangle Framework to Detect Fraud Risks

If you asked anyone whether stealing is wrong, most would answer “Yes”. Yet, global organisations lost USD4.5 trillion to fraud. We explore the...

Jason Yap, CFA

Credit Suisse Group – Here We Go Again

CREDIT SUISSE GROUP: There were already concerns related to various high profile screw-ups. The latest appears to be Greensill-related construction...

Thomas J. Monaco

Credit Suisse Group – Painful To Watch

CREDIT SUISSE GROUP: The immediate impact from Archegos is larger than expected. However, the stellar 1Q21 results plus managing 1H21 capital...

Thomas J. Monaco

Credit Suisse Group – Capital Raise Likely Coming

CREDIT SUISSE GROUP: Credit Suisse didn’t have close to the full family office picture. Potential aggregate losses likely will cause it to breach...

Thomas J. Monaco

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