Forensic Case Files + Capstone

Learning objectives

By the end of the week you can:

1. Reconstruct the mechanics of twenty-one major frauds and quality-of-earnings failures (Enron, WorldCom, Tesco, Toshiba, Valeant, Wirecard, Luckin Coffee, Steinhoff; Satyam, IL&FS, Yes Bank, DHFL, Manpasand, Vakrangee, PC Jeweller, Cox & Kings, CG Power, Zee, Gitanjali, Ricoh India, Gensol) at journal-entry level where publicly known, and classify each into the M2.06 taxonomy and M2.07 cash-flow/screen framework.
2. Name what was visible in advance for each case: the specific filing lines, ratios, notes, and disclosures that fired one to three years before collapse. State which M2.06/M2.07 test catches each one.
3. Distinguish adjudicated fact from allegation in your own writing, using the language protocol (what a regulator found, what an agency alleged, what a journalist reported), and explain why this distinction is an analyst's fiduciary and legal obligation.
4. Judge the gatekeepers: assess auditor independence (fees, tenure, confirmations, resignations), board and audit-committee fiduciary conduct, and promoter governance (pledge, related-party ecosystems), using the cases as calibrated precedents.
5. Run the full 10-step QoE workup on a live company in about three hours: spread, ratio panel, residue pass, notes evidence, quantitative screens, severity-laddered findings register, core-earnings bridge, management-credibility read, verdict memo, calibration log.
6. Pass a timed forensic exam: catch at least 80% of seeded shenanigans with a false-positive rate under 20%, naming the family and the detection test for each catch.
7. Convert flags into portfolio-grade decisions using the position-response ladder (question → discount → limit → avoid/exit) rather than binary fraud verdicts, and articulate why false positives destroy analyst credibility as surely as misses destroy capital.

Prerequisites & connections

Builds on. Everything in Phase 2, deliberately. M2.01–M2.02 (the ratio panel each case file computes), M2.03 (ROIC, Enron's single most damning number), M2.04 (CFO/EBITDA and FCF conversion, the WorldCom and Vakrangee tells), M2.05 (benchmarking: WorldCom's line-cost ratio and Cox & Kings' DSO die by cross-section), M2.06 (the seven earnings games, the residue table, the severity ladder, the India disclosure arsenal), M2.07 (CFO games, Beneish M-Score, Sloan accruals, Altman Z″, Piotroski F, the NBFC/ALM panel). From Phase 1: M1.06 (revenue recognition), M1.07 (capitalization and impairment), M1.09 (consolidation: Enron's SPEs and IL&FS's 347 entities), M1.10 (the auditor's report, CARO, Schedule III).

Feeds into. Phase 3 immediately (never DCF a company you haven't QoE-cleared; garbage inputs produce precise garbage), M5 sector playbooks (each sector's red-flag panel descends from these cases), M8.02 (the ten-minute QoE pass inside the 1–2 hour teardown is all of this compressed), C7 (management and governance judgment), and your permanent red-flags checklist artifact, finalized here.

The one-sentence version of the week. Seventeen times in twenty-five years, public filings told anyone who computed five ratios and read three notes that the reported numbers could not be true. The week makes you the person who computes them, then proves it under time pressure on companies whose endings are not yet written.

4.1 How to work a case file: method, hindsight discipline, and the three duties

The five-part anatomy. Every case file below has the same skeleton, and every case file you ever write should too:

1. The business and the story told: what the company claimed to be, and why the market believed it. Frauds are narratives first; the numbers are set-dressing.
2. The mechanics: the actual manipulation, at journal-entry level where public findings permit. You learned in M2.06 that every lie is a debit and a credit; here you see where real managements put them.
3. Visible in advance: the specific lines, ratios, and notes in public filings that fired before the end. That part builds your skill; read it with a calculator, not a highlighter.
4. Tests that fire, meaning which M2.06/M2.07 instruments catch it: the residue tests, the screens, the India disclosure arsenal.
5. Aftermath and lesson: what broke, who paid, what the gatekeepers did and failed to do, and the one transferable rule.

The hindsight discipline. Worked casually, case studies teach arrogance, because everything is obvious after the fact. Worked properly, they teach calibration. For every case, ask three questions: (a) When did the evidence become visible in public documents? (b) At that moment, what confidence did the evidence justify: a question, a discount, a position limit, or an exit? (c) Who acted on it in real time, and what did it cost them to be early? The honest answers are humbling. Flags typically preceded collapse by one to three years, they justified exposure decisions rather than fraud verdicts, and the people who acted early (short sellers, journalists, a handful of auditors who resigned) were attacked, sued, investigated, and occasionally right too soon to profit.