Statistical Possibility of Poor Quality Financial Reporting by Some Large Corporates – India Ratings

By Accommodation Times News Services

Land businessThe underlying financial health of at least some BSE 500 corporates (excluding banking and financial services) is not reflected through their key reported financial numbers such as EBITDA, PBT and PAT, tentatively concludes India Ratings & Research (Ind-Ra). The agency has used Benford’s law for analysing the quality of financial reporting of large Indian corporates for the period between FY02 to FY13. This approach has been used globally for forensic accounting purposes.

The tentative conclusions on the quality of financial reporting are based on a statistical analysis. As with any such analysis, Ind-Ra does not rule out the chances of both false positives and false negatives.

The study does not imply fraudulent reporting. It however endeavours to highlight to investors that a disproportionately higher focus on margins and earnings than on cash margins could lead to a very limited understanding of the health and performance of the corporates. The results of the analysis also support the agency’s focus on cash-based metrics such as cash flow from operations as opposed to accrual-based calculations involving EBITDA, PBT and PAT. 

The key findings of the analysis are as follows:

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