Dead Firms by unknow

Author:unknow
Language: eng
Format: epub
Publisher: Emerald Publishing Limited
Published: 2016-06-21T00:00:00+00:00

Where Are Companies Disappearing: Methodological Note

To identify a shell company is an arduous task. The accounting practices that underlie the transactions passing through these shell companies are extremely opaque. In the present analysis, the annual financial statements are scrutinised for anomalous ratios that can be possibly attributed to the operation of shell company. As mentioned earlier, the primary exercise was to see whether the company in question disappeared and had not merged or been acquired during the financial year from which the companies stop reporting.

As is known about shell companies, their reporting of financial information is extremely erratic, that is there will be years for which the company may remain dormant or report no information. The first step therefore is to check for erratic financial reporting. Assuming that if a company decides to disclose information on its operation in a particular year should ideally choose to do so in subsequent years as well, the fact that it stops reporting in a particular year is indicative of dormancy.

The standard definition of a shell company is one that exists on paper and does not have any day-to-day operations. The purpose of such a company is to serve the financial needs of another company, which entail avoidance of taxation. Modifying this definition for the modus operandi adopted in India, a shell company must therefore not be taxpayer and may show inactivity over a period of time with a sudden spurt in its sales or an abnormal loss that it wishes to pass on to the related company.

On the basis of understanding of the operation of shell companies multiple criteria are used for their identification. First, the sample of companies that are selected for the analysis are those which have erratic financial reporting during the course of the 15 years, that is 2000–2014, that is they appear and disappear in the dataset. Secondly, since the theme of the paper is to check the shutdown of companies those entities are also selected that eventually shut down their operations in India.

In order to build the case for a suspicious firm, multiple criteria is constructed. The following constitute the list of identifiers:

The company should have reported income from sources other than sales of goods and services.

Though the company had income it did not report any profit and did not pay any corporate tax which means that the company was operating with zero profits. This dormancy with sporadic reporting of income (from other sources) that is set off against equivalent expenses, so as to yield zero profit, is indicative of suspicious transactions.

The company reports the expenses equivalent of its income. That is, the income that it generates from other sources is siphoned off in the form of expenses.

In addition the stock prices, as discussed earlier also display anomalies over time, therefore the price to earnings (PE) ratio (as per data from Bombay stock exchange) is compared with the industry average and the Earnings per share (EPS) of the company is compared with the industry average. Companies are identified

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.