Bamboo Innovator Daily: 22 May (Fri) – Conquering complexity with simple rules; Want To Do Big Things? Make Yourself Small; You are not special: How to get from narcissism to thoughtfulness


  • Conquering complexity with simple rules: Forbes
  • Want To Do Big Things? Make Yourself Small: Forbes
  • You are not special: How to get from narcissism to thoughtfulness: Economist
  • Melinda Gates on Bill, ending poverty, and her plans to invest in women and girls: Fortune
  • Incumbents as attackers: Brand-driven innovation: McKinsey
  • Here’s How to Make Millions as an Art Forger: Bloomberg
  • The battle of Waterloo: Appallingly bloody, yet decisive, the battle of Waterloo in June 1815 deserves the attention it is getting 200 years later: Economist
  • The pressure on companies to form alliances with rivals is growing inexorably: Economist


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Bamboo Innovator Daily: 21 May (Thurs) – All Lives Have Equal Value: Reflections On My First Year as CEO of the Gates Foundation by Sue Desmond-Hellmann; Why Reading Books Is the Best Thing You Can Do


  • All Lives Have Equal Value: Reflections On My First Year as CEO of the Gates Foundation: Medium
  • Why Reading Books Is the Best Thing You Can Do: Investorfieldguide
  • What kind of leadership is needed in flat hierarchies? FastCo
  • The Fine Line Between Success And Bankruptcy: Techcrunch
  • For an Octopus, Seeing the Light Doesn’t Require Eyes: NYT
  • American Innovation Lies on Weak Foundation: NYT
  • How to Earn Respect as a Leader: HBR
  • Focus on Winning Either Hearts or Minds: HBR
  • Trader transcripts: ‘If you ain’t cheating, you ain’t trying’: FT
  • Meet the French Billionaire Who Wants to Rule U.S. Cable: Bloomberg
  • What’s Wrong With ‘Mathiness’ in Economics?: Bloomberg


  • More Than a Numbers Game: A Brief History of Accounting: Amazon
  • The Story Solution: 23 Actions All Great Heroes Must Take : Amazon

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Bamboo Innovator Daily: 20 May (Wed) – Inside the Magic: The definitive history of ILM, the special effects powerhouse that revolutionized moviemaking and changed entertainment forever


  • Inside the Magic: The definitive history of ILM, the special effects powerhouse that revolutionized moviemaking and changed entertainment forever: Wired
  • 6 strategies great leaders use for long-term success:BI
  • 11 pieces of life-changing advice from commencement speeches by tech celebrities: BI
  • Here’s what’s on Bill Gates’ summer reading list: GatesNotes
  • How To Stop Worrying: Barker
  • ‘Despicable Me’ founder shares secret of success: KT
  • When it comes to you and your group, keep your verbs humble: JT
  • With yoji jukugo (四字熟語), four little characters can say so much: JT
  • Management Accounting Skills Found Lacking in Entry-Level Talent: WSJ
  • Warren Buffett impressed by children’s money-making ideas: reuters
  • “Competitive Intelligence” Shouldn’t Just Be About Your Competitors; It’s about seeing the market as a whole. HBR
  • Explain Your New Strategy By Emphasizing What It Isn’t; Contrasts will help your team understand how to prioritize. HBR
  • Andreessen Horowitz’s lessons for Asian VCs and founders: e27
  • Buddhism played a key role in Korea: KT
  • David Letterman: Comedian, late night legend. and shrewd businessman?: Fortune
  • Dogbert Explains What CEOs Do: Zerohedge
  • Why Thought Leadership Is Absolutely Essential To Professional Services Firms: Forbes
  • That’s billion, with a bee: Measuring the massive cost of hive collapse: Reuters


  • The Magic of Reality: How We Know What’s Really True: Amazon

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Bamboo Innovator Daily: 19 May (Tues) – Berkshire Hathaway’s Disintermediation: Buffett’s New Managerial Model; A conductor who’s taught classes at Google and Goldman Sachs explains how great leaders inspire brilliance


  • A conductor who’s taught classes at Google and Goldman Sachs explains how great leaders inspire brilliance: BI
  • From welfare to one of the world’s wealthiest women – the incredible rags-to-riches story of J.K. Rowling: BI
  • Families Find the Principles That Keep the Business Going: NYT
  • Learning From Mistakes: The question, would you go back and undo your errors is unanswerable. The question is: What wisdom have you learned that will help you going forward? : NYT
  •  ICE’s Jeffrey Sprecher Has Built a Global Trading Powerhouse: II
  • How Doctors Deliver Bad News; Doctors are trying new ways of solving an old problem—how to tell patients they aren’t going to get well: WSJ
  • The Plain-Vanilla Accountant Goes Out of Style: WSJ
  • Leading Teams through Change at the Speed of Business: Strategy&
  • The crazy story of an ex-cop busted for running a website that taught people how to cheat polygraphs: BI
  • Leadership Lessons From the Brothers Grimm; Whether it’s kissing frogs, slaying dragons or battling wits with the wicked witch, fairy tales hold salient leadership lessons for today’s executives. Insead


  • The Ignorant Maestro: How Great Leaders Inspire Unpredictable Brilliance: Amazon

Investing Process

  • Berkshire Hathaway’s Disintermediation: Buffett’s New Managerial Model : SSRN

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Long-Term Contract Accounting Fraud in Asia From Construction to Software

 “Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
Bamboo Innovator Insight (Issue 83)

  • The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
  • Get The Moat Report Asia – a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
  • Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.
Dear Friends,Long-Term Contract Accounting Fraud in Asia From Construction to SoftwareA Dreamer and an Accountant is a lethal combination. McDonald’s Ray Kroc had financial wizard Harry Sonneborn to advise him that real estate was the key to a franchise’s financial success. Thomas Edison had his right-hand business partner Samuel Insull who took care of financing, operations, hirings, firings and mergers.

Tanaka Hisashige and Ichisuke Fujioka, the “Thomas Edisons of Japan”, must have wished there is a competent accountant to exercise financial stewardship over their business creation Toshiba (6502 JP, MV $14.6bn). Toshiba was involved in an accounting scandal in inflating profits by over ¥50bn ($419m) for the three year cumulative period through FY13 after calling for an urgent press conference at its headquarters in Minato City, Tokyo, on 15 May 2015 to appoint an independent investigation committee to probe the accounting issues, four years after the Olympus accounting fraud revelation in 2011 that hid $1.7bn in losses in a 13-year cover-up.

Starting from a small workshop rented from the second floor of a temple in Roppongi, Tokyo in 1873, six years after the Meiji Restoration and at the age of 74, Hisashige-san produced the first telegraph equipment in Japan. After meeting Thomas Edison in 1884 while on a tour in the United States, Fujiioka-san pledged to devote himself to establishing a Japanese electric power industry, succeeded in developing an economical, durable light bulb and in constructing an electric railway, taking Japan into the age of electricity. Hisashige’s firm, later renamed Shibaura Engineering Works, merged with Fujiioka’s Tokyo Electric Company to form Tokyo Shibaura Electric, which soon became known as Toshiba.

The in-house investigation into the accounting scandal relates to the underestimation of costs for 9 out of the 250 projects using the percentage-of-completion (POC) accounting method: 4 projects totalling ¥6bn at the power systems company, 4 projects totalling ¥30bn at the social infrastructure systems company and one project totalling ¥14bn at the community solutions company. Toshiba derived around 11% of operating income from its power and social infrastructure business. This is the second accounting investigation in less than two years for Toshiba, which has twice delayed reporting its earnings for the year ended in March because of irregularities. The new panel’s probe will extend to Toshiba’s 593 consolidated subsidiaries, including electrical engineering giant Westinghouse Electric, owned by Toshiba since 2007.

Toshiba and one of its listed subsidiaries, Toshiba Plant Systems & Services (1983 JP, MV $1.2bn), are also members of the JPX-Nikkei Index 400, which was started last year to showcase Japan’s best shares to institutional investors and shame executives of companies that weren’t picked into improving capital efficiency to make the cut. It selects the 400 companies in Japan with the highest return on equity and profit over the past three years. Corporate governance is another factor in choosing the members. The gauge recalculates its constituents every year using data from the last business day of June, and publishes the results in August. Sony Corp was among 31 members that got replaced in 2014. Interestingly, Toshiba has four outside board directors, an apparent sign of good “corporate governance” to keep checks and balances on the managers. Toshiba is now in a race to report its restated earnings before the June 30 deadline. Toshiba risks losing the attention of about ¥650bn tracking the JPX-Nikkei 400 in exchange-traded and mutual funds should it get kicked out of the JPX-Nikkei Index.

We wish to highlight the area of revenue recognition and the accounting for long-term contracts, in particular the percentage-of-completion (POC) accounting method, which has received relatively little inspection from academics and practitioners. There are important implications for value investors given that the POC accounting method is common across industries from construction/infrastructure/property and defence to software.

In essence, long-term contracts present special problems for revenue recognition, which allows for both the POC method and the completed contract method (CCM). Under the CCM, no revenue is recognized until the project is 100% complete; and, the related project costs are held as inventory. The POC method recognizes revenue and costs as measurable important progress milestones on a project (output-based measure) or based on a ratio of costs incurred to date over expected total contract costs (input-based measure 1: cost-to-cost method) or based on comparing measures such as labor hours, labor dollars, machine hours or quantities of material consumed to date to the total quantity estimated forte entire project (input-based measure 2: efforts-expended method). Under the POC method, managers can opportunistically manipulate the percentage of completion to recognize revenue prematurely and conceal contract overruns.

The following can be manipulated to affect revenue recognition:

  • Concealing subcontractor, labor and other project costs
  • Subjective estimation of costs to complete the projects
  • Shifting costs between projects
  • Improper allocation of indirect overheads to projects
  • Misallocation between project and non-project costs
  • Improperly deferring project costs
  • Premature expensing of pre-contract costs
  • Commingling of project and other costs
  • Recognition of unapproved change orders and claims that have no basis for inclusion in contract value
  • Setting improper project milestones where cost-to-cost is the more appropriate basis

Note: Should the above red flags be found, value investors should adjust downward the revenue by an amount that is the difference between unbilled receivables (or amount due from customers in contract work) and the work-in-progress (WIP).

Past prominent cases involving POC accounting fraud include:

  • Defence contractor Halliburton (HAL US) had increased revenue by $434m during 1998-2001 by booking cost overruns on construction projects before clients agreed to pay for them. In the wake of the recent Toshiba scandal, South Carolina Electric & Gas, a client of Westinghouse and its business partner Chicago Bridge & Iron (CBI US), had filed a petition on the incremental capital costs on a nuclear plant construction that total $698m, of which $539m are associated with delays and other contested costs.
  • Data-mining software company MicroStrategy (MSTR US), worth $31.1bn at its peak as compared to its present market cap of $2bn, had recognized over half ($17.5m) of the licensing revenue immediately in a $27.5m multi-year licensing agreement with NCR. The foundation of MicroStrategy’s product had been its corporate data-mining program which combs through terabytes of data looking for interesting relationships; MicroStrategy’s customers McDonald’s, Wal-Mart, NCR could use the program to detect customer buying patterns. According to the NCR order, because MicroStrategy’s software license sales were part of multiple-element transactions that included other services such as product support and development and consulting, the company was required to apply POC accounting. However, for a number of transactions that were subsequently restated due to a misapplication of the accounting standard, MicroStrategy had (1) improperly separated software license sales from their service elements and (2) characterized revenue in multiple element transactions as product or software revenue and recognized it at the time of the transaction. Without this $17.5m addition to third quarter revenue in 1999, MicroStrategy would have reported a revenue decline of 20% from the previous quarter and a loss instead of a profit.
  • Similar accounting issues to MicroStrategy arose for…

Recent accounting scandals in Asia who had potentially abused the POC accounting method include water treatment company Sound Global (967 HK, $1.36bn) whose auditors identified audit issues of missing RMB2bn cash shortfall and had reported matters to Singapore’s Ministry of Finance in an announcement on May 4, around three months after allegations of fraud by Emerson Analytics which the company denied with the media supporting the management and blasting the short-seller for the unfair attack. For instance, unbilled receivables (amount due from customer for contract work) at Sound Global soared over five-folds from RMB203m in FY09 to RMB1.1bn in FY13, representing around 15% and 35% of sales respectively, an indication of aggressive revenue recognition before projects are actually completed in the subjective use of the POC accounting method. Managers often opportunistically manipulate the estimates under the POC accounting method to inflate revenue and profits to achieve compliance with existing and future debt covenants and to raise more external financing in debt and equity. Note that the total debt at Sound Global had jumped from RMB227m in FY09 to RMB3.8bn in FY13.

Another example is Japanese vacuum machinery company Ulvac (6728 JP, MV $796m). Around 2010, Ulvac reported that its full year ended Jun 2010 sales were down 1% and operating profit was up 38%. However, the result was due to the switch to POC accounting method and aggressive accounting in revenue recognition much earlier. Interestingly, Ulvac disclosed in the footnotes that had it used the same revenue recognition method as before, its sales would have been down 21% and there would be a loss. Since Jun 2010, Ulvac’s share price is flat, underperforming the 100% rise in the Nikkei index.

Ulvac (TSE: 6728 JP) Stock Price Performance 2010-2015



When Samuel Insull was not named the president of what is now known as General Electric, he left and went on to build a electricity utilities empire using financial engineering and complex holding companies structure carrying out M&As and became one of the richest man in the world with a personal worth of over $150m (over $1.7bn in today’s dollars). To pay for expansion, Insull had sold low-price bonds and stock. Over a million middle-class Americans bought in – but their investments were made worthless by the Great Depression. Overnight, Insull went from a hero on the cover of Time magazine to the villain who had stolen the people’s money. It was said that before Enron, there was Insull. Charged with fraud, Insull was tried in 1934 and acquitted of the charges. But his reputation was destroyed, and he left the country for good. Four years later, Insull died of a heart attack in the Paris subway in 1938 with 84 cents in his pocket.

When financial and accounting wizards Harry Sonneborn and Samuel Insull left Ray Kroc and Thomas Edison respectively, they were in a “percentage of completion” mode in not being able to build an idea larger than themselves to complete the work. The awkward Dreamer and the suave professional Accountant is the “completed contract”. When separated from the Dreamer and her vision, the Accountant often flounders and loses his Way. Similarly, the technical interpretation and application of the POC accounting method cannot be separated from the wide-moat business model analysis of the company since the long-term nature of the contract with the customer determines the economic substance and viability of the business’ work in progress, of an idea larger than oneself.

Warm regards,


The Moat Report Asia

A new monthly issue of The Moat Report Asia is now available!

Access the in-depth idea presentation:

This month, we highlight a wide-moat innovator who is the #1 in Asia in a patented automotive electronics part that is part of the fast-growing Advanced Driver Assistance System (ADAS) market worth >$22bn by 2018, doubled from $11bn in 2014. The ADAS market is driven by more stringent safety requirements from governments forcing the automotive industry to develop automotive electronics solutions to increase vehicle safety. [Company’s name] is the third-largest in the world behind Valeo (FR EN) and Bosch. It has >50% market share in new cars sold in China, and the installation rate of this ADAS product on China’s auto is still low (35%+ on new cars vs 80%+ in developed markets). Established in 1979 by founder and Chairman Mr. C, [Company’s name] is one of the rare Tier-1 automotive suppliers in Asia to major OEM car makers that include Ford, GM, Daimler, Hyundai, Nissan, China’s top 10 auto companies such as Great Wall Motor, thereby directly shipped to them and involved in their R&D processes and early stage processes of concept car design and prototyping, creating a pre-emptive advantage in winning new orders. Over the past 36 years, [Company’s name] has forged formidable competitive advantages in scale, product quality, technological know-how and R&D capabilities and in May 2012, [Company’s name] outgunned illustrious industrial automotive giants Valeo (founded in 1923) and Bosch (founded in 1886) to sign a breakthrough global 10-year contract with GM, with the commencement of worldwide shipment to 18 countries and 25 factories at the end of 2016.

Paid subscribers get:

(1)    The Monthly Moat Report Asia (20 issues)

(2)    The Weekly Bamboo Innovator Insight Articles (>70 Issues)

(3)    Access to the Members’ Forum

(4)    Videos and Presentations by Thoughts Leaders, Entrepreneurs and Business Leaders in Asia

(5)    Asian Extractor – Unearthing Accounting Fraud in Asia ( We are pleased to present the presentation materials exclusively for our Moat Report Asia subscribers:

  • Week 1 – Survival in the Asian Capital Jungle: Who Knows What When? (108 slides)
  • Week 2 – Western Tools to Catch An Asian Snake? (111 slides)
  • Week 3 – The Incentivized Asian “Wedge” Snake to Tunnel Corporate Wealth (105 slides
  • Week 4-5 – Shedding of the Asian Snake’s Skin, The Opportunistic Tunneling of Corporate Wealth (157 slides)
  • Week 6 – Descend into the Asian Snake’s Lair, Occult Offshore Centers, Tax-Tunneling, and Consolidation Craftiness (89 slides)
  • Week 7-9 – The Asian Snake Charmer and Stock Manipulation Scheme  (112 slides)
  • Week 10 – The Accounting of Words and the Hiss of the Asian Snake (57 slides)

You will also get download access to the presentation by our invited expert guest speakers:

  • Mr. Jarrod Baker, the Senior Managing Director at NYSE-listed forensic specialist FTI Consulting Inc (NYSE: FCN, MV $1.5bn).
  • Mr. Hemant Amin, Founder, Chairman and CEO of Asiamin Capital, a successful multi-million single family office, and Founder and Chairman of the BRKets investor group (

(6)    Emerging Markets Research. KB is also the co-advisor to the School of Accountancy’s SMU Emerging Markets Club ( Carefully-curated presentations are made available for download for our subscribers:

  • Kerry Logistics Network (636 HK) and China’s Transportation & Logistics Industry, by JIANG Lingjun
  • PT Bank Tabungan (BTPN IJ): BTPN’s Successful Business Model, by Daniel IGOR
  • PT Sumber Alfaria Trijaya Tbk (Alfamart) (AMRT IJ): Maintaining Its Stranglehold as Competition Heats Up in Indonesia’s Modern Grocery Retail Industry, by Kelly GOH Wan Jun
  • Mitra Adi Perkasa Tbk PT (MAPI IJ): Still Fashionable in the Fashion Apparel Retail Industry? by Lucas LIM
  • Alibaba: Embracing Its Challenges + China Online Market: Growing with Challenges, by JIANG Lingjun
  • Ulmart: Russia’s Own Amazon, by Christina LIM

Bamboo Innovator Daily: 18 May (Mon) – Fashion designer Diane von Furstenberg says this is the key to success: Trusting Yourself


  • Apple CEO Tim Cook Urges GWU Graduates To Develop Moral Compass; ““The sidelines are not where you want to live your life. The world needs you in the arena.”: VIMEO
  • Fashion designer Diane von Furstenberg says this is the key to success: Trusting Yourself: BI
  • Listening well in a chorus of data: Markit’s focus on quality sets it apart from its competitors, says co-founder and president Kevin Gould.: BT
  • Mozart-loving chickens may answer quest for healthier nugget: Reuters
  • 5 Challenges When Startups Move Into the Big Leagues: WSJ
  • Does body language help a TED Talk go viral? 5 nonverbal patterns from blockbuster talks: TED

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Apple CEO Tim Cook Urges GWU Graduates To Develop Moral Compass; “The sidelines are not where you want to live your life. The world needs you in the arena.”

Apple CEO Tim Cook Urges GWU Graduates To Develop Moral Compass

The Huffington Post  |  By Irina Ivanova

Posted: 05/17/2015 3:36 pm EDT Updated: 5 hours ago

Apple CEO Tim Cook urged graduating George Washington University students to follow their values and find a job that helps them do good in a commencement speech delivered Sunday. Cook talked of justice and injustice in a speech that paid homage to Martin Luther King Jr., Robert F. Kennedy and Jimmy Carter, delivered to a crowd on the National Mall in Washington, D.C., VentureBeat reported. The university expected about 25,000 people to attend the commencement exercises, according to the outlet.

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