How to identify a Satyam

The C-Score was originally developed by James Montier to look at companies that resorted to cooking their books. Montier remarked, 'In good times, few focus on such 'mundane' issues as earnings quality and footnotes. However, this lack of attention to 'detail' tends to come back and bite investors in the arse during bad times.' Montier also found the C-Score an effective way to identify short-selling candidates. Stocks with a C-Score of five and a price-to-sales ratio of greater than two generated around negative 4 per cent absolute return every year. Think of the C-Score as a way to identify what companies to run far, very far, from. Here is how Montier developed the C-Score: Is there a growing divergence between net income and operating cash flow? This means earnings can be pumped up; cash is harder to do. Are days sales outstanding (DSO) increasing? Are companies flushing stocks down to dealers? Are days sales of inventory (DSI) increasing? Are stocks flying off the shelves or catching dust? Are other current assets