AN APPLICATION OF FORENSIC ACCOUNTING USING ALTMAN ZSCORE- A STUDY ON KFA “Welcome To An Airlines Without Passengers!

1. AN APPLICATION OF FORENSIC ACCOUNTING USING ALTMAN ZSCORE- A STUDY ON KFA“Welcome To An Airlines Without Passengers!!!!” PRESENTED BY: SATYA SWAROOP PATNAIK satya.cryptic@gmail.com JULEKHA YASMIN julekha23@gmail.com NITU MISHRA nitumishra26@gmail.com SATYABRATA MOHANTY  satyabrata541@gmail.com

2. HISTORY • Kingfisher Airlines was established in 2003. It is owned by the United Breweries Group whose major stake is held by Vijay Mallya. • Tag line- “FLY THE GOOD TIME”. • The airlines started commercial operations on 9th May 2005 with a fleet of four new Airbus A320-200s operating a flight from Mumbai to Delhi. • It started its international operations on 3rd September 2008 by connecting Bengaluru with London. • Kingfisher Airlines is one of the only seven airlines awarded 5-star rating by Skytrax.

3. CONTINUED.. • Kingfisher operates 250 daily flights with regional and long- haul international services. • In May 2009, Kingfisher Airlines carried more than 1 million passengers, giving it the highest market share among airlines in India. • Kingfisher also won the Skytrax award for India’s best airline of the year 2011.

4. FINANCIAL CRISIS • The Kingfisher Airlines financial crisis refers to a series of events that led to severe disruptions within Kingfisher Airlines. • Ever since the airline commenced operations in 2005, it has been reporting losses. • After acquiring Air Deccan, Kingfisher suffered a loss of over 1,000cr for three consecutive years. • By early 2012, the airline accumulated losses of over 7,000cr.

5. CURRENT SCENARIO • The DGCA suspended its flying license on October 20,2012. • KFA has temporarily shut down its operations.

6. THE 8 REASONS FOR DOWNFALL • Non payment of dues. • A huge failure. • Frequent Changes. • It hit badly. • Strong Initial Opposition. • “Treated as a Step-Child”. • Pet Projects. • Curtailing Plans.

7. SNAPSHOTS OF DOWNFALL • It started in the month of November, Kingfisher Airlines could not pay- Pilots, Stewardesses, Janitors, Fuel Prices. • It has a total debt of Rs. 7000cr even after about 1400cr was kind of written off last year. • The airline made an operational loss of Rs. 1027cr losses over the last year operation.

8. CONTINUED.. • BPCL has even filed a court case for recovery on unpaid dues of over 250cr. • Their cheque of Rs. 151cr to clear the dues recently bounced further worsening the situation. • Bengaluru and Hyderabad airports have decided to ask Kingfisher for landing charges before they allow the KF planes to land.

9. CONTINUED.. • It has absolutely no assets that it can sell or mortgage. • The bankers converted, approximately Rs. 750cr to equity. In lieu of the waive off, the banks got a 23% stake in the airline. • Hence the banks lost about Rs. 300cr in this transaction. • At the time of restructuring, Kingfisher’s total debt was Rs. 8,414cr.

10. BANKS PROVIDING LOAN TO KINGFISHER AIRLINES PUBLIC SECTOR

11. CONTINUED.. PRIVATE SECTOR

12. POSSIBLE SOLUTIONS – BALANCE SCORECARD

13. SUGGESTIONS • Foreign Investment . • Fuel efficient planes for shorter distance. • Improve revenue per passenger. • Avoid aggressive expansion of fleets. • Find a strategic partner with significant hunk of cash might be forced to undergo a wind up that entails to liquidation of corporate assets to payoff its liabilities. • Corporate debt restructuring. • American Style Bankruptcy system.

14. CONTINUED.. • Kingfisher Airlines, is in talks with two foreign carriers, including International Airlines Group (IAG)- the owner of British Airways and Iberia, for a potential rescue package. • There is huge possibility that the government would bail out the airlines as Kingfisher Airlines constitute around 16% of the total Indian fleet and holds 18% domestic passenger shares.

15. COMPETITOR ANALYSIS

16. COMPARISON WITH COMPETITOR

17. COMPARISON WITH COMPETITOR

18. SWOT ANALYSIS STRENGTH: • Strong brand value. • Support from parent company. • Added over 1 million passengers in a year. WEAKNESS: • Financial issues due to heavy Debt. • Laying of employees caused a bad image. • Unable to generate expected return on investment done. • Overspending of funds.

19. CONTINUED.. OPPORTUNITY: • The Indian aviation industry is growing at a rate of 24% per year. • Large number of domestic untapped routes. • Disposable income especially in middle class has increased. THREATS: • Rising fuel cost. • Govt. policies. • Least cost carrier.

20. FORENSIC ACCOUNTING • The term ‘Forensic’ denotes the application of scientific methods and techniques to the investigation of crime. • The term ‘Accounting’ is the process of keeping financial accounts. It is the language of business • Forensic accounting is a specialised mode of accounting analysis. • It is the application of specialised knowledge and specific skills to investigate the evidence of economic transactions. • The job demands reporting where the accountability of the fraud is established and report is considered as evidence in the court of law or in the administrative proceedings.

21. CONTINUED.. • The base of the forensic accounting is accounting knowledge, knowledge of auditing, Internal control, risk assessment and fraud detection. • It requires the understanding of the legal environment and also a strong set of communication skills both written and oral.

22. CONTINUED.. • Reviewing the opposing expert's reports on damages and the strengths and weaknesses of the positions taken. • Assisting in settlement meetings and negotiations. • Attending the trial to hear testimony of opposing experts and assisting in the cross-examination process.

23. FORENSIC ACCOUNTANT - QUALITIES • Specialised knowledge about the techniques of finding out the fraud. • Patience and analytical mindset. • Keen in exposing any type of possibility of fraud. • Need to question financial documents and look for inconsistencies.

24. BEGINNING OF ANALYSIS OF FORENSIC ACCOUNTING • With increasing corporate frauds, the importance of forensic accounting is growing. • Forensic accounting in its present state can be broadly classified into two categories: litigation support; and investigative accounting

25. LITIGATION SUPPORT • Securing documentation • Reviewing relevant documentation • Assisting in the examination and discovery process • Attending to the examination and discovery process

26. INVESTIGATIVE ACCOUNTING • Reviewing the factual situation • Assisting in the preservation, protection and recovery of assets • Co-ordinating with other experts • Assisting in the tracing and recovery of assets

27. COMMON ACCOUNTING FRAUD AREAS • Harvey R Kelly has identified some common fraud areas:

28. A LINK TO NEXT • This subsequent proceedings of the seminar will be touching on a small part of forensic accounting i.e. Investigative Accounting on review of factual information to understand the indication of bankruptcy from financial statements using Altman Z score.

29. THE ALTMAN Z-SCORE • The biggest calamity that can befall equity investors is corporate bankruptcy, which wipes out the equity of a firm and knocks the stock’s investment value down to zero. • NYU professor Edward Altman developed the Z-Score in the late 1960s to explicitly address the likelihood that a company would go bankrupt.

30. CONTINUED.. • The Z-Score is another tool that investors can use to monitor the safety of their investments. • At a minimum, however, a low or declining Z-Score should spur you to conduct more in-depth analysis to seek out the root cause.

31. ORIGINAL Z-SCORE FORMULA • The Original Altman Z-Score consists of five performance ratios that are combined into a single score. These five ratios are weighted using the following formula: Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 0.999E Where: A = working capital ÷ total assets B = retained earnings ÷ total assets C = earnings before interest & taxes ÷ total assets D = market value of equity ÷ total liabilities E = sales ÷ total assets

32. Z-SCORE FOR NON MANUFACTURING FIRMS • Altman modified the Z score formula in 1983 for non manufacturing firms which is: Z-score = 6.56A+ 3.26B+ 6.72C+ 1.05D Where: A = working capital ÷ total assets B = retained earnings ÷ total assets C = earnings before interest & taxes ÷ total assets D = book value of equity ÷ total liabilities

33. Z-SCORE RANGE FOR NON MANUFACTURING FIRMS • Altman came up with the following rules for interpreting a firm’s Z-Score: • Above 2.6 indicates a firm is unlikely to enter bankruptcy • Between 1.1 and 2.6 is a “grey zone” showing characteristic of bankruptcy • Below 1.1 indicates a firm is headed for bankruptcy, also known as “bankrupt zone”

34. FIGURES FOR CALCULATION OF Z-SCORE OF KFA

35. CALCULATION OF Z-SCORE OF KFA

36. INTERPRETATION For both the years the Z score for KFA is bankruptcy zone.

37. CONCLUSION • Consultants, professionals and researchers should use the forensic accounting • There is need for prediction and alert the firms and its stakeholders • Curriculum should include forensic accounting