Prem Watsa-owned Fairfax accused of cooking Quess books for profit

Prem Watsa-owned Fairfax Financial Holdings has been accused of cooking India-based Quess Corp's books for profit by forensic-cum-activist investment firm Muddy Waters. 

In its report, Muddy Waters said Fairfax Financial Holdings used Quess as an accounting lever to create $889.9 million of profit and book value in 2018. The February 8 report highlighted several accounting manipulations by its holding companies. Prem Watsa is known as the Warren Buffett of Canada. 

Fairfax has been increasing stakes in Indian companies, prominent among them apart from Quess Corp are Thomas Cook and Bangalore International Airport.

Muddy Waters' report claims Fairfax could have reported a loss of around $205 million for Q1 2018 which was done by de-consolidating the company.

Quess IPOed in India in 2016. Fairfax, which owns its stake through Thomas Cook India, owned 49% of Quess when it de-consolidated it. Fairfax justified the de-consolidation by claiming it entered an agreement to transfer sufficient control of the company to a 12% shareholder. 

Since then, Fairfax has changed the accounting policy it applies to its Quess stake two times. These repeated policy changes seem to have been designed to avoid testing the Quess investment for impairment. 
As of September 30, 2023, Fairfax carries Quess at a $225 million (87%) premium to  Quess' market value.

When Fairfax de-consolidated Quess, it accounted for its stake at Fair Value Through Profits and Losses (FVTPL). FVTPL required Fairfax to adjust the carrying value to Quess' market price. However, after de-consolidation, Quess' shares lost around 39 percent.

Rather than booking losses, during Q4 2018, Fairfax changed the accounting method to the Equity Method. Under this, Fairfax kept the initial fair value as its basis, and was required to add proportional shares of profits or subtract losses. This change to the Equity Method enabled Fairfax to avoid booking a $372 million loss during Q2 to Q4 2018.

Muddy Waters said that Fairfax's basis for de-consolidating Quess was because it entered into a strategic agreement with the founder of Quess. However it said, the agreement was more about a desire to produce a large accounting gain rather than being a strategic one.

"We infer that the strategic agreement purported to transfer control of Quess to the founder. We suspect that there was little "strategic" about this agreement, other than the desire to produce a large accounting gain," said Muddy Waters.