Muddy Waters alleged the New Oriental Education & Technology Group Inc.'s (NYSE: EDU)network of schools were in fact numerous franchises and not, as the company claimed, owned centrally.

The company’s chief executive denied the existence of franchisees several times over the past 2 years, which its CFO of  reiterated previously.

"These franchisees are not a hidden bonus for investors. Rather, they are part of a substantial fraud in EDU's accounts," Muddy Waters said in the report.

What New Oriental is accused of doing is using fees from its franchises to inflate the cash levels on its balance sheet, thereby persuading its auditors to give it a clean bill of health.

"It is virtually certain that EDU uses the upfront franchise and other fees to inflate its cash balances in order to receive unqualified audit opinions from its auditor," according to the report.

“Annual inspection report of people-run non-enterprise units in Beijing” accounted for a third of the 97 pages long Muddy Waters’ report. Other materials include an audio slip and several documents from Chinese government.

A source close to New Oriental told journalist from the 21st Chinese Business Hearld that only “Paopao English” exist some franchisees, as it’s not a main business for the firm.

New Oriental is based in Beijing and provides education services in China. It claims to have a network of 55 schools and a further 609 learning centers throughout the country.