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    Beneish M Score

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    Sudershan Thaiba
    The Beneish M-score is a statistical model that uses financial ratios to determine if a company's reported earnings have been manipulated. It calculates 8 ratios and combines them into a single M-score, where a score below -1.78 suggests low manipulation risk and above -1.78 suggests high manipulation risk. For example, Enron was correctly identified in 1998 as having an earnings manipulation risk by students using the M-score model.

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    Beneish M Score

    Uploaded by

    Sudershan Thaiba
    167 views3 pages
    The Beneish M-score is a statistical model that uses financial ratios to determine if a company's reported earnings have been manipulated. It calculates 8 ratios and combines them into a single M-score, where a score below -1.78 suggests low manipulation risk and above -1.78 suggests high manipulation risk. For example, Enron was correctly identified in 1998 as having an earnings manipulation risk by students using the M-score model.

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    Beneish M Score

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    The Beneish M-score is a statistical model that uses financial ratios to determine if a company's reported earnings have been manipulated. It calculates 8 ratios and combines them into a single M-score, where a score below -1.78 suggests low manipulation risk and above -1.78 suggests high manipulation risk. For example, Enron was correctly identified in 1998 as having an earnings manipulation risk by students using the M-score model.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    167 views3 pages

    Beneish M Score

    Uploaded by

    Sudershan Thaiba
    The Beneish M-score is a statistical model that uses financial ratios to determine if a company's reported earnings have been manipulated. It calculates 8 ratios and combines them into a single M-score, where a score below -1.78 suggests low manipulation risk and above -1.78 suggests high manipulation risk. For example, Enron was correctly identified in 1998 as having an earnings manipulation risk by students using the M-score model.

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    © All Rights Reserved
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    of 3

    Beneish M-score

    From Wikipedia, the free encyclopedia


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    this article by adding citations to reliable sources. Unsourced material may be
    challenged and removed.
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    2020) (Learn how and when to remove this template message)

    The Beneish model is a statistical model that uses financial ratios calculated with


    accounting data of a specific company in order to check if it is likely (high probability)
    that the reported earnings of the company have been manipulated.

    Contents

     1How to calculate
     2How to interpret
     3Important notices
     4Example of successful application
     5Further reading on financial statement manipulation
     6See also
     7References

    How to calculate[edit]
    The Beneish M-score is calculated using 8 variables (financial ratios): [1][2]

     Days Sales in Receivables Index


    (DSRI) DSRI = (Net Receivablest / Salest) / (Net Receivablest-1 / Salest-1)

     Gross Margin Index (GMI)


    GMI = [(Salest-1 - COGSt-1) / Salest-1] / [(Salest - COGSt) / Salest]

     Asset Quality Index (AQI)


    AQI = [1 - (Current Assetst + PP&Et + Securitiest) / Total Assetst] / [1 - ((Current Assetst-
    1 + PP&Et-1 + Securitiest-1) / Total Assetst-1)]

     Sales Growth Index (SGI)


    SGI = Salest / Salest-1

     Depreciation Index (DEPI)


    DEPI = (Depreciationt-1/ (PP&Et-1 + Depreciationt-1)) / (Depreciationt / (PP&Et +
    Depreciationt))
     Sales General and Administrative Expenses Index (SGAI)
    SGAI = (SG&A Expenset / Salest) / (SG&A Expenset-1 / Salest-1)

     Leverage Index (LVGI)


    LVGI = [(Current Liabilitiest + Total Long Term Debtt) / Total Assetst] / [(Current
    Liabilitiest-1 + Total Long Term Debtt-1) / Total Assetst-1]

     Total Accruals to Total Assets (TATA)


    TATA = (Income from Continuing Operationst - Cash Flows from Operationst) / Total
    Assetst
    The formula to calculate the M-score is:[1]
    M-score = −4.84 + 0.92 × DSRI + 0.528 × GMI + 0.404 × AQI + 0.892 × SGI +
    0.115 × DEPI −0.172 × SGAI + 4.679 × TATA − 0.327 × LVGI

    How to interpret[edit]
    The threshold value is -1.78 for the model whose coefficients are reported above.
    (see Beneish 1999, Beneish, Lee, and Nichols 2013, and Beneish and Vorst 2020).

     If M-score is less than -1.78, the company is unlikely to be a manipulator. For


    example, an M-score value of -2.50 suggests a low likelihood of manipulation.
     If M-score is greater than −1.78, the company is likely to be a manipulator. For
    example, an M-score value of -1.50 suggests a high likelihood of manipulation.

    Important notices[edit]
     Beneish M-score is a probabilistic model, so it cannot detect companies that
    manipulate their earnings with 100% accuracy.
     Financial institutions were excluded from the sample in Beneish paper when
    calculating M-score. It means that the M-score for fraud detection cannot be
    applied among financial firms (banks, insurance). [dubious  –  discuss][citation needed]

    Example of successful application[edit]


    Enron Corporation was correctly identified 1998 as an earnings manipulator by
    students from Cornell University using M-score. [citation needed] Noticeably, Wall Street
    financial analysts[who?] were still recommending to buy Enron shares at that[which?] point in
    time.[citation needed]

    Further reading on financial statement manipulation [edit]


     A sequence of articles on Alpha Architect blog. [3][4][5]
     An article on Investopedia about different types of financial statement
    manipulation ("smoke and mirrors", "elder abuse", "fleeing town", and others). [6]

    See also

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