Finance:Beneish M-Score
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.
How to calculate
The Beneish M-Score is calculated using 8 financial ratios.
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
Formula
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 [1]
How to interpret
If M-Score is less than -2.22 - the company is unlikely to be a manipulator.
If M-Score is greater than -2.22 - the company is likely to be a manipulator.
https://www.investopedia.com/terms/b/beneishmodel.asp
Important notices
- 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).
Example of successful application
Enron Corporation was correctly identified as an earnings manipulator by students from Cornell University using M-Score. Noticeably, Wall Street financial analysts were still recommending to buy Enron shares at that point in time.
Further reading on financial statement manipulation
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
References
- ↑ 1.0 1.1 "The Detection of Earnings Manipulation Messod D. Beneish". https://ru.scribd.com/doc/33484680/The-Detection-of-Earnings-Manipulation-Messod-D-Beneish.
- ↑ "Beneish M Score Definition". https://ycharts.com/glossary/terms/beneish_m_score.
- ↑ "Attention Value Investors: How to Predict Accounting Trickery". 2015-04-20. http://blog.alphaarchitect.com/2015/04/20/attention-value-investors-how-to-predict-accounting-trickery/.
- ↑ "The Accrual Anomaly For Dummies". 2011-09-07. http://blog.alphaarchitect.com/2011/09/07/the-accrual-anomaly-for-dummies/.
- ↑ "Managing the Risks of Permanent Capital Impairment (Part 1 of 4)". 2012-06-25. http://blog.alphaarchitect.com/2012/06/25/managing-the-risks-of-permanent-capital-impairment-part-1-of-4/.
- ↑ Beattie, Andrew (2006-11-26). "Common Clues Of Financial Statement Manipulation" (in en-US). Investopedia. http://www.investopedia.com/articles/07/statementmanipulation.asp.
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