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| '''The Beneish model''' is a ] that uses ] calculated with accounting data of a specific company in order to check if it is likely (high probability) that the reported ] of the company have been manipulated. |
'''The Beneish model''' is a ] that uses ]s calculated with accounting data of a specific company in order to check if it is likely (high probability) that the reported ] of the company have been manipulated. | ||
| == How to calculate == | == How to calculate == | ||
| Line 26: | Line 26: | ||
| == How to interpret == | == How to interpret == | ||
| If M-Score is less than -2.22 - the company is unlikely to be a manipulator. |
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. |
If M-Score is greater than -2.22 - the company is likely to be a manipulator. | ||
| == Important notices == | == Important notices == | ||
| Line 38: | Line 38: | ||
| == Further reading on financial statement manipulation == | == Further reading on financial statement manipulation == | ||
| A sequence of articles on Alpha Architect blog<ref>{{Cite web|url=http://blog.alphaarchitect.com/2015/04/20/attention-value-investors-how-to-predict-accounting-trickery/|title=Attention Value Investors: How to Predict Accounting Trickery|date=2015-04-20|website=Alpha Architect|access-date=2017-01-28}}</ref><ref>{{Cite web|url=http://blog.alphaarchitect.com/2011/09/07/the-accrual-anomaly-for-dummies/|title=The Accrual Anomaly For Dummies|date=2011-09-07|website=Alpha Architect|access-date=2017-01-28}}</ref><ref>{{Cite web|url=http://blog.alphaarchitect.com/2012/06/25/managing-the-risks-of-permanent-capital-impairment-part-1-of-4/|title=Managing the Risks of Permanent Capital Impairment (Part 1 of 4)|date=2012-06-25|website=Alpha Architect|access-date=2017-01-28}}</ref> |
A sequence of articles on Alpha Architect blog.<ref>{{Cite web|url=http://blog.alphaarchitect.com/2015/04/20/attention-value-investors-how-to-predict-accounting-trickery/|title=Attention Value Investors: How to Predict Accounting Trickery|date=2015-04-20|website=Alpha Architect|access-date=2017-01-28}}</ref><ref>{{Cite web|url=http://blog.alphaarchitect.com/2011/09/07/the-accrual-anomaly-for-dummies/|title=The Accrual Anomaly For Dummies|date=2011-09-07|website=Alpha Architect|access-date=2017-01-28}}</ref><ref>{{Cite web|url=http://blog.alphaarchitect.com/2012/06/25/managing-the-risks-of-permanent-capital-impairment-part-1-of-4/|title=Managing the Risks of Permanent Capital Impairment (Part 1 of 4)|date=2012-06-25|website=Alpha Architect|access-date=2017-01-28}}</ref> | ||
| An article on Investopedia about different types of financial statement manipulation (Smoke and Mirrors, Elder Abuse, Fleeing Town and others)<ref>{{Cite news|url=http://www.investopedia.com/articles/07/statementmanipulation.asp|title=Common Clues Of Financial Statement Manipulation|last=Beattie|first=Andrew|date=2006-11-26|newspaper=Investopedia|language=en-US|access-date=2017-01-28}}</ref> |
An article on Investopedia about different types of financial statement manipulation (Smoke and Mirrors, Elder Abuse, Fleeing Town and others).<ref>{{Cite news|url=http://www.investopedia.com/articles/07/statementmanipulation.asp|title=Common Clues Of Financial Statement Manipulation|last=Beattie|first=Andrew|date=2006-11-26|newspaper=Investopedia|language=en-US|access-date=2017-01-28}}</ref> | ||
| == See also == | == See also == | ||
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| == References == | == References == | ||
| {{Reflist}} | {{Reflist}} | ||
| ⚫ | __INDEX__ | ||
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| ⚫ | __INDEX__ | ||
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Revision as of 08:23, 29 January 2017
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)
- Days Sales in Receivables Index
(DSRI) DSRI = (Net Receivablest / Salest) / Net Receivablest-1 / Salest-1)
- Gross Margin Index (GMI)
GMI = /
- Asset Quality Index (AQI)
AQI = /
- 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 = /
- 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 + 0.4.404 × AQI + 0.892 × SGI + 0.115 × DEPI −0.172 × SGAI + 4.679 × TATA − 0.327 × LVGI
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.
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 application of the M-Score for fraud detection among financial firms can potentially lead to wrong conclusions.
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 of time.
Further reading on financial statement manipulation
A sequence of articles on Alpha Architect blog.
An article on Investopedia about different types of financial statement manipulation (Smoke and Mirrors, Elder Abuse, Fleeing Town and others).
See also
References
- ^ "The Detection of Earnings Manipulation Messod D. Beneish". Scribd. Retrieved 2017-01-08.
- "Beneish M Score Definition". ycharts.com. Retrieved 2017-01-08.
- "Attention Value Investors: How to Predict Accounting Trickery". Alpha Architect. 2015-04-20. Retrieved 2017-01-28.
- "The Accrual Anomaly For Dummies". Alpha Architect. 2011-09-07. Retrieved 2017-01-28.
- "Managing the Risks of Permanent Capital Impairment (Part 1 of 4)". Alpha Architect. 2012-06-25. Retrieved 2017-01-28.
- Beattie, Andrew (2006-11-26). "Common Clues Of Financial Statement Manipulation". Investopedia. Retrieved 2017-01-28.