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Beneish M-score: Difference between revisions

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== How to calculate == == How to calculate ==
⚫ The Beneish M-score is calculated using 8 variables (financial ratios):<ref name=":0">{{Cite web|url=https://ru.scribd.com/doc/33484680/The-Detection-of-Earnings-Manipulation-Messod-D-Beneish|title=The Detection of Earnings Manipulation |author=Messod D. Beneish|website=Scribd|access-date=2017-01-08}}</ref><ref>{{Cite web|url=https://ycharts.com/glossary/terms/beneish_m_score|title=Beneish M Score Definition|website=ycharts.com|access-date=2017-01-08}}</ref>
The Beneish M-Score is calculated using 8 financial ratios.

⚫ === Variables (financial ratios)<ref name=":0">{{Cite web|url=https://ru.scribd.com/doc/33484680/The-Detection-of-Earnings-Manipulation-Messod-D-Beneish|title=The Detection of Earnings Manipulation Messod D. Beneish|website=Scribd|access-date=2017-01-08}}</ref><ref>{{Cite web|url=https://ycharts.com/glossary/terms/beneish_m_score|title=Beneish M Score Definition|website=ycharts.com|access-date=2017-01-08}}</ref> ===
* Days Sales in Receivables Index * Days Sales in Receivables Index
(DSRI)
(DSRI) DSRI = (Net Receivables<sub>t</sub> / Sales<sub>t</sub>) / (Net Receivables<sub>t-1</sub> / Sales<sub>t-1</sub>) DSRI = (Net Receivables<sub>t</sub> / Sales<sub>t</sub>) / (Net Receivables<sub>t-1</sub> / Sales<sub>t-1</sub>)
* Gross Margin Index (GMI) * Gross Margin Index (GMI)
GMI = / GMI = /
Line 22: Line 21:
TATA = (Income from Continuing Operations<sub>t</sub> - Cash Flows from Operations<sub>t</sub>) / Total Assets<sub>t</sub> TATA = (Income from Continuing Operations<sub>t</sub> - Cash Flows from Operations<sub>t</sub>) / Total Assets<sub>t</sub>


The formula to calculate the M-score is:<ref name=":0" />
=== 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 <ref name=":0" /> :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 == == How to interpret ==

Revision as of 06:29, 6 May 2020

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 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

The formula to calculate the M-score is:

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

The threshold value is -2.22:

  • 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 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.
  • An article on Investopedia about different types of financial statement manipulation (Smoke and Mirrors, Elder Abuse, Fleeing Town and others).

See also

References

  1. ^ Messod D. Beneish. "The Detection of Earnings Manipulation". Scribd. Retrieved 2017-01-08.
  2. "Beneish M Score Definition". ycharts.com. Retrieved 2017-01-08.
  3. https://www.investopedia.com/terms/b/beneishmodel.asp
  4. "Attention Value Investors: How to Predict Accounting Trickery". Alpha Architect. 2015-04-20. Retrieved 2017-01-28.
  5. "The Accrual Anomaly For Dummies". Alpha Architect. 2011-09-07. Retrieved 2017-01-28.
  6. "Managing the Risks of Permanent Capital Impairment (Part 1 of 4)". Alpha Architect. 2012-06-25. Retrieved 2017-01-28.
  7. Beattie, Andrew (2006-11-26). "Common Clues Of Financial Statement Manipulation". Investopedia. Retrieved 2017-01-28.
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