Detection Of Earnings Manipulation: Beneish M-Score

Detection Of Earnings Manipulation: Beneish M-Score by Sui Chuan Yeo, ValueEdge

Fraud and earnings manipulation are difficult to detect for most investors. To make things simpler, we introduce to readers a mathematical model that uses eight variables as an indicator for earnings manipulation.

What is the Beneish M-Score?

The Beneish M-Score was created by Professor Messod Beneish in 1999 to detect earnings manipulation. His subsequent paper in 2007 found that using the M-Score as a stock selection strategy yielded a hedged return of 13.9% per annum. Ignoring its supposed effectiveness, the M-Score’s main appeal lies in its convenience.  It is created from eight variables which are easily obtained from the company’s financial statements.

Calculation of the Beneish M-Score

1. Days’...
   

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