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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.
The Beneish M-score is calculated using 8 variables (financial ratios): [1] [2]
(DSRI) DSRI = (Net Receivablest / Salest) / (Net Receivablest-1 / Salest-1)
GMI = [(Salest-1 - COGSt-1) / Salest-1] / [(Salest - COGSt) / Salest]
AQI = [1 - (Current Assetst + PP&Et + Securitiest) / Total Assetst] / [1 - ((Current Assetst-1 + PP&Et-1 + Securitiest-1) / Total Assetst-1)]
SGI = Salest / Salest-1
DEPI = (Depreciationt-1/ (PP&Et-1 + Depreciationt-1)) / (Depreciationt / (PP&Et + Depreciationt))
SGAI = (SG&A Expenset / Salest) / (SG&A Expenset-1 / Salest-1)
LVGI = [(Current Liabilitiest + Total Long Term Debtt) / Total Assetst] / [(Current Liabilitiest-1 + Total Long Term Debtt-1) / Total Assetst-1]
TATA = (Income from Continuing Operationst - Cash Flows from Operationst) / Total Assetst
The formula to calculate the M-score is: [1]
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).
A 2023 research paper will use an aggregate score of many companies to predict recessions. It finds that the score in early 2023 is the highest in some 40 years. [3] [4]
Enron Corporation was correctly identified 1998 as an earnings manipulator by students from Cornell University using M-score. [5] [6] Noticeably, Wall Street financial analysts[ who? ] were still recommending to buy Enron shares at that[ which? ] point in time.[ citation needed ]
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional companies. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,600 staff and was a major electricity, natural gas, communications, and pulp and paper company, with claimed revenues of nearly $101 billion during 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years.
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