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 M-Score
1. Days’ Sales in Receivables Index (DSRI)
2. Gross Margin Index (GMI)
3. Asset Quality Index (AQI)
4. Sales Growth Index (SGI)
5. Depreciation Index (DEPI)
6. SGA Index (SGAI)
7. Leverage Index (LVGI)
8. Accruals to Total Assets (TATA)
