Very often, one of the most challenging tasks in any financial fraud investigation is to identify the right investigative tool. One tool that can be used in financial fraud investigation is the Beneish Model. Beneish Model is a mathematical model that uses financial ratios and eight variables to
identify whether a company has manipulated its earnings. The variables are
constructed from the data in the company's financial statements and, once
calculated, create an M-Score to describe the degree to which the earnings have
been manipulated. The eight variables are:
1. DSRI - Days' sales in receivable index
2. GMI - Gross margin index
3. AQI - Asset quality index
4. SGI - Sales growth index
5. DEPI - Depreciation index
6. SGAI - Sales and general and administrative expenses index
7. LVGI - Leverage index
8. TATA - Total accruals to total assets
Once calculated, the eight variables are combined together to achieve an
M-Score for the company. An M-Score of less than -2.22 suggests that the
company will not be a manipulator. An M-Score of greater than -2.22 signals
that the company is likely to be a manipulator. As such, an investigation can be proceeded against such company.
