Beneish M-Score

Executive Summary

In the late 1990’s Professor Messod Beneish published an equation that uses eight financial ratios to predict if a company manipulates its earnings. Several years later Professor Beneish modified the equation to use only five financial ratios. If a company’s M-Score is greater than     -2.22, Professor Beneish claims that the company is very likely to manipulate its earnings. Though it is not necessarily illegal for companies to manipulate earnings, at least to some extent, it is a good indicator that the company could be doing so to hide poor performance. The M-Score is fairly accurate, identifying 76% of companies that manipulated earnings between 1982 and 1992. Of the 76%, 17.5% were false positives. Although the M-Score clearly is not perfect, it is still a useful tool in detecting earnings manipulation.

I created an Excel VBA program that utilizes a user-provided ticker, then uses that ticker to extract the needed financial information from marketwatch.com to calculate both the five- and eight-variable M-Scores. The program is versatile, meaning it can calculate M-Scores for any public company as long as the user inputs a valid ticker. The program compares the M-Score against the -2.22 threshold and tells the user whether the company is likely to be manipulating earnings or not.  

Links
http://files.gove.net/shares/files/16w/tabese10/Beseau_Tanner_Final_Project.pdf
http://files.gove.net/shares/files/16w/tabese10/Final_Project.xlsm