In CAFI exam A afternoon session;
Q. Which of the following from Andrei’s Beneish M-score determination is the best indicator that Galaxy could be manipulating earnings?
Why would the answer be 2, DSR is a factor that indicates what is being manipulated and it is an indication contributing to the total M-Score. But in the end the main indicator should not be the M-Score?
Where is the exhibit of M scores? we wouldn’t be able to answer unless we see leverage score and dso score , remember when you are detecting manipulation using Beneish Model , the higher the score the more likely this company is manipulating using this specific item (ie: Leverage or DSO)
M-score lower than -1.78 means the likelihood of earnings management is low. If it’s greater than -1.78, it means a strong likelihood of earnings management.
So, you want to look at two things when answering the question: 1. coefficient of each variable 2. the value of that variable.
The largest positive contributor to the regression is your answer.
Variable Name** Variable Value of Variable Beneish Model Coefficient Contribution Days sales in receivables index D SRI 1.759 0.92 1.619 Gross margin index GMI 0.943 0.528 0.498 Asset quality index AQI 0.814 0.404 0.329 Sales growth index SGI 1.053 0.892 0.939 Depreciation index DEPI 0.932 0.115 0.107 Sales, general, and administrative expenses index SGAI 0.95 −0.172 −0.163 Accruals Accruals 0.107 4.67 0.499 Leverage index LEVI 0.861 −3.270 −2.815 Intercept −4.840 M-score **−3.83
Oh, so since the M-Score is -3.83 then the main indication is the DSRI, had the M-Score been 3.83, then the M-Score would have been the main indicator, right?
Absolutely right, the only index that raises a red flag here is DSRI given its relatively high coefficient of M score
Keeping -1.78 as a cut off which you probably wouldn’t need for this question given the big differences between the three variables coefficients
Main : -3.83
Leverage: -3.27
DSRI: 1.619