Session 14 CII Beniesh Model

8/10/2019 Session 14 CII Beniesh Model

1/22

Detecting Earnings Manipulation:

A lication of Beniesh Model


2/22

Interpretation of Probability

Assessment Provided by BeneishModel:

Estimated Probability:

>11.72% Very significant danger of earnings

manipulation; extreme caution

recommended in all furter analysis.

!et"een #.$$% and 11.72% erious ris& of earnings manipulation;furter analysis necessary to confirm or

dispel negati'e signal

Between 2!"# and $!!# %rey &one' analysis does not sufficiently

argue for or against acceptance

(ess than 2!"# )o evidence of manipulation


3/22

*ariables in Beneish Model and +orrelation

with Manipulation of Earnings

Assessment of Distortions in financial

statement data:, Days sales in -eceivables Inde. /

0 Asset 1uality Inde. /

" Depreciation Inde. /

$ %3A Inde. /4 5otal Accruals to 5otal Assets /


4/22

*ariables in Beneish Model

Assessment of firm6s incentives7ability to

violate %AAP:, +apital tructure /

9

0 5ime (isted 9

" ales %rowth /

$ Prior Positive Accruals Decisions /4 Declining +ash ales /


5/22


6/22

Interpretation of ,,#

!et"een #.$$% and 11.72%

erious ris& of earnings manipulation; furter

analysis necessary to confirm or dispel

.


7/22

Beneish Manipulation Inde. and

Probability of Manipulation in case of +II()) *++P Violator (ontrol

,irms

1. Days Sales 1.543 1.269 1.199

2. Gross Margin Index 0.865 1.042 1.004

3. Asset Quality Index 0.132 0.937 0.807

4. Depreciation Index 0.752 0.981 1.021

5. SG&A Index 1.005 0.997 0.981

6. Total Accruals to Total Assets 0.142 0.204 0.144

7. Sales Growth Index 1.656 1.431 1.379

8. Abnormal Return 0.511 -0.325 0.011

9. Time Listed 19 29 31

10. Leverage 1.569 0.564 0.500

11. Positive Accruals Dummy 0.000

12. Declining Cash Sales Dummy 0.000

Manipulation Index -1.273


8/22

Additional Analysis: imple Analytical

Procedure ; *ertical Analysis of Assets

4,#

$2#

$!#

""#

$#

4#


9/22

imple Analytical Procedure ; ?ori&ontal

Analysis of Assets

,2!#

"0!#

244#

0


10/22


11/22

Additional Analysis: imple Analytical Procedure

; ?ori&ontal Analysis of (iabilities

$=2#

,!!

-etained Earnings

Paid up +apital

(5D

,#

,=#

# ,# 2# 0# "# $# 4#


12/22


; *ertical Analysis of Income tatement

=$# =


13/22


; ?ori&ontal Analysis of Income tatement

2"#

20=#

2$0#

,!$#

2!


14/22

5hree *ariables of %reatest +oncern

Days sales in -eceivables Inde. and %rowth in

ales

(everage


15/22


16/22

Additional Analysis of (everage

ignificant increase in borrowings " million

to 2" million 5he (5D of peer competitorsranges between $ million to ,4 million

Most of sales revenue is based on a few

customers

Accounts -eceivables collection ris8


17/22

Depreciation and PP3E

Additional Machines Purchased *s Additional

Depreciation C" Fears

Even though depreciation e.pense relative to

amount of "$0< Million Dollars is clearly on

the low end of this range


18/22

1ualitative -is8 Gactors Analysis Industry +onditions @perating +haracteristics

and Ginancial tability: Industry was very competitive and characteri&ed by

rapid changes

na e o genera e pos ve cas ows rom pera veActivities

5oo much borrowings

Management +haracteristics:

Most of the Independent Directors are Insiders

Audit committee met only once during ,!!


19/22

Gacts

-eal name of +ircuit Industries Inc is

+omptroni. Inc Graud cheme:

vers a e a es: a e re a es

Inflated PP3E

@thers: inflated inventory undercharged revenue

e.penses


20/22

Pros and +ons of the Beneish Model

Merits:

Based on publicly available data

+ost effective

information into one summary number

Demerits:

It failed to integrate inventory in its model It does not consider the >ualitative factors


21/22

teps to Analy&e, ee Beneish M9core Model 7 +omposite

Inde.2 a +omment on distorting variables

omment on ot vat ng var a es0 +ompute +omposite Inde. for this company

based on Beneish9M score

" +ompare and comment based on Beneish Mscore inde. score


22/22

teps to Analy&e$ +ompare with %AAP violators 7 +ontrol firms

9 find most important four4 Analytical procedure

i ales

ii Depreciationiii (everage

Documents

Session 14 CII Beniesh Model