The Beniesh Model: How the formula detected 76% of accounting frauds over a decade including Enron & Worldcom
Beneish had a 76% accuracy as opposed to 17% for auditors and others over the course of his study. He also realized those that were very close to the threshold in addition the 24% he missed underperformed all benchmarks by an average of 12% from 93-2003. He also as a paper which i have not read on this tool as stock picker tool. Here are the components a score less greater than - 2.22 is a red flag.
DSRI - Days sales receivables in year T / the DSR T-1. A large increase could be due to inflation
GMI - Gross margin- Ratio of GM T-1/T - if the ratio is above 1, depending on the degree to which it is mean margins are deteriorating therefore acct manipulation would be more likely.(don't take this to literally because it does very odd when used by itself)
AQI - Asset quality - Take all non-current assets except PP&E divided by total assets. year T/ T-1
SGI - Sales growth - sales in year T / sale in T-1
DEPI - Depreciation use depreciation in T-1/ T - lower than one could indicate revisions in asset life by adopting a method more income friendly
SGAI - Sales, general, admin expenses - T/ T-1
LVGI - Leverage - total debt (not just lnterest bearing)/ total assets. T/T-1.
TATA – Total accruals to Total Assets - Only for current year total accrual = working capital - cash - depreciation. total accuruals/ total assets. M score - M = -4.84+0.92*DSRI+0.528*GMI+0.404*AQI+0.892*SGI+0.115*DEPI-0.172*SGAI+4.679*TATA-0.327*LVGI