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8/10/2019 Session 14 CII Beniesh Model
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Detecting Earnings Manipulation:
A lication of Beniesh Model
8/10/2019 Session 14 CII Beniesh Model
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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 #.$$% and 11.72% erious ris& of earnings manipulation;furter analysis necessary to confirm or
dispel negati'e signal
Between 2!"# and $!!# %rey &one' analysis does not sufficiently
argue for or against acceptance
(ess than 2!"# )o evidence of manipulation
8/10/2019 Session 14 CII Beniesh Model
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*ariables in Beneish Model and +orrelation
with Manipulation of Earnings
Assessment of Distortions in financial
statement data:, Days sales in -eceivables Inde. /
0 Asset 1uality Inde. /
" Depreciation Inde. /
$ %3A Inde. /4 5otal Accruals to 5otal Assets /
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*ariables in Beneish Model
Assessment of firm6s incentives7ability to
violate %AAP:, +apital tructure /
9
0 5ime (isted 9
" ales %rowth /
$ Prior Positive Accruals Decisions /4 Declining +ash ales /
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8/10/2019 Session 14 CII Beniesh Model
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Interpretation of ,,#
!et"een #.$$% and 11.72%
erious ris& of earnings manipulation; furter
analysis necessary to confirm or dispel
.
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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
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Additional Analysis: imple Analytical
Procedure ; *ertical Analysis of Assets
4,#
$2#
$!#
""#
$#
4#
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imple Analytical Procedure ; ?ori&ontal
Analysis of Assets
,2!#
"0!#
244#
0
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8/10/2019 Session 14 CII Beniesh Model
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Additional Analysis: imple Analytical Procedure
; ?ori&ontal Analysis of (iabilities
$=2#
,!!
-etained Earnings
Paid up +apital
(5D
,#
,=#
# ,# 2# 0# "# $# 4#
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Additional Analysis: imple Analytical Procedure
; *ertical Analysis of Income tatement
=$# =
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Additional Analysis: imple Analytical Procedure
; ?ori&ontal Analysis of Income tatement
2"#
20=#
2$0#
,!$#
2!
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5hree *ariables of %reatest +oncern
Days sales in -eceivables Inde. and %rowth in
ales
(everage
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8/10/2019 Session 14 CII Beniesh Model
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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
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Depreciation and PP3E
Additional Machines Purchased *s Additional
Depreciation C" Fears
Even though depreciation e.pense relative to
amount of "$0< Million Dollars is clearly on
the low end of this range
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1ualitative -is8 Gactors Analysis Industry +onditions @perating +haracteristics
and Ginancial tability: Industry was very competitive and characteri&ed by
rapid changes
na e o genera e pos ve cas ows rom pera veActivities
5oo much borrowings
Management +haracteristics:
Most of the Independent Directors are Insiders
Audit committee met only once during ,!!
8/10/2019 Session 14 CII Beniesh Model
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Gacts
-eal name of +ircuit Industries Inc is
+omptroni. Inc Graud cheme:
vers a e a es: a e re a es
Inflated PP3E
@thers: inflated inventory undercharged revenue
e.penses
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Pros and +ons of the Beneish Model
Merits:
Based on publicly available data
+ost effective
information into one summary number
Demerits:
It failed to integrate inventory in its model It does not consider the >ualitative factors
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teps to Analy&e, ee Beneish M9core Model 7 +omposite
Inde.2 a +omment on distorting variables
omment on ot vat ng var a es0 +ompute +omposite Inde. for this company
based on Beneish9M score
" +ompare and comment based on Beneish Mscore inde. score
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teps to Analy&e$ +ompare with %AAP violators 7 +ontrol firms
9 find most important four4 Analytical procedure
i ales
ii Depreciationiii (everage
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