What is M-Score?
A mathematical model that uses financial ratios to detect potential earnings manipulation or accounting fraud.
Think of it like this
Like a lie detector for financial statements - it flags companies whose numbers look too good to be true.
Formula
M-Score = -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- DSRI: Days Sales in Receivables Index
- GMI: Gross Margin Index
- AQI: Asset Quality Index
- TATA: Total Accruals to Total Assets
Why it matters
- Helps identify potential fraud before it's revealed
- Created by Professor Messod Beneish at Indiana University
- Successfully flagged Enron before its collapse
- Combines 8 financial statement variables
What's a good value?
< -2.22
Normal
Low probability of manipulation
-2.22 to -1.78
Gray Zone
Needs further investigation
> -1.78
Manipulator
High probability of manipulation
Real-world example
Enron had an M-Score above -1.78 for years before the fraud was discovered.
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