| M-Score study signals upcoming economic trouble |
| The manipulation of earnings in corporate America is on the rise, according to new research on accounting fraud that employs the M-Score, a technique used to identify malfeasance at Enron several years before the firm imploded in 2001. The M-Score is calculated from eight ratios on a company’s balance sheet, all numbers that public companies report quarterly, and compares the ratios to earnings statements from a year earlier. One metric looks at changes in accruals, which is when an expense has been incurred, but not yet paid, while another identifies whether companies change how much depreciation they take. False information on balance sheets has “real economic effects because it represents misinformation on which firms base their investment, hiring, and production decisions,” says Messod D. Beneish, a professor of accounting at Indiana University who developed the M-Score in the 1990s, and his co-authors, David Farber of Indiana University-Purdue University in Indianapolis and Matthew Glendening and Kenneth Shaw, both of the University of Missouri. The theory is that their index might be catching distress in the stages when some companies are taking steps to try to cover it up. In aggregate, when more firms are reporting sales that haven’t actually been completed, declining asset quality or any of the other indicators, it likely indicates that something in the economy is beginning to go wrong. |
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