The Beneish model is a mathematical model that uses financial ratios and eight variables to identify whether a company has manipulated its earnings. The variables are constructed from the data in the company's financial statements and, once calculated, create an M-Score to describe the degree to which the earnings have been manipulated.
Breaking Down the Beneish Model
The eight variables are:
1. DSRI - Days' sales in receivable index
2. GMI - Gross margin index
3. AQI - Asset quality index
4. SGI - Sales growth index
5. DEPI - Depreciation index
6. SGAI - Sales and general and administrative expenses index
7. LVGI - Leverage index
8. TATA - Total accruals to total assets
Once calculated, the eight variables are combined to achieve an M-Score for the company. An M-Score of less than -2.22 suggests that the company will not be a manipulator. An M-Score of greater than -2.22 signals that the company is likely to be a manipulator.
Who Created the Model?
Professor M. Daniel Beneish of the Kelley School of Business at Indiana University created the model. Beneish's paper, "The Detection of Earnings Manipulation" was published in 1999, and he has written a number of follow-up studies and extensions. Professor Beneish's webpage at the business school has an M-Score calculator.