M-Score – A Tool to Uncover Financial Misreporting

Abstract

Companies often engage in incorrect recognition of revenues, disproportionate capitalization of expenses, inadequate reporting of non-cash charges (such as depreciation and amortization), incorrect accruals, among other ways, to hide deteriorating profit margins or to project sustained growth. Thus, evaluation of financial reports is necessary to determine whether or not they adhere to the generally accepted accounting principles and whether or not the earnings reported in these financial reports are sustainable and capable of providing sufficient returns. Financial analysts and forensic examiners employ qualitative approaches and quantitative tools to determine whether or not a company has engaged in manipulating its financial reports. This article focuses on one qualitative tool known as the M-Score which was developed in 1999 by Dr. Messod D. Beneish, an American professor at Kelley School of Business in Indiana University, Bloomington, Indiana.