Viewing a single comment thread. View all comments

marketrent OP t1_je1vs1u wrote

Excerpt from the linked summary^1 about an aggregate measure of financial misreporting:^2

>False information on balance sheets has “real economic effects because it represents misinformation on which firms base their investment, hiring, and production decisions,” Dr. Beneish 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—wrote in December.

>Messod D. Beneish, a professor of accounting at Indiana University who developed the M-Score in the 1990s, and several co-authors have calculated an aggregate score for nearly 2,000 companies.

>The M-Score is calculated from eight ratios on a company’s balance sheet, all numbers that public companies report quarterly, and comparing the ratios to earnings statements from a year earlier.

>The “M” is for manipulation, and uses a company’s financial statements to determine whether it is engaging in manipulation.

>“We think this is a measure of misinformation in the economy,” said Dr. Beneish. The new aggregate measure was published in a December paper, and the latest data—compiled in March and shared with The Wall Street Journal—shows that the collective probability of fraud across major companies is the highest in over 40 years.


>There are ways for companies to manipulate all these metrics to appear profitable even when actual sales aren’t improving.

>For example, one of the eight metrics raises a flag if a company abruptly starts reporting more “receivables,” that is, more money owed to the firm but not yet paid.

>Another flag goes up if a company reports higher values of assets that cannot be sold, and that aren’t clearly identified as plants, property or equipment.

>A third metric looks at changes in accruals, which is when an expense has been incurred, but not yet paid. Another identifies whether companies change how much depreciation they take.

>Dr. Lee, now a professor at the University of Washington in Seattle, says that any of the eight metrics wouldn’t necessarily mean trouble.

>But when the score of the combined metrics is rising, it shows “a growth company, with core businesses that are eroding, that is running out of economic steam and using aggressive accounting,” he said. Even if the accounting is legitimate, he added, “you may want to avoid that company.”

^1 Josh Zumbrun for the Wall Street Journal/News Corp, 24 Mar. 2023,

^2 Messod D. Beneish, David B. Farber, Matthew Glendening, and Kenneth W. Shaw. Aggregate financial misreporting and the predictability of U.S. recessions and GDP growth. The Accounting Review (1 Dec. 2022)


lost_in_life_34 t1_je266tu wrote

the receivables thing is pretty old. back in the 90's a bunch of companies were selling a lot of stuff to the dot coms and other startups on credit and lost big when they went under and then when all that gear was resold on ebay and chapter 7 auctions