Research paper says possible accounting fraud by some firms
View(s):A research paper written by university students has shown possible accounting manipulations of some listed firms over three financial years.
The Research Journal of the CA Sri Lanka published in connection with the second Research Conference of CA Sri Lanka held recently published research paper appearing on pages 106-121 titled “Using Beneish M Score Model to Detect Red Flags of Corporate Financial Statement Fraud in Sri Lanka” by three undergraduates from the University of Kelaniya and University of Sri Jayewardenepura – Mudith Sujeewa, M. D. Pubudu Kawshalya, Athula Manawaduge” has attempted to identify certain red flags of financial statement fraud in public limited companies listed in Colombo Stock Exchange (CSE) in Sri Lanka.
Beneish M-Score is a mathematical model, and uses eight financial ratios weighted by coefficients to identify whether a company has manipulated its profits. It was created by Prof. Messod Beneish who published a paper in June 1999 called “The Detection of Earnings Manipulation”. 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.
The research paper done by Sri Lankans shows that the findings of this study need to be interpreted in light of its limitations, although most of these are common to this type of study. The research paper inter alia, concludes that it is found that, in each year (2013 – 2017) considered for the study, there are companies with a Beneish M Score of greater than -2.22, which can be gauged for possible manipulations on those financial statements.
It says those seven companies in the manufacturing sector, one company in the healthcare sector, and one company in the trading sector were likely manipulators in the financial year 2016/2017. It identified eight companies in manufacturing sector, one company in construction sector, one company in service sector and one company in trading sector as likely to be manipulators for the financial year 2015/2016.
Four companies in manufacturing sector, one company in healthcare sector one company in service sector and two companies in the trading sector, were identified as likely to be manipulators for the financial year 2014/2015. Ten companies in manufacturing sector, two companies in construction sector, two companies in healthcare sector one company in service sector and two companies in the trading sector were being identified as likely to be manipulators for the financial year 2013/2014. This research’s associated observations show that top level management, auditors, forensic accountants, regulatory authorities and other stakeholders can use the Benish M Score model to detect the red flags of financial statement frauds in Sri Lankan context. It says that findings of this study need to be interpreted in light of its limitations, although most of these are common to this type of study. It adds that while the period for analysis is short it would be of interest to extend the time horizon.
The sample of companies selected is limited and care needs to be taken when generalising results to other countries and cross-contextual comparison is also not facilitated through this study, it said. This research was sent to the Securities Exchange Commission (SEC) and the CSE.