New research on accounting fraud, using a technique that flagged Enron as an earnings manipulator several years before the energy company’s spectacular 2001 implosion. Messod D. Beneish, a professor of accounting at Indiana University who developed the M-Score in the 1990s, and several co-authors have examined the aggregate score for 2000 companies to determine whether they have engaged in financial manipulations. The disturbing findings suggest that the probability of accounting fraud is the highest its been in 40 years. The manipulation relates to the financial statements filed by these companies.
“We think this is a measure of misinformation in the economy,” said Dr. Beneish. The new aggregate measure was published in a December paper.
One of the eight metrics raises concern is when the company suddenly starts reporting more “receivables,” owed to the firm but not yet paid. Another is when a company reports higher values of assets that cannot be sold and that aren’t clearly identified as plants, property or equipment.
This type of analysis was used and showed that three years before Enron’s collapse by a group of students at Cornell University’s business school. The worked under the instruction of accounting professor Charles Lee, using Dr. Beneish’s model, and showed “may be a company manipulating its earnings.” No one paid attention.
Jeffrey Newman is a whistleblower lawyer who handles cases in the SEC whistleblower program and also cases that fall under the False Claims Act. He can be reached at 617-823-3217 or at Jeffrey.newman1@gmail.com
