Financial statement fraud: Detecting financial statement manipulation in Malaysian public listed companies using Beneish M-Score Model

This study attempts to assess the applicability of Beneish M-Score Model in detecting financial statement fraud from Malaysian perspective. Furthermore, the study also attempts to identify which financial statement information that may indicate the company engaged in fraud and to examine the relationship amongst variables in Beneish M-Score Model. The study uses several analysis methods to arrive at the conclusion. First, the study uses Beneish M-Score Model which consists of eight (8) variables; DSRI, GMI, AQI, SGI, DEPI, SGAI and TATA. From these variables, the study will derive to M-Score index. Based on the M-Score index, the study may conclude the Dependent Variables; if M-Score > -2.22 the companies will be classified as manipulators and if M-Score < -2.22 the companies will be classified as non-manipulators. Second, the study uses Mann-Whitney U Test to identify which financial statement information may indicate the company engaged in fraud. Third, the study uses Granger Causality Test to examine the relationship amongst the variables. From the analysis, Beneish Model has successfully detected 28 companies out of 33 companies that manipulated their financial statements with successful rate of 84.8%. Furthermore, among the eight (8) variables, stakeholders may focus on three (3) variables that have statistically significant differences between manipulator and non-manipulator companies. There are Days’ Sales in Receivables Index (DSRI), Gross Margin Index (GMI) and Selling, General and Administration Expenses Index (SGAI). Last but not least, stakeholders need to know there are four (4) variables may give cause and effect to or will influence the other five (5) variables. There are; GMI Granger Cause DEPI, SGI Granger Cause DSRI and GMI, LVGI Granger Cause SGAI and SGAI Granger Cause SGI. Beneish M-Score Model may assist stakeholders to analyse whether there were manipulations in the financial statement of a company and help them to make wise decision. However, it is not the holy grail of fraud detection, but may trigger the red flag of fraud. There is no assurance that the analysis will be 100% accurate. To become wise decision maker, stakeholders also need to be concerned on the corporate governance issues.