M-Score Analysis

The Beneish M Score by Professor Messod Beneish, is a mathematical model

that uses eight financial ratios to identify whether a company has
manipulated its earnings. The variables are constructed from the company's
financial statements and create a score to describe the degree to which the
earnings have been manipulated.

The M score is based on a combination of below Eight various below

mentioned ratios:

1. DSRI= Days Sales in Receivable Index

This measures the ratio of days sales in receivables versus prior year as an
indicator of revenue inflation. If there is a large increase in DSRI then can
predict that could be indicative of revenue inflation. We can see that index
value up lifted from 2007-2008 (0.88) to 2008-2009(0.94) and further a boom
can be seen from 2009-2010(1.16).

Apart from the above we can see there is also a fall in the index value to 0.99
in 2010-2011 and again rise from 2011-2013 and again decrease in 2014.
This indicates revenue inflation from 2007-2010 and decrease in 2010 to
2011 again increase in 2011-2013.

2. GMI: Gross Margin Index

Measured as the ratio of gross margin in year versus gross margin in another
year. Gross margin has steep fallen when this index is higher than 1. A firm
with bad falling prospects is more likely to cook fraud earnings.

Toshiba GMI rise from 2007 to 2009 and reduced from 2010 to 2014 which is
lower than 1.
The following analysis shows that there is few level of manipulations in
earnings in the books of accounts. The amalgamations can be done in net
cash sales and net credit sales.
This shows Toshiba has practiced some manipulations in their earnings from
2007, 2008 and 2009.

3. AQI: Asset Quality Index

Asset quality is a form of tool to measure the ratio of non-current assets apart
from plant, property and equipment to total assets. AQI can be ratio of asset
quality in year to year.

Toshiba has a slight increase in AQI ration of 1.03 in 2007 to 1.06 in 2008 to
1.57 in 2009 & decrease to 0.99 in 2010 and again increase to 1.05 in 2011
and decrease to 0.98 in 2014.
Here we can witness that the current asset value decrease in huge amount in
year of 2010 and remains next to constant.
 4. SGI: Sales Growth Index
This checks the ratio of sales viz prior year. As the sales growth standalone is
the not the measure to the manipulation, this hint suggests that growth
companies are likely to find themselves under pressure to manipulate in
order to keep up appearances. Ratio of sales in year to sales in year. So in
case of Toshiba there is highest in 2014 and then in 2008 and then in 2011
which means. It looks like there are not very much manipulations made in
case of sales or no is linked to revenue because hardly any fluctuations in
ratios. The index value decreases from 1.08 to 0.94 from 2007 to 2010 and
again rises to 1.02 in 2011 then remain same in year 2012 and 2013 and
again rises in 2014 to 1.13.

5. DEPI: Depreciation Index

Measured as the ratio for the rate of depreciation in year versus year to the
corresponding rate in year. DEPI more than 1 depicts that assets are being
depreciated at a slow rate. This suggest that the firm might be updating
useful asset life assumptions upwards, or trying a new method that is income
friendly. Toshiba has more than one in year 2008 only rest less than one.
Manipulation in depreciation rate is practiced in year of 2008 because the
value of DEPI is more than one in year of 2008.(Exhibit 6)

6. SGAI: Sales, General and Administrative expenses Index

The ratio of SGA expenses in year corresponding to year prior. This is
assumed that financial admits would assume a disproportionate increase in
sales as negative signal about firms future prospects. Toshiba has maximum
number in 2008 and then in 2012 and 2014, so it is seen that there is
manipulation in sales in 2008, 2012 and 2014.

7. LVGI: Leverage Index

This is the ratio of total debt to total assets in year corresponding to year
prior.
Toshiba has value more than 1 in 2009 and then 2012. So LGI > 1 indicates
an increase in leverage. It seems the organization has higher up the leverage
in year 2009 and 2012 and in remaining year there is no similar event.

8. TATA: Total Accruals to total Assets

This ratio tries to calculate the Total accruals change in working capital
accounts other than cash less depreciation. This shows the organization has
discretionary accounting choices to change earnings in the year of 2008 only
rest of the years Toshiba has lower value of the ratio.

M Scr = -4.840 + 0.920 x DSRI + 0.528 x GMI + 0.404 x Q + 0.892

x SGI + 0.115 x DPI - 0.172 x SGI - 0.327 x LVGI + 4.697 x TT
An M-Score of less than -2.22 suggests that the company will not be
fraudster in manipulating its books of accounts. An M-Score of greater than
-2.22 signals that the company is likely to be manipulator. From the excel
sheet, it can be seen that for the period 2014-13, the m-score was -2.45, for
2013-12 it was -2.60, for the period 2012-11 it was -2.42 and for 2011-10 it
was -2.67. The m-score value -2.80 in 2010-09 is the highest and in 2009-08
the m-score was -2.77 and it is during this period that the actual fraudulent
activities commenced. Overall we can see that the m-score value has been
above -2.20 thereby indicating that there was some kind of Fraudulent
activities going on in the company.