Accounting-Fraud Indicator Signals Coming Economic Trouble – WSJ

Unless you study accounting, you have likely never come across the M-Score, which is the number underlying both the Enron episode and the economywide concern now. The “M” is for manipulation, and uses a company’s financial statements to determine whether it is engaging in manipulation.

Since the 1990s, the metric has been used to identify red flags at individual companies. Now 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. It shows a disturbing pattern in the historical data: The probability of manipulation usually rises rapidly in the quarters before the economy tips into recession.

“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.

Source: Accounting-Fraud Indicator Signals Coming Economic Trouble – WSJ