BENEISH MODEL AND FALSIFIED FINANCIAL STATEMENT IN NIGERIA Aimienrovbiye Humphrey EHIGIE PG/MGS1314774 Department of Accounting Faculty of Management… [601754]

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BENEISH MODEL AND FALSIFIED FINANCIAL
STATEMENT IN NIGERIA

Aimienrovbiye Humphrey EHIGIE
PG/MGS1314774

Department of Accounting
Faculty of Management Sciences
University of Benin
Benin City

Being a Thesis (Acc830) Proposal Presented to the Department of
Accounting, Faculty of Management Sciences, University of Benin in Partial
Fulfillment for the requirements of the award of M.Sc. Degree in Forensic
Accounting.

Supervised by DR. P. O. IBADIN

June , 2015

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CHAPTER ONE
INTRODUCTION

1.1 Background to the study

Fraud is serious threat to t he survivability of many organisations because it has formed
part of the cost of running a business. Most organisations are yet to come to terms with the
reality that the cost of preventing fraud is cheaper than the c ost of the loss suffered as a result
of fraud occurrence. Fraud risk emanates from the fr audulent or unethical behaviours of
employees and management . Fraud risk include fraudulent financial reporting, asset
misappropriation, over -billing customers, tax fr aud, and commercial bribery just to mention
but a few (KPMG Forensic, 2006). In their submission, Gupta and Gill (2012 ) opine d that
fraudulent financial sta tement has been one of the main problem for mo st organization s across
the globe. They stated further that the quantitative and q ualitative content of the financial
statements should be adequately analy sed concurrently in order to detect fraud risk. The series
of falsified financial statement had consi derably affected the economy, management and the
operating activities of the organisations.
Financi al statement fraud involves an attempt to benefit by encoura ging investment of
equity stock, hiding negative cash flows, obtaining new finance, sell the Company for a higher
price, complying with dividend pay -out and loan covenants , and hyping performance bonuse s.
Consequently, third parties will be highly encouraged to purchase stock, lend money o r
otherwise provide benefit to the company where, however, the company fraudulently improv e
financial position, omis sion of negative inform ation or contingent liabilities (James
Provenzano , 2012 ). Fraudule nt financial reporting was defined by Auditing St andard Board
(ASB) (2012) as a deliberate or advertent misstatements, which include the omission of
amounts or disclos ures in financial statements to deceive the users of financial statements . This

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is the result of management effort towards managing earnings in order to mislead the users of
financial statement and to influence their perspectives about the financial perfor mance of the
business entity . Management may carry out earnings management through illegitimate
adjustment of principles, policies, assumptions and judgments. Besides, p ressures and
motivation may take the fore front of fraudulent behaviours in order to increase the degree of
their occurrence in fraudul ent financial statement . This situ ation would occur when there is
pressure to meet expe ctations , targets or a desire to optimize compensation based on corporate
performance. Eventually, financial report is del iberately manipulated by management when it
materially misstate the financial s tatements. Put simply, m anagement may be motivated to
reduce earnings by a material amount to mini mize tax or to inflate earnings to secure bank
financing , which constitute or tantamount to fraudulent behaviours .
According to Cullen and Wilcox (2010), fraudulent behaviours that result in violation
of trust can be traced to the fraud factors which were highlighted by Cressey (1950). According
to him, fraudulent or unethical behavi ours are output of non-shareable financial problem,
technical skill and rationalisation when put together . These factors were later referred to as
pressure, opportunity, and rationalisation in subsequent studies . These elements are represented
and explaine d in the fraud triangle theory. These elements according to Cressey (1950) present
the crux that makes fraudulent financial statement intents and intentions realistic: they consist
of what is now termed fraud triangle.
Wolfe and Hermanson (2004) have argu ed that the fraud triangle can be improved upon
in order to enhance the prevention and detection fraud by considering a fourth element known
as capability, which led to the evolution of fraud diamond theory. They further stated that traits
and ability of t he right person must be present for financial statement fraud to occur. They
strengthened their argument by considering the elements of capability and they include the
person’s position, intelligence and creativity, ego, coerce, deceit and stress managemen t. The

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person’s position in the organization may furnish the ability to exploit an opportunity to commit
financial statement fraud (e.g. CEO and CFO) . Intelligence and creativity indicates the
smartness of the fraudster to understand and exploit internal c ontrol weaknesses and utilise his
authorized access to commit financial statement fraud. Most frauds are committ ed by
intelligent, experienced, and creative people, with in -depth knowledge of the company’s
controls and vulnerabilities. Ego is the confidenc e that the financial statement fraud will not be
detected and that he could easily talk himself out of trouble if caught. However, the degree of
confidence affects the cost -benefit analysis of engaging in fraudulent behaviour. Most
fraudster s coerce others into commit ting financial statement fraud. A fraudster with a
persuasive personality can convince or persuade others into committing fraud. Fraudster are
deceitful, in other words they can lie effectively and consistently. To avoid being detected,
fraudst ers look auditors, investors, and others right in the eye and lie with confident . They keep
track o f all lies, so that the series of story remain consistent. Fraudsters ensure that stress is
adequately managed. Committing fraud and managing the fraud in th e long run can be
extremely hectic because there is the risk of detection as well a s the need to conceal financial
statement fraud on a daily basis (Hay, 2013). This study examines B eneish model and falsified
financial statement in relation to fraud diamon d theory.
The remainder of this paper is divided into the following: section tw o dwells on the
review of relevant and related literature, this was followed by section three which discussed
the methodology of the research, while section four will examine t he data analysis and finally
five is the conclusion.
1.2 Statement of research problem
Financial statement f raud results in some of the biggest losses and will always rank
number one in the category of losses (Omar , Koya, Sanusi, & Shafie , 2014 ).

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Beasley , Carcello and Hermanson (1999) in the ir study that was commissioned by
Committee of Sponsoring Organizations of the Tread way Commission (COSO), submit ted that
most companies that commit financial statement fraud were either experiencing net losses or
close to break -even point in the periods prior to the fraud . In addition, p ressures of financial
distress may have provided the motivation for fraudulent behaviours in the companies. They
buttressed that some companies had experienced downward trends in net pr ofit in periods
before the occurrence of the first fraud , while o ther companies had experienced upward trends
in net income. Consequently, subsequent frauds may have been designed to reverse downward
phenomena for some companies while others battle to sust ain the upward trends . In his opinion,
Badawi (2008), highlighted some cases of fraudulent behaviours engaged in by different
companies in order to boost their financial performance , consequently suffer huge losses . These
companies include Adelphia Communi cations , AOL Time Warner , Bristol -Myers Squibb ,
CMS Energy , Duke Energy , Dynegy , El Paso , Enron , Global Crossing , Halliburton ,
Homestore.com , Kmart , Merck , Mirant , Nicor Energy, LLC , Peregrine Systems , Qwest
Communications International , Reliant Energy , Tyco, WorldCom , and Xerox . In addition,
corporate accounting fraud and scandals have damaged employees and stockholders morale,
threate n an organization’s esteemed reputation and existence.
Gupta and Gill (2012 ) opin ed that financial statement fraud is a her culean task to detect
because of the features of financial statements and their red flags. They added that the
appearance of red flags may not substantiates the occurrence of fraud and it is therefore difficult
to ascertain their effect prior to the detect ion of the entire fraud. Besides, the fact that financial
statements can be misleading even if t hey are prepared in compliance with GAAP consequently
escalates the problem. Albrec ht, Holland, Malaguen˜o, Dolan and Tzafrir (2014 ) harps on the
facts that fin ancial statements fraud is basically a form of fraud that negatively affects
individuals, organiz ations, and society. More so , it is important to u nderstand why individuals

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engage in financial statement fraud . Besides, there has not been an extensive amoun t of
research done on the aspects of Beneish model and falsified financial statements in Nigeria .
Primarily, based on the above research probl em this study focus on examining how falsified
financial statements can be detected using Beneish model in Nigeria . Hence, the study therefore
shall provide answers to the following research question:
I. To what extent can beneish m odel predict the effect of falsified financial statements?
II. What red fla gs does beneish model produce in a falsified financial statement ?
III. How does beneish model promotes transparency and reliability of the financial reporting
process?
IV. To what extent can beneish model enhance integrity and objectivity of financial
statement ?
1.3 Objectives of the study
The primary objectiv e of this stu dy is to de termine the effect of beneish model and
financial statements in Nigeria .
While the secondary objectives include to:
I. Establish if beneish model can predict the effect of falsified financial statements.
II. Determine whether beneish model can produce red flags i n a falsified financial
statement .
III. Determine if beneish model promotes transparency and reliability of the financial
reporting pro cess.
IV. Ascertain whether beneish model would enhance integrity and objectivity financial
statement .

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1.4 Research hypotheses
Ho1 Beneish model cannot predict the effect of falsified financial statements.
Ho2 Beneish model cannot produce red flags in the falsified financial statements.
Ho3 Beneish model cannot promotes transparency and reliability of the financial reporting
proce ss.
Ho4 Beneish model cannot enhance the i ntegrity and object ivity of financial statement.
1.5 Scope of the study
The fundament al focus of this study is to determine the relevance of beneish model to
a falsified financial statements with emphasis on the i nternal audit and general accounting
departments of some selected companies listed in the Nigeria Stock Exchange operating within
Benin City, Edo State Nigeria. The study shall adopt a survey approach through the collection
of secondary data from the annua l financial statements of the select companies.
1.6 Significant of the study
An in -depth under standing of the relevance of B eneish model to a falsified financial
statement will provide assistance to accounting academics, accounting practitioners,
manageme nt team of the various organisations which cut across the diverse sectors of the
Nigeria economy in the formulation, design and implementation of an effective and efficient
accounting system and internal control mechanisms. Hence, this study will provide s ignificant
contributions to the auditing and forensic accounting research and the opportunity for
subsequent and further researchers will be well established.

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1.7 Limitation of the study
The basic ch allenge of this study is in terms of the measurement a nd genuineness of the
figures in the financial statements where the secondary data will be obtained and employed in
this research. Furthermore, various researchers ado pt different proxies for the variables in the
beneish model and financial statement s. Bes ides, there is no accurate certainty as to the
correctness of the measurement of these variables because they are not within our control.

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CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This section will be utilised to review rele vant and related literatures on beneish m odel
and falsified financial statement in Nigeria . It is divided into different sections and subsections
which cover the concept ual framework which include fraud, falsified financial statement, and
beneish model . The other parts are theoretical framework, empirical review and case study .
2.2 CONCEPT UAL FRAMEWORK
2.2.1 Fraud
Section 240 of the Statement of Auditing Standards (SAS) issued by the Auditing
Standard Board (2012) defines fraud as an intentional act by a person or persons among
management staff, individuals charged with governance, employees and t hird parties,
involving the use of deception which results in a misstatement in financial statements or
falsifying the financial statements that are the subject of audit. Wells (2011) was of the opinion
that fraud is different from error; fraud is an inten tional misstatement or omissions of amount
or disclosures from an entity’s accounting r ecords or financial statements. Fraud as anything
that connotes a false representation of material fact done by an individual to another party with
an intent to mislead and induce the other party to accept and justifiably depend on the facts to
his detriment. Meanwhile , in the world of business, fraud has more various meanings; Fraud is
an intentional deception, misappropriation of company’s assets, and the manipulation o r
alteration of the company’s financ ial information to the benefit of the fraudsters (Hall, 2011).
Viewing from another perspective , Hamilton and Gabriel (2012) aver that f raud may
encompass the theft of inventory assets, misuse of expense account, secret commission and
bribery, false invoicing, electronic and telecommunication fraud, unauthorized use of

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information, cheque forgery, false fina ncial statements, and so on, though it could take any
dimension yet the primary point is that business organization s who are victim s of fraudulent
acts suffers and bears the losses . Dandago (1997), argued that fraud is an inten tional
misrepresentation of facts and figures in the financial statements by one or more persons who
are among the management staff, employees o r third parties. It is the use of criminal deception
to obtain personal gain illegally , and it involves deliberate cheating which aimed at gaining an
undue advantage. The fundamental elements that must be present in fraud include: Prescribe
representation, kno wledge that the representation is false, reliance on the representation and
damages suffered by the person relying on it. Beasley, Carcello, Hermanson and Neal (2010),
submits that f raud affects all types of companies irrespective of their sizes and these companies
ranged from start-ups that has not acquired or generated assets or revenues to companies that
acquired $400 billion worth of assets or over $100 billion worth of revenues. In the same vein,
share holders’ equity which ranged from negative equity of over $1 billion to positive equity of
over $53 billion. Besides, the actu al size of the fraud , companies aforementioned are
substantially bigger than the fraud companies in COSO’s 1999 study. In their research, 347
companies were studied and their total assets, total revenues, and stockholders’ equit y averaged
$5.772 billion, $2.557 billion, and $1.001 billion, respectively, while the median of total assets
was $93.1 million, then the median of total revenues was $72.4 million, and the median of
stockholders’ equity was $39 .5 million in the period before the fra ud. Given the third quartiles
of total assets of $674 million, total revenues of $466 million, and stockholders’ equity
amounted to $242million, the range of companies sampled operated under $500 million .

2.2.2 Falsified Financial Statement (F FS)
In The Committee of Sponsoring Organisation of Treadway Commission report,
Beasley , Carcel lo, Hermanson and Neal (2010), stated that falsified financial statem ents

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involves intentional material misstatement of financial statements or fi nancial disclosures or
the p erpetration of an illegal act that has a material direct effect on the financial statements .
They further differentiate falsified financial s tatement from other possible causes of materially
misleading financial statements, such as unintentional errors and ot her corporate improprieties
that do not necessarily cause material inaccuracies in the financial statements. Falsified
financial statements are all in the context of material misstatements which include restatements
of financial statements due t o errors or ear nings management activities that resul t in a violation
of external regulatory provisions . Gupta and Gill (2012) , explained that c ompanies may
produce an attractive picture of their financial statements to the investors by mani pulating and
concealing the financial information and qualitative narrative s of financial statements. More
so, these disclosures may not apparently contain fraud indicators, however , the warning signs
of fraud can be determined or identified by proper construe of the sy ntactic as well as semantics
of any natural l anguage because fraud sters may create artificial indic ators by using semantic
of the language.
Emphasising more on falsified financial statements, Ogiedu and Odia (2013 ) have
argued that financial statement is prepared in order to show the true financial position of a
company as at the end of the financial year . They stress ed further that the financial statement
enables investors to make informed decisions on their inves tments. They maintained that over
the years, financi al statements have been manipulated by management either throu gh fraud or
negligence in order to achieve their objectives. More so, auditors have been at the receiving
end of the inaccuracies in corporate financial statements. However, in recent time, there has
been a change in this trend to shift the blame to manag ement because the auditors alone cannot
solve the problem of inaccurate corporate financial stat ements. The responsibility of
management involves the control over the preparation of company’s financial statements. They
posits that manageme nt is held liable for fraudulent financial statements in order to enhance

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investors’ confidence through improve transparency , accountability , reliability, integrity and
objectivity of financial disclosure s.
2.2.3 Beneish Model (M Score)
Warshavsky (2012) states that Beneish Model is a quantitative forensic indexing
technique which was developed to assist in detecting manipulated earnings by the management
of an organi sation . This technique was developed by Professor Messod Daniel B eneish. He
added that, Beneish Model is similar to the A ltman Z -Score, but, however, it is employed to
disco ver earn ings manipulation rather than forecast ing bankruptcy. Beneish model and Altman
Z-score are u sed for predicting the occurrence of falsified financ ial statement and bankruptcy
respectively. Consequently, c ompanies with higher B eneish scores are more likely to be
manipulators. Beneish model as submitted by Ben eish and Nichols, (2007 ) helps in profiling
organisations charged with mani pulation of earnings and further, categori se the benchmark into
manipulators and non -manipulators and c omparin g with the variables derived from the annual
financial statement s of the companies . They emphasised that investigation must be conducted
in order to identify actual causes for the resulting financial abnormalities. Eventually , the
Beneish Model based the indicators of companies susceptible to earnings manipulation on eight
financial variables ; Days sales in Receivables index, Gross Margin index, Asset s Quality index,
Sales Growth index, Depreciation in dex, Sales and General Administrative index, Leverage
index and Total accruals and Total assets . The probability of manipulation increases when the
company financial statements shows s tatistical significant changes in accounts receivable,
deteriorating gross margins, decreasing asset quality, sales growth and increasing accruals . The
ratios employ by Beneish model are discuss below:
Sales Growth Index (SGI)
Grove and Clouse (2012), asse rted that t his measure is current year sales divided by
prior year sales. It assist in detect ing abnormal inc reases in sales which may be as a result of

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fraudulen t recognition of revenue . If a company experiences a very large increase in sales from
one period to the next, it may be due to shifting revenue to a later period or booking phony
revenue. Sales Growth Index (SGI) was further advocated by Warshavsky (2012), that when
a result of greater than 1.0 is derived, it means that sales growth of the current y ear is compared
to that of the prior year. Moreover, s ales growth itself is not indicative o f earnings
manipulation, but , some growth are more likely to be the outcome earnings manipulation
committed by the companies . Amoa -Gyarteng, (2014), stated that the index compares sales
between two years. Therefore, an increase in sales could mean great performance for the
company . However, gr owth companies are more prone to earnings manipulation as they will
want to maintain the standard of incessant growth .
Sales cy
Sales py
Gross Margin Index (GMI)
As highlighted by Warshavsky (2012) , Gross Margin Index (GMI) m easures the ratio
of a company’s previous year’s gross margin to the present year’s gross margin. However,
when the results are greater than 1.0 it indicates that the company’s gross margin has
deteriorated. Furthermore, the deterioration of gross margin is a negative indicator of a
company’s future , consequently, the company is expose d to earnings manipulation. The Gross
Margin Index , according to Grove and Clouse (2012) measure s previous year’s gross m argin
divided by the current year’s gross margin. It was substantiated that this is not a direct measure
for potential manipulation, but companies experiencing decline gross margins may increase the
pressure to improve their financial performance. Pressure of this nature may result to fraud or
questionable financial reporting in order to maintain net income margins . Amoa -Gyarteng ,
(2014 ), advocated that this ratio compares the gross margin between the prev ious year and the

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current year. He added that a company may be compel to engage in financial statement fraud
by the deteriorating gross margins.
(Sales py – Cost of Sales py) /Sales py
(Sales cy – Cost of Sales cy)/ Sales cy
NB: The current and previous year are denoted by cy and py respectively.
Asset Quality Index (AQI)
As explained by Warshavsky (2012), the quality of a company’s assets is measured by
Asset Quality Index, by computing the ratio of non -current assets to total assets. This ratio
indicates the amount o f total assets that are less certain to be greatly realized, and identified as
asset quality. He added that , where the ratio is greater than 1.0 , it indicates that the company
has prospectively increase its intangible assets, and create room for earnings manipulatio n.
Hence, the greater the Assets Quality Index , the greater the probability of earnings
manipulation and it indicates a reduction in asset quality. Grove and Clouse (2012), were of
the view that Asset Quality Index measure s percentage of total intangible assets for the current
year divided by the sam e percentage calculation for previous year. An increase in the index
represent a dditional expenses that a re being capitalized to maintain profitability. Instead of
expensing costs, such as research and development or advertising, these costs are being
capitalized as intangible assets. Therefore, capitalization increases asse ts while h elping to
preserve the company ’s profitability . Amoa -Gyarteng , (2014 ), argued that t he greater the A sset
Quality Index the higher the possibility of the co mpany to commit financial statement fraud. It
further captures the manipulations done in other assets which indicate excessive capitalization
of expenditure.
1-(Current Assets cy + Property Plant & Equipment cy) / Total Assets cy
1-(Current Assets py + Pr operty Plant & Equipment py )/Total Assets py

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Days Sa les in Receivables Index (DSRI)
In the opinion Grove and Clouse , they argued that Days Sales in Receivable Index
(DSRI) measures the DSRI for the current year divided by the DSRI for the previous year.
However, c ompanies that are trying to smooth revenue and profit may allow their customers to
highly extend credit terms so that they can buy much earlier. By this practice , they will increase
revenue i n the immediate quarter but dwindle future performance in subsequent q uarters. This
metric will detect companies making relevant changes in their collection policies or early
revenues. For, Warshavsky (2012) , he maintained that this ratio measures the days that sales
are in accounts receivable, and benchmark this ratio against the l ast year. Where a result of
greater than 1.0 is obtained it indicate s that accounts receivable as a percentage of sales has
risen from the prior year. Although this increase in accounts receivable in relation to sales may
not be proportionate yet it could be as a consequent of the company’s principal business
activities , which include legitimate and approved month end sales or general business credit
decisions . Amoa -Gyarteng , (2014 ), submits that this ratio measures how accounts receivables
as a percentage of sales h ave changed compared to the year before. More so, the distortions in
accounts receivables that may have originate from an inflated revenue recognition are captured .
(Accounts Receivable cy / Sales cy)
(Accounts Receivable py /sales py)
NB: CY indicates cu rrent year while PY indicate prior year.
Total A ccruals to Total Assets (TATA)
In his opinion, Warshavsky (2012), states that accruals are estimates of the short term
forecasted inflow and outflow activities of a company. Furthermore, with the exclusion of any
major changes within the company, these accruals should be moderately consistent within some
accepta ble standards of statistical v ariation. Accruals have constantly provided a traditional
opportunity to commit fraud . As a result , a higher positive accruals a re associated with potential

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earnings manipulation . Amoa -Gyarteng, (2014), posits that t his index uses accou nting profits
that are artificial in nature and are not backed by profits at hand. Hence, h igh ac cruals at the
time of decreased cash may denote revenue manipulation. Grove and Clouse (2012), define
Total Accruals to Total Assets as a metrics that represents total accruals to total assets. The
accrua ls represent non -cash earnings and it is s imilar to Sloan’s accrual measure and Dechow
fraud model ’s accrual measure. Where there is an increase in the accruals it represents an
increased probability of earnings manipulation and possible operating and cash flow problems.

(Change in Working capital) – (Change in Cash) + (Change in Current Tax Paya ble) + (Current
Portion of Long Term Debt ) – Depreciation and Amortization Expense
Total Assets

Depreciation Index (DEPI )

As spelt out in Warshavsky (2012 ), a deprecia tion index (DEPI) which is greater than
1.0, may indicate an upward review or revaluation of the estimated lives of a co mpany’s
property, plant and equipment (PPE) , which would increase its income . As a follow up , Amoa –
Gyarteng, (2014), emphasised that t his index indicates that an increase in income as a result of
a reduction in depreciation that could b e a sign of earnings manipulation.
Depreciation Expense py / (Depreciation Expense py + PPE py)
Depreciation Expense cy / (Depreciation Expense cy + PPE cy)

Sales, General and Administrative Expenses Index (SGAI )
Sales, General and Administration Expens es (SGAI) was defined by Warshavsky
(2012) as a ratio that measures the ratio of a company’s sales, general and administrative
expenses to sales. A n increase in sales that is not proportionate as compared to sales, general
and administrative expenses, would indicate a negative signal concerning the compa ny’s future

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prospects . In specific terms, Amoa -Gyarteng , (2014), pointed out that a h igher sales, general
and administrative expenses indicate a fall in administrative efficiency, then there is the
probability of the company to engage in financia l statement fraud.
Sales, General and Administrative Expenses cy /Sales cy
Sales, General and Administrative Expenses py / Sales py

Leverage Index (LVGI)
Leverage Index (LVGI) was explained by Warshavsky (2012) as a ratio that measures
a company’s total debt to total assets. Where the lever age index is greater than 1.0, it indicates
an increased leverage and, the company, therefore, is more prone to f inancial statement
manipulation . Amoa -Gyarteng , (2014 ), stated that an increase in leverage could make a
company susceptible to earnings manipulation.
(Long Term Debt cy + Current Liabilities cy ) / Total Assets cy
(Long Term Debt py + Current Liabilities py )/ Total Assets py
Warshavsky , (2012) argued that e ach v ariable can be used independently to assess a
particular elemen t of the company’s financ ial statement data, however, Beneish Model takes a
company’s results of these eight variables and applies them in the following formula:
M= -4.84 + (0.92*DSRI) + (0.528 * GMI) + (0.404 *AQI) + (0.892* SGI) + (0.115 * DEPI) –
(0.172 * SGAI) + (4.679* TATA) – (0.327 * LVGI) to calculate the MSCORE
The figure of -4.84 is applied as a constant in the formula, and each of the eight variables is
multiplied by its respective constant number. When applying the beneish Model, a score of
greater than -2.22 (i.e., less of a negative) is an indication that the company’s financial
statements may have been manipulated.

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2.3 THEORETICAL FRAMEWORK
2.3.1 Agency Theory (AT)
An agency relationship is an agreement in which one or more persons (the p rincipal)
enter into a contract with another person (the agent) to carry out some services on their behalf
which involves delegating some decision making authority to the agent (Jensen & Meckling
1976). Agency theory tends to address the difficultly that e manates from every possible action
of an agent whose decisions affect both his or her own welfare and the welfare of the principal
(Chapple, Ferguson & Kang, 2007 ). Amara, Ben amar and Jarboui (2013) classified agency
theory into leader’s opportunism and i nformation asymmetry. They stated that leader’s
opportunism occurs through decision making and actions taken by leaders. However, in most
situations unnoticed by shareholders and where the financial situation is poor, the leader would
be tempted to manipul ate accounting records and conceal the true picture of the situation.
Furthermore, the leader’s opportuni sm is reinforced through a falsified financial statements in
accounting by information asymmetry, which is the postulate of agency relationship. In their
submission , they viewed information asymmetry as a determin ant of the opportunistic
behavio ur of the leader. It employ all informati on to commit fraud using its initiatives. In
addition, the leader would explore the flexibility of the principles of accounting in order to
select the accounting methods that would yield positive result. Information asymmetry is the
basis of the problem of conflict of interest and result in the rise of fraud risk. If the company is
faced with weakness in the internal control and accounting system, the ag ency relationships
affect both shareholders and creditors while the leader commits fraud.
2.3.2 Fraud Triangle Theory (FTT)
The origin of fraud triangle is traceable to Dr. Donald R. Cressey, in 1950 when he
made an innovative contribution to the study o f organised crime, white -collar crime and
criminology. In 1950, Dr. Donald R. Cressey in his publication titled “Other Peoples’ Money”,

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argued that the presence of a non -shareable financial problem, general knowledge/technical
skills and rationalisation wi ll lead to violation of trust. He concentrated his research on the
circumstances that make individuals to participate in fraudulent and unethical activities, and
these elements were now referred to as the fraud triangle theory. Fraud triangle consists of t hree
elements that are relevant for fraud to take place; they are perceived pressure, opportunity and
rationalisation.
Albrecht, Hill, and Albrecht (2006), explained that fraud triangle theory is synonymous
with fire triangle. They said that, three element s are necessary for the occurrence of fire, these
include oxygen, fuel, and heat. However, financial statement fraud can only occur when the
elements of pressure, opportunity and rationalisation are present. Ruankaew (2013), opines
that fraud, like fire, cannot ignite in the absence of anyone of the three elements highlighted in
the fraud triangle theory and the severity of financial statement fraud is a function of the
strength of the individual element.
FIGURE 1
FRAUD TRIANGLE

Adapted from Tugas 2012.

Pressure
Opportunity
Rationalisation

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2.3.3 Fraud Diamond Theory (FDT)
The framework of fraud diamond theory was developed by Wolfe and Hermanson
(2004), it was an extension of Cressey’s (1950) fraud triangle. Wolfe and Hermanson (2004),
explained that fraud triangle could be advanced to improve both fraud prevention an d detection
by considering the fourth element known as “Capability”. They stressed further, that, in order
to address pressure, opportunity and rationalisation, the individual capability is important.
Capability is the traits and ability of the right perso n to commit financial statement fraud and
it plays a major role in the actual execution of fraud even with the presence of the other three
elements.
Most multibillion dollar frauds would not occur if the right person with the right
capabilities was not available. Also, oppor tunity paves way to fraud while pressure and
rationalisation bring the person towards it. Furthermore, the person must have the traits and
ability to recognise the openings created by opportunity and commit fraud. To this end, the
fundamental question is, who could turn opportunity for fraud into reality? A fraudster’s
thought process can be determined by employing the four elements of fraud diamond theory.
The fundamental contribution made by the four elements in fraud diamond is that, the traits
and abili ty to commit fraud are vividly and absolutely considered in the assessment of
fraudulent behaviour. Fraud diamond transcends beyond viewing fraud opportunity broadly in
terms of situational factors, as it has been the practice under current and past auditi ng standards
(Wolfe & Hermanson, 2004). The components of fraud diamond include: perceived pressure,
perceived opportunity, rationalisation and capability.
Perceived Pressure
Pressure is the incentive or motivation of the individual or management to commit
financial statements fraud and i t is usually made up of financial burden or to meet up with

21
expected financial perfo rmance . Basically motivation begins with the strong desire to achieve
the fundamental necessities which include food, shelter, recognition, financial means, etc. The
bid to fulfil these desires leads to fraudulent behaviou rs which the individual and management
believes to be the means by which these needs can be fulfil. However, the motivation or
pressure experienced in financial statement fraud is often associated with the anticipated
negative output of reporting the firm’s true financia l performance (Albrecht, Holland,
Malaguen˜o, Dolan & Tzafrir, 2014). Cressey (1950), emphasised that pressure is the non –
shareable financial problem that exist when an individual believes or convinces himself that
the financial problem cannot be resolve b y seeking assistance from other persons, either due to
the phobia of losing their status or forfeiting their self -esteem (Clinard 1954). Perceived
pressure is the motivation of the person or man agement to commit fraud, which usually likened
to financial burden or the desire to meet the expect result or target s or to achieve financial
performance (Shelton, 2014).
Pressure is not real and when fraudsters believe that they are being pressured, this
mind -set can motivate them to commit fraud. Therefore, perceived pressure is the product or
the outcome of non -shareable financial challenges. More so, financial pressure affects
employees’ motivation and it is referred to as the most popular form of pressure and has
influenced about 95% of all fraud cases (Albrecht, Hill, & Albrecht, 2006).
Omar, Mohamad and Hesri (2010) were of the view that pressure involves a situation
whereby the potential fraudster is confronted with financial or personal or work related
problems and went further to opt for short -term panacea to their problems, which fraudulent
and unethical activity is one of the possible options or alternat ives to provide solution. Section
240 of the Statement of Auditing Standards (SAS) issued by Auditing Standard Board (2012)
spells out that an individual may have the pressure to falsify financial statement o r
misappropriate the assets of an employer because he is greedy, living beyond his means or have

22
huge personal debts. Pressure is the motivation that leads to unethical or fraudulent behaviours,
however, fraudsters are faced with different forms of pressures to commit fraud. Some
indicators of pressure are greed, large expenses or pe rsonal debt, living beyond one’s means,
personal financial losses, gambling or drug habits and inability to meet financial projections
(Ruankaew, 2013).
Perceived Opportunity
Ruankaew (2013) believed that opportunity is created by the systems weaknesses , thus,
paving ways for the individual to execute fraud. He further argued that opportunity is a weak
internal control and accounting systems. Fraudsters need to perceive that the opportunity to
commit financial statements fraud exist and that there is no stringent consequences a ttached.
Opportunity involves the act of perceiving that there are techniques to commit fraud that is
undetectable, however, a fraudster that perceives an opportunity to commit fraud senses that it
would be unlikely that any wrongdoing could be proven. Une thical actions are considered
possible by an individual who perceive s an opportunity to falsify financial statement s.
Eventually, boards of directors strive to mitigate the management and employees perception of
opportunity by implementing sound accounting and internal co ntrol systems that prevent and
detect fraud (Albrecht et al, 2014). Section 240 of Statement of Auditing Standards advanced
that perceived opportunity to falsify financial statement exists when an individual believed that
the internal control can be overridden and perhap s, the individual occupy a position of trust or
has knowledge of a specific deficiency in the internal control system. A perceived opportunity
is not real, however, the fraudster believes that there is an existing opportunity to commit fraud.
The lesser th e chances of getting caught, the more likely that fraud will occur (Ruankaew,
2013).
Sauser (2007), suggested that other factors relating to perceived opportunity are the
conviction that no one considers fraudulent behaviours as a grievous offence, the ass umption

23
that the company is not aware that fraud is being committed, the mind that no one care about
fraud risk, and the presumption that no frequent check of employees for violation of the
organisation’s policies.
Omar, Mohamad and Hesri (2010) submitted that perceived opportunity in an
organisation is the trust given by the organisation to the potential fraudster who handles
relevant functions within the operations of the company or when there are weaknesses in the
company’s internal control system. The concept of perceived opportunity connotes that
fraudsters will cash in on the prevailing circumstances available or open to them. The indicators
of a perceived opportunity are weak internal controls, powerless internal audit, auditor
complacent and an anal yst going along (Kelly & Hartley, 2010) .
Rationisation
Rationalisation is the justification that unethical behaviour is anything other than
fraudulent activity (Ruankaew, 2013). This justifies why fraudulent behaviours are committed.
Fraudsters formulate s ome forms of morally acceptable justifications before engaging in a
fraudulent behaviour. Rationalization involves how the person justifies in thei r own mind, the
falsification of financial statements (Shelton, 2014) . Section 240 of SAS issued by Auditing
Standard Board (ASB) (20 12), states that an individual may be able to rationalise executing a
fraudulent act. Moreover, fraudsters possess an attitude, character, and ethical values that make
them commit financial statements fraud deliberately and willingly. Besides, some honest
individuals can commi t fraud in an environment or situations that imposes sufficient pressure
on them. Therefore, where the individual cannot justify any unethical actions he is not
courageous enough to engage in fraudulent behaviour. However, the indicators of
rationalisation are: I am only borrowing, the organisation can afford it, and it is not even a
serious issue. It is imperative to comprehend that rationalisation is difficult to observe. It is

24
difficult to understand the mind of the individual or management who engage in financial
statements fraud. Furthermore, excuses for f inancial statement fraud include, it is in the best
interest of the company, shareholders, or employees, everybody is doing it, it will only be
within a short -term, and this is our only option. Consequently, such rationalizations are targeted
at reducing t he perception of unethicality or to assume a more utilitarian ‘‘it is not ideal, but it
is for the greater good’’ (Albrecht et al, 2014).
Capability
The introduction of the concept of capability brought an advancement to the earlier
work of Dr. Donald R. Cressey in 1950. Consequently, their advancement did not only increase
the number of fraud element but also changed the name from fraud triangle to fraud diamond.
Gilmore and Johnson (2013) were of the opinion that capability is one’s personal traits, abil ities
and character. They added that in the presence of opportunity, pressure/incentive, and
rationalization, there is need to consider the additional attribute regarding an individual’s
ment al attitudes towards falsifying financial statements . In their submission, capab ility
connotes the act of delving into the mind of the individual and attempting to ascertain a person’s
thought processes, attitudes and character. However, this is a very subjective aspect and most
auditors have limited experience. Omar, Mohamad and Hesr i (2010), emphasised that it will
be easier to perpetrate fraud if the fraudsters ar e confident, can coerce , and have authority or
power to make direct or influence decisions. Rudewicz (2011) s tates that an individual’s
personality traits and capability hav e a direct impact on the probability of fraud.
Wolfe and Hermanson (2004) identified six (6) essentials of personal capability which
referred to as Stress, Position, Intelligence and Creativity, Coerce, Ego and Deceit. In the real
sense, individual capabil ity can be viewed as an element that spices up the act of committing
fraud, because it requires the right person to be in place to understand and exploit it.

25
Stress: Wolfe and Hermanson (2004) state s that stress is the chall enges encountered
in the processes involved in committing financial statements fraud. Fraudster must first
consider how to manage the stress in order not to get the members of the gang frustrated in the
process. There is a feeling of stress and guil t while committing unethical or fraudulent
behaviou r which might pose some challenges (Gilmore & Johnson, 2013). However, Rudewicz
(2011) opined that the individual must be able to control the stress as committing and
concealing financial statements fraud could be extremely stressful. Effective stress
management is a function of other variables of the individual capability which include position,
ego, intelligence and creativity, deceit and coerce.
Position: This is the second variable the right person must possess to conveniently
commit fraud. Wolfe and Hermanson (2004) argue d that the person’s position within the
organization may provide the ability to exploit an opportunity for fraud not ava ilable to others.
For instance, divisional managers have the positional authority to influence when contracts or
deals take effect, thus affecting the timing of revenue or expense recognition. In addition, when
people per form certain function repeatedly such as bank reconciliations or setting up new
vendor accounts , their capability to commit financial fraud increases as their knowledge of the
function’s processes and controls expands over time. Where the right person occupies a
position of authority, he has more influence s over certain situations and could also exercise
authority that enables him manage stress effectively. A person in a position of authority has
more influence s over particular situations or the environment (Rudewicz , 2011) . One’s sense
of responsibility will have a significant impact on one’s behaviour (Gilmore & Johnson, 2013).
Intelligence and Creativity: Wolfe and Hermanson (2004) submitted that traits and
ability enhance fraudster attitude in committing financial statements fraud. This is the third
variable that involves the talents which are built in the right person to facilitate the smooth
exhibition of fraudulent behaviour. A sense of skill and tal ent will make committing fraud

26
easier to engage in (Gilmore & Johnson, 2013). The fraudster is smart enough to understand
and exploit the opportunities emanating from internal control weaknesses and the fraudster
uses his position or authority to access th e greatest advantage by falsifying financial statement
(Rudewicz, 2011).
Coercion: The ability to coerce is the fourth variable the fraudster must possess in order
to falsify financial statements . Wolfe and Hermanson (2004) explained that the individual must
be able to coerce others into the fraudulent behaviour of committing fr aud. A fraudster
persuades and compels others to commit and conceal fraud. Rudewicz (2011) was of the view
that an individual with a persuasive personality traits can successfully convince others to go
ahead with the fraud or look elsewhere (Gilmore & John son, 2013).
Ego: Ego is the fifth variable that involves the degree of confidence developed by the
fraudster. Wolfe and Hermanson (2004) argued that the fraudster has a strong ego and exercises
great degree of confidence that he cannot be detected. Further more, the person believes that he
can easily talk himself out of trouble if caught. In other words, he can defend himself when
caught. Consequently, such confidence and arrogance can affect the individual’s cost -benefit
analysis of engaging in fraudulent a nd unethical behaviour. But a more confident person,
estimates the cost of fraud to be lower. Rudewicz (2011) opined that this common personality
type involves someone who is determined to make it in life at all cost, self -absorbed, and
exhibits self -confid ent. A large ego will convince an individual that he or she cannot get caught
when committing fraud or will be able to talk his/her way out of fraud related problems
(Gilmore & Johnson, 2013).
Deceit: The sixth variable of personal capability is the abilit y of the individual to lie
effectively and consistently. In their submi ssion, Wolfe and Hermanson (2004 ) mentioned that
the fraudster will look at the auditors, investors, and others right in the eyes and lie convincingly
in order to avoid being caught or detected. Rudewicz (2011) explained that the fraudster must

27
keep track with the overall story. Most persons are well equipped to defend themsel ves
convincingly than others . Viewing from a mental perspectives, these individuals are more
capable of commi tting f raud (Gilmore & Johnson, 2013).
The fraud diamond encapsulated above can b e expressed below dramatically.
FIGURE 2: FRAUD DIAMOND

Adapted from Tugas, 2012.

2.4 EMPIRICAL REVIEW
Amoa -Gyarteng K. (2014) argued that t he incentives an d benefi ts in falsifying financial
statements are momentary. He buttressed that bankruptcy and fraud models like those
postulated by Altman (1968) and Beneiesh (1999) will help future investors to keep away from
companies that may possibly experi ence financial statements fraud in the foreseeable future .
He conducted his study using Altman Z and Beneish model, where he tried to uncover potential
bankruptcy signals and the probability of earnings manipulation at AngloGold Ashanti
Pressure
Opportunity
Rationalisation
Capabilit

28
respectively. In his fi ndings the Z scores of AngloGold Ashanti for the year s 2010, 2011 and
2012 were 0.20, 2.61 and 1.41 respectively. Eventually, only year 2011 show that AngloGold
Ashanti was not having financial stress while year 2010 and 2012 indicate d that the company
was having financial stress. He finalised by saying that t he adverse Altman Z scores were as a
result of the negative earnings which the firm recorded in 2010 and 2012 and interpreted that
the company paid more money than the income it generated . Using the Ben eish model on the
same financial statement he discovered that D ays Sales Receivables Index grew progressively
from 2010 to 2013, meaning that accounts receivables as a percentage of sales has increased
aggregately . The manipulators mean o f 1.465 was greate r than the years that were review ed.
Gross Margin Index deteriorated b etween year 2011 and 2012 , consequently, the Gross Margin
Index for the three years were lower than the manipulators mean. Assets Quality Index for the
three years did not crossed the ma nipulators mean of 1.254. Sales Growth Index was greater
than 1.0 between year 2010 and 2012. He stated further that bankruptcy and fraud models for
forecasting like those postulated by Altman (1968) and Beneish (1999) respectively will help
future investo rs to keep away from companies that may possibly experience inventory fraud in
the foreseeable future. He stressed that the practice of falsifying financial statemen t will only
stop when managem nt report financial statements ethically and choose to desist from engaging
in fraudulent practice s entirely.

29
AngloGold Ashanti
Beneish M scores for Years 2010, 2011 and 2012 and Beneish Mean Predictive
Indices for Non -Manipulators and Manipulators .

Metrics 2010 2011 2012 Non-
Manipulators Manipulators
Days Sales in Receivables (DSRI) 0.914 1.150 1.389 1.031 1.465
Gross Margin (GMI) 0.758 0.837 1.108 1.014 1.193
Asset Quality (AQI) 1.041 0.930 1.173 1.039 1.254
Sales Growth (SGI) 1.416 1.232 0.967 1.134 1.607
Depreciation (DEPI) 0.916 0.967 1.147 1.001 1.077
Sales, General and Administrative (SGAI) 1.009 1.026 1.083 1.054 1.041
Total Accruals to Total Assets (TATA) 0.139 (0.140) (0.085) 0.018 0.031
Leverage (LVGI) 0.322 1.840 1.173 1.037 1.111
Total -1.44 -3.19 -2.48 0 0
Source: Extracted from Amoa -Gyarteng K . (2014)

In his study, Mahama, (2015) used Enron Corp as a case study where he applied the
standards of the Beneish model to the financial statement which covers the period (1997 to
2001) prior to the fraud. However, from his findings , it was obvious that Enron financial
statem ents have been manipulated as far as 1998 where an M -Score of -2.426 was obtained .
He added that, Catanach & Rhoades -Catanach (2003) after employing the Beneish model
discover a high probability of earnings manipulation in Enron’ s financial statements years
before it collapse. A mixed result was obtained from t he independent indices used i n the model.
The indices for the year (1998) were presented as follows 0.786, 0.936, 1.064, 1.542, 0.847,
0.772, -0.052 and 1.009 for DSRI, GMI, AQI, SGI, DEPI, SGAI, TATA and L VGI
respectively. The result shows that out of the eight indice s, only three (AQI, SGI and LVGI )
had values above 1.0 in 1998 thus agreeing with the results of the M -Score.

30
Warshavsky (2012), demonstrated B eneish Model using Enron Corporation and ZZZ
Best. He maintained that Bene ish Model was modified from already existing analytical ratios
and they use in predicting and detecting the existence of earnings manipulation in the financial
statements . The B eneish Model has its advantage based on the appl ication of eight unique
indices, both individually and collectively . He benchmark Enron Corporation has shown on the
table below:
ENRON CORPORATION
Metrics Non-
Manipulators Manipulators Enron
Days Sales in Receivables (DSRI) 1.031 1.465 0.625
Gross Ma rgin (GMI) 1.014 1.193 1.448
Asset Quality (AQI) 1.039 1.254 1.308
Sales Growth (SGI) 1.134 1.607 1.526
Depreciation (DEPI) 1.001 1.077 1.017
Sales, General and Administrative (SGAI) 1.054 1.041 0.649
Total Accruals to Total Assets (TATA) 0.018 0.031 0.012
Leverage (LVGI) 1.037 1.111 1.041
Source: Extracted from Warshavsky (2012),
The table above shows that E nron score was too close to, or higher, than manipulators
in three of the eight metrics : Gross Margin Index (GMI), A sset Quality Index (A QI) an d Sales
Growth Index (SGI). Warshavsky (2012), stressed that Enron financial statement indicated that
the Gross M argin Index decreased from 21.15 percent in 1996 to 14.61 percent in 1997, and
then to 6.22 percent in 2000. Enron’s Gross Margin Index of 1.448 exceeded the mean index
of 1.193 for the manipulators’ category by 21.4 percent. The Asset Quality Index for E nron of
1.308 was higher than the manipulators mean index of 1.254, and 25 percent greater than the
mean of 1.039 for non-manipulators. The Sales Growth Index for E nron was 1.526, which
represented an index close to the mean of manipulators as determined by Beneish Model.

31
ZZZZ BEST COMPANY Inc.
Metrics Non-
Manipulators Manipulators Z-BEST
Days Sales in Receivables (DSRI) 1.031 1.465 177,622
Asset Quality (AQI) 1.039 1.254 2.043
Sales Growth (SGI) 1.134 1.607 3.905
Total Accruals to Total Assets (TATA) 0.018 0.031 0.064
Source: Extracted from Warshavsky (2012).
From the above table t he mean Sales Growth Index for non -manipulators and
manipulators was 1.134 and 1.607, respectively while Z Best index was 3.905, which denote
143 percent increase over the mean manipulators. However, the sales growth in its capacity
does not indicate fraudulent practices (earnings manipulation s). Total Accruals to Total Assets
for non-manipulators mean index is 0.018 , and the manipulators mean index is 0.031 while Z –
Best’s index of 0.064 was over 100 percent higher than the mean m anipulators .
Jianfei Leng (2011) in his study discovered that an effective and efficient internal
control system have strong impact on earnings quality of an organisation. He elaborated further
that earning quality through a significant test indicated that the earnings quality of listed
companies have a significant impact on internal con trol informat ion disclosure, in order words
the better the earnings quality , the higher level of the internal control d isclosure of information .
The alternate hypotheses for this study were accepted while the null hypotheses were rejected.
Specifically, t he control variabl es which include Earnings Per Share (EPS), Board Size ( BS),
the proportion of Independent Directors (ID), Ownership Concentration ( OC) and the
establishment of Internal Audit Agency ( IAC) were all significance in the test. He concluded
that all the control variables had significant impact on i nternal control information dis closure,
which was consistent with some previous re searches. Return on Equity ( ROE ) and Debt to

32
Assets ( DTA ) were not significant in the test, in other words they do not have significant impact
on internal control disclosure of information .

CASE STUDY: CADBURY NIGERIA PLC
In October, 2006 , the Board of Directors of Cadbury Nigeria Plc made public the di scovery of
overstated accounts covering a period of four years. Cadbury Nigeria Plc was founded in 1965
as a subsidiary of Cadbury UK the parent body. Cadbury Nigeria Plc produces and market
beverages, confectionery and other food products. Cadbury is a multinational company which
as at December 31, 2006, was owned 5 0.02% by Cadbury Schweppe s Plc and 49.98% by
individuals and institutio nal holders. As at year 2005 to be precise Cadbury was rated as one
of the most esteemed company in Nigeria . The Nigerian Securities and Exchange Commission
(SEC) on receiving the news of overstated financial s tatements from the Board of Directors of
the Company conducted an investigation on the issue in which it was discover ed that the
financial statements were actually overstated by an estimated amount which was up to the tone
of N13 billion. Consequently, the SEC an Admini strative Proceedings Committee (APC) was
constituted to try the directors, some management staff of the company, the external auditor,
Akintola Williams Delloite (AWD) and the Registrars, Union Registrars Limited for gross
misconduct and violation of the provisions of the Investments and Securities Act 1999, the
SEC Rules and Regulations 2000 (as amended), Code of Conduct for Capital Market Operators
and their Employees and the Code of Corporate Governance in Nigeria. Eventually, t he APC
found all the parti es guilty of various offences which range from preparation of falsified
financial statements, absolute fraud and gross negligence. However, v arious administrative
sanctions and penalties were imposed on the parties that were found guilty . Evaluating the
gravity of the offence committed , members of the public and other in terested parties considered
the admin istrative sanctions imposed as inadequate and not commensurate to the offence

33
committ ed. Unfortunately, the third parties who suffered the losses resulting from the falsified
financial statements in this case were not attended to (Ogiedu & Odia 2013). Finally, apart
from the case of Cadbury, t here have been many other cases of falsified financial statement in
Nigeria but for the purpose of this study the case of Cadbury will be used to test whether the
fraud could have been predicted and detected before it occurrence .

34
CHAPTER THREE
METHODOLOGY
3.1 Introduction
This chapter discusses the methodology to be employed in the study. It will cut across
the research design, population and sample, method of data analyses, method of data collection,
data analyses techniques and operationalisation of variables which are highlighted as follows.
3.2 Research design
The time series survey will be employ in this study since it requires the use of secondary
data which will be obtain from the annual financial statements of selected companies listed in
the Nigeria stock Exchange . Therefore, this will further be achieved through the use of simple –
random sampli ng technique. The study w ill adopt the use of quantitative data, however, beneish
model will be used to test and validate the hypotheses.
3.3 Population and sample
The entire population of the study incl ude all the manufacturing companies listed in the
Nigeria Stock Exchange, Nigeria. In addition, simple random sampling technique will be
employed to choose the sample respondents from the population. Therefore, the study shall
adopt a survey approach thr ough the use of secondary data which will be gathered from the
annual financial statement of the companies that constitute the population for the study.
3.4 Method of data collection
The secondary source of data will be employed as a means of data gatheri ng. More so,
data collection will be based on the annual financial statements for the period of five (5) years
covering 2000 to 2004 .

35
3.5 Data analyses techniques
The analyses of data in this research will be perform with the means of the Beneish
Model while data will be extracted from the copies of th e annual financial statements .
3.6 Model specification
The M -Score is based on the eight (8) variables as above, which is calculated by using
the formula of: M = -4.84 + ( DSRI +GMI + AQI +SGI +DEPI + SGAI +TATA+ LVGI ).
M= -4.84 + (0.92*DSRI) + (0.528 * GMI) + (0.404 *AQI) + (0.892* SGI) + (0.115 * DEPI) –
(0.172 * SGAI) + (4.679* TATA) – (0.327 * LVGI) to calculate the MSCORE .
The study will adapt the Beneish Model (M Score) to establish whether the co mpany
would have been able to indicate that they were prone to earning management manipulation.
Several studies have employed the Beneish Model in their researches, they include Omar ,
Koya, Sanusi, & Shafie , (2014 ), Amoa -Gyarteng (2014) , Mahama, (2015), Beneish & Nicho ls,
(2005), Beneish et al (199) . There are eight variables taken into account for developing the M –
Score, as listed below:
1. Days' Sales in Receivable I ndex (DSRI)
Accounts Receivable (cy)
Sales (cy)

Accounts Receivable (py)
Sales (py)

2. Gross Margin I ndex (GMI)
Sales (py) – Cost of Sales (py)
Sales (py)

Sales (cy) – Cost of Sales (cy)
Sales (cy)

36
3. Asset Quality Index (AQI)
1-(Current Assets (cy) + PPE (cy)) / Total Assets (cy)

1-(Current Assets (py) + PPE (py)) / Total Assets (p y)
4. Sales Growth Index (SGI)
Sales (cy)

Sales (py)
5. Depreciation I ndex (DEPI)
Depreciation Expense (py)
Depreciation Expense (py) + PPE (py)

Depreciation Expense (cy)
Depreciation Expense (cy) + PPE (cy)
6. Sales, General and Administrative Expe nses Index (SGAI)
Sales, General and Administrative Expenses (cy)
Sales (cy)

Sales, General and Administrative Expenses (py)
Sales (py)

7. Leverage Index (LVGI)
Long Term Debt (cy) + Current Liabilities (cy)
Total Assets (cy)

Long Term Debt (py) + Current Liabilities (py)
Total Assets(py)
8. Total Accruals to Total Assets (TATA)
(Working Capital (cy) – (py)) – (Cash (cy) – (py)) + (Income Tax Payable (cy) – (py)) +
(Current Portion of Long Term Debt (cy) – (py)) – Depreciation. & Amort. Expense (cy)

Total Assets (cy)

The M -Score is based on the eight (8) variables as above, which is calculated by using the
formula of: M = -4.84 + ( DSRI +GMI + AQI +SGI +DEPI +SGAI +TATA+ LVGI ).

37
M= -4.84 + (0.92*DSRI) + (0.528 * GMI) + (0.404 *AQI) + (0.892* SGI) + (0 .115 * DEPI) –
(0.172 * SGAI) + (4.679* TATA) – (0.327 * LVGI) to calculate the MSCORE . The figure of –
4.84 is applied as a constant in the formula, and each of the eight variables is multiplied by its
respective constant number. When applying the beneish Model, a score of greater than -2.22
(i.e., less of a negative) is an indication that the company’s financial statements may have been
manipulated. The table below shows the benchmark of the Beneish model and it is categorised
into Non -Manipulators and man ipulators.
Metrics Non-
Manipulators Manipulators
Days in Sales in Receivables (DSRI) 1.031 1.465
Gross Margin (GMI) 1.014 1.193
Asset Quality (AQI) 1.039 1.254
Sales Growth (SGI) 1.134 1.607
Depreciation (DEPI) 1.001 1.077
Sales, General and Administ rative (SGAI) 1.054 1.041
Total Accruals to Total Assets (TATA) 0.018 0.031
Leverage (LVGI) 1.037 1.111

38
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