BENEISH MODEL AND FALSIFIED FINANCIAL STATEMENT IN NIGERIA Aimienrovbiye Humphrey EHIGIE PG/MGS1314774 Department of Accounting Faculty of Management… [601707]

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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 reporting. This situ ation would occur when there is
pressure to meet expe ctations or a desire to optimize compensation based on corporate
performance. Eventually, financial report is deliberately 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 fraudulent be haviours .
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 behaviours 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. These elements are represented and explained 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 argued 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 the right person must be present for financial s tatement 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 management. The

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person’s position in the organization ma y 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 control weaknesses and utilise his
authorized ac cess to commit fraud. Most frauds are committed by intelligent, experienced,
creative people, with in -depth knowledge of the company’s controls and vulnerabilities. Ego
is the confidence that the fraud will not be detected and that he could easily talk him self out of
trouble if caught. However, the degree of confidence affects the cost -benefit analysis of
engaging in fraudulent behaviour. Most fraudster coerce others into commit ting 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, fraudsters look auditors, investors, and others right in the eye and lie with confident .
They keep track o f all lies, s o that the series story remain consistent. Fraudsters ensure that
stress is adequately managed. Committing fraud and managing the fraud in the 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 beneish model and falsified
financial statement in relation to fraud diamond th eory.
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 the data analysis and finally
five is the conclusion.
1.2 Statement of research problem
Financial statement f raud r esults 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 th e 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 prov ided the motivation for fraudulent behaviours in the companies. They
buttressed that some companies had experienced downward trends in net profit in periods
before the occurrence of the first fraud , while o ther companies had experienced upward trends
in ne t income. Consequently, subsequent frauds may have been designed to reverse downward
phenomena for some companies while others battle to sustain 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 Communications , 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 , Qwest Communications International , Tyco ,
WorldCom , and Xerox . In addition, corporate accounting fraud and scandals h ave 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 herculean 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 detection of the entire fraud. Besides, the fact that financial
statements can be mis leading 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 financial statements fraud is basically a form of fraud that negatively affects

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individuals, organiz ations, and society. More so , it is important to u nderstand why individuals
engage in financial statement fraud . Besides, there has not been an extensive amount of
research done on the aspects of Beneish model and falsified financial stat ements 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 qu estion:
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 repor ting
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 determine 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 in a falsified financial
statement .
III. Determine if beneish model promotes transpar ency 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
Ho 1 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
process.
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 internal audit and general accounting
departments of some selected companies lis ted 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 annual financial statements of the select companies.
1.6 Significant of the study
An in-depth under standing of relevance of beneish model to a falsified financial
statement will provide assistance to accounting academics, accounting practitioners,
management 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 significant
contributions to the auditing and forensic accounting research and the o pportunity 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 and 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. Besides, there is no accurate certainty as to the
correctness of the measurement of th ese 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 relevant and related literatures on fraud diamond
and inventory fraud. It is divided in to 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 third parties,
involving the use of deception which results in a misstatement in financial statements that ar e
the subject of audit. Wells (2011) was of the opinion that fraud is different from error; fraud is
an intentional misstatement or omissions of amount or disclosures from an entity’s accounting
records or financial statements. Fraud as anything that conno tes 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. Moreover, in the world
of business, fraud has more varia nt meanings; Fraud is an intentional deception,
misappropriation of company’s assets, and the manipulation or alteration of the company’s
financial data to the benefit of the perpetrators (Hall, 2011).
However, Hamilton and Gabriel (2012) aver that f raud may include the theft of
inventory assets, misuse of expense account, secret commission and bribery, false invoicing,
electronic and telecommunication fraud, unauthorized use of information, cheque forgery, false

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financial statements, and so on, though it could take any dimension yet the basic 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 financial inform ation by one or
more perso ns among management staff, employees or third parties. It is the use of criminal
deception to obtain personal gain illegally . It involves deliberate cheating which aimed at
gaining an undue advantage. The basic elements that must be present in fraud includ e: Prescribe
representation, knowledge 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 irresp ective of their sizes and these companies
ranged from start-ups with out assets or revenues to companies with $400 billion in assets or
over $100 billion in revenues. In the same vein, share holders’ equity which ranged from
negative equity of over $1 billio n to positive equity of over $53 billion. Besides, the typical
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 r evenues, and stockholders’ equity averaged $5.772 billion, $2.557 billion, and $1.001
billion, respectively, the median of total assets was $93.1 million, the median of total revenues
was $72.4 million, and the median of stockholders’ equity was $39 .5 mill ion in the period
before the fraud . Given third quartiles of total assets of $674 million, total revenues of $466
million, and stockholders’ equity of $242million, most of the sample companies operated under
the $500 million size range.

2.2.2 Falsified F inancial Statement (F FS)
Beasley, Carcello, Hermanson and Neal (2010), in The Committee of Sponsoring
Organisation of Treadway Commission report stated that fraudulent financial reporting
involves intentional material misstatement of financial statements o r financial disclosures or

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the perpetration of an illegal act that has a material direct effect on the financial statements .
However , financial s tatement fraud was differentiated from other possible causes of materially
misleading financial statements, suc h as unintentional errors and other corporate improprieties
that do not necessarily cause material inaccuracies in financial statements. Fraudulent financial
reporting are all in the context of material misstatements which include restatements of
financial statements due t o errors or earnings management activities that resul t in a violation
of the federal antifraud securities provisions. Among other views, Gupta & Gill (2012) ,
explained that c ompanies may produce an attractive picture of their financial sta tements to the
investors by manipulating 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 formula ted by proper construe of the syntactic as
well as semantics of any natural l anguage because fraud sters may create artificial indic ators by
using semantic of the language.
Ogiedu and James (2013 ) 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 emphasised
further that the financial statement enables investors to make informed decisions on their
inves tments. Over the years, financial statement fraud has been manipu lated by management
either through fraud or n egligence in order to achieve their objectives. Moreover, 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 t rend to shift the blame to management 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 added that manageme nt is held liable for fraudulent financial statements in
order to enhance investors’ confidence through improve transparency and accountability of
disclosure s.

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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 company.
This technique was developed by Professor Messod Daniel B eneish. He added that, the
Beneish Model is similar to the A ltman Z -Score, but, however, it is employed to discover
earnings manipulation rather than to forecast bankruptcy. Consequently, c ompanies with
higher B eneish scores are more likely to be manipulators. Beneish and Nichols, (2007 )
submitted that the Beneish model helps in profi ling companies charged with manipulation of
earnings and further, categori se them into manipulators and non -manipulators using the
variables from the annual financial statement s of the companies . They emphasised that
investigation must be conducted in orde r to identify prospective actual causes for the resulting
financial abnormalities. The Beneish Model based the indicators of companies susceptible to
earnings manipulation on eight financial variables The probability of manipulation increases
when the comp any financial statements shows statistical 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), asserted 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
fraudulen t recognition revenue . If a company experiences a very large i ncrease 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 th at sales growth of the current year is compared
to that of the prior year. Moreover, s ales growth itself is not indicative o f earnings
manipulation, but , some growth companies are more likely to commit earnings manipulation.

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Amoa -Gyarteng, (2014), stated t hat 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 t he company’s gross margin has deteriorated.
Furthermore, the deterioration gross margin is a negative indicator of a company’s future ,
consequently make that company more expose to manipulate earnings. 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. However, 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 th e 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 b y cy and py respectively.

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Asset Quality Index (AQI)
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 i ncrease in the index represent additional 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,
capital ization increases asse ts while helping to preserve the company ’s profitability . Besides,
Warshavsky (2012), explained that the quality of a company’s assets is measured by Asset
Quality Index, by computing the ratio of non -current assets to total assets. T his ratio indicates
the amount of total assets that are less certain to be greatly realized, identified as asset quality.
More so, where the ratio is greater than 1.0 , it indicates that the company has prospectively
increase its intangible assets, and crea te room for earnings manipulation. Hence, the greater the
Assets Quality Index , the greater the probability of earnings manipulation and it indicates a
reduction in asset quality. Amoa -Gyarteng , (2014 ), argued that t he greater the A sset Quality
Index the higher the possibility of the company 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 Ass ets cy
1-(Current Assets py + Property Plant & Equipment py )/Total Assets py
Days Sa les in Receivables Index (DSRI)
In their opinion Grove and Clouse (2012), added that Days Sales in Receivable Index
measures DSRI for the current year divided by DSRI for the previous year. However,
companies 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 in the immediate quarter but hurt fu ture performance in subsequent quarters. This

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metric will detect companies making relevant changes in their collection policies or early
revenues. Warshavsky (2012) maintained that this ratio measures the days that sales are in
accounts receivable, and ben chmarks this ratio against the last 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 no t be
proportionate yet it could be as a consequent of the company’s principal business activities ,
which include legitimate end -of-month sales or general business credit decisions . Amoa –
Gyarteng , (2014 ), submits that this ratio measures how accounts receiv ables as a percentage of
sales have 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 p y /sales py)
NB: CY indicates current year while PY indicate prior year.
Total A ccruals to Total Assets (TATA)
Grove and Clouse (2012), define Total Accruals to Total Assets as a metrics that
represents total accruals to total assets. The a ccrua ls represe nt non -cash earnings and it is
similar 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 prob lems. 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 moderatel y consistent within some acceptable standards of statistical v ariation.
Accruals have constantly provided a traditional opportunity to commit fraud . Consequently, a
higher positive accruals a re associated with potential earnings manipulation . Amoa -Gyarteng ,
(2014), posits that t his index uses accou nting profits which are artificial in nature and are not

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back ed by profits at hand. Hence, h igh ac cruals at the time of decreased cash may denote
revenue manipulation.
(Change in Working capital) – (Change in Cas h) + (Change in Current Tax Payable) + (Current
Portion of Long Term Debt ) – Depreciation and Amortization Expense
Total Assets

Depreciation Index (DEPI )

A Deprecia tion Index (DEPI) which is greater than 1.0, may indicate an upward review
or revaluatio n of the estimated lives of a company’s property, plant and equipment (PPE) ,
which would increase its income (Warshavsky , 2012) . In his submission, Amoa -Gyarteng,
(2014), emphasised that t his index indicates that increase in income as a result of a reducti on
in depreciation which could be 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, G eneral and Administration Expenses (SGAI) m easures 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 company’s future prospects ( Warshavsky , 2012) . In specific terms, Amoa –
Gyarteng , (2014), pointed out that a h igher sales and administrative expenses indicate a fall in
administrative efficiency, then there is the probability of t he company to engage in financial
statement fraud.
Sales, General and Administrative Expenses cy /Sales cy
Sales, General and Administrative Expenses py / Sales py

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Leverage Index (LVGI)
Leverage Index (LVGI) m easures the ratio of a company’s total debt to total assets.
Where the leverage index is greater than 1.0, it indicates an increased leverage and, the
company, therefore, is more prone to f inancial statement manipulation ( Warshavsky , 2012) .
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 independent ly to assess a particular
element of the company’s financial statement data, however, the B eneish 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 applyin g 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.

2.3 THEORETICAL FRAMEWORK
2.3.1 Agency Theory (AT)
An agency relationship is an agreement in which one or more persons (the principal) 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 t o address the difficultly that emanates from every possible action of an
agent whose decisions affect both his or her own welfare and the welfare of the principal

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(Chapple, Ferguson & Kang, 2007 ). Amara, Ben amar and Jarboui (2013) classified agency
theory into leader’s opportunism and information 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 le ader would
be tempted to manipulate accounting records and conceal the true picture of the situation.
Furthermore, the leader’s opportunism is reinforced through a fraud in accounting by
information asymmetry, which is the postulate of agency relationship. In their submission they
viewed i nformation 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 o f 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 c ontrol
accounting system, the agency 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 Dr. Donald R. Cressey, in 1950 when he made
an innova tive contribution to the study of organised crime, white -collar crime and criminology.
In 1950, Dr. Donald R. Cressey in his publication titled “Other Peoples’ Money”, argued that
the presence of a non -shareable financial problem, general knowledge/technic al skills and
rationalisation will 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 theo ry. Fraud triangle consists of three elements that
are relevant for fraud to take place; they are perceived pressure, opportunity and rationalisation.

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Albrecht, Hill, and Albrecht (2006), explained that fraud triangle theory is synonymous
with fire triang le. They said that three elements are necessary for the occurrence of fire, these
include oxygen, fuel, and heat. However, 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 fraud is a function of the strength of the individual element.
FIGURE 1
FRAUD TRIANGLE

Adapted from Tugas 2 012.
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 and 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 trait s and ability of the right person to commit fraud and it plays a major role
in the actual execution of fraud even with the presence of the other three elements.
Pressure
Opportunity
Rationalisation

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Most multibillion dollar frauds would not occur if the right person with the right
capabilitie s was not available. Also, opportunity 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 en d, 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 diamo nd is that, the traits
and ability 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 practi ce under current and past auditing 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 to commit fraud and it is usually
made up of financial burden. 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 desi res leads to fraudulent behaviours which the individual 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 re porting
the firm’s true financial 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 finan cial problem cannot be resolve
by 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
to commit fraud, which usually liken ed to financial burden (Shelton, 2014).

21
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 th e 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 alternatives 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 misappropriate the assets of an employer
because he is greedy, living beyond his means or have 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 personal 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 c reated 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 fraud exist and that t here no stringent consequences attached. 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. Unethical actions are considered possible by an individual

22
who perceives an opportunity to commit fraud. Eventually, boards of directors strive to mitigate
the management and employees perception of opportunity by implementing sound accounting
and internal control systems that prevent and detect fraud (Albrecht et al, 2014). Section 240
of Statement of Auditing Standards advanced that perceived opportunity to commit fraud exists
when an individual believed that the internal cont rol can be overridden and perhaps, 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 opportunit y to commit fraud. The lesser the 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 behaviour s as a grievous offence, the assumption
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, Mo hamad 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 analyst 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 c ommitted.

23
Fraudsters formulate some forms of morally acceptable justifications before engaging in a
fraudulent behaviour. Rationalization involves how the person justifies in their own mind,
committing the crime (Shelton, 2014) . Section 240 of SAS issued A uditing Standard Board
(ASB) (2012), 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
fraud deliberately and willingly. Besides, s ome honest individuals can commit 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, t he 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 difficult to understand the mind of the indivi dual.
Furthermore, excuses for financial 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 rationaliza tions are targeted at reducing the
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 th e 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 capabilit y is one’s personal traits, abilities
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
mental attitudes towards committing f raud. In their submission, capability connotes the act of
delving into the mind of the individual and attempting to ascertain a person’s thought processes,

24
attitudes and character. However, this is a very subjective aspect and most auditors have limited
experience. Omar, Mohamad and Hesri (2010), emphasised that it will be easier to perpetrate
fraud if the fraudsters are confident, can coerce, and has authority or power to make direct or
influence decisions. Rudewicz (2011) s tates that an individual’s perso nality traits and
capability have 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 th e real
sense, individual capability 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.
Stress: Wolfe and Hermanson (2004) state that stress is the chall enges encountered or
engaged in processes involved in committing 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 feelings of stress and guilt while committing u nethical and fraudulent behaviour 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 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 that the person’s position within the
organization may provide the ability to exploit an opportunity for fraud not available to others.
For instance a divisional managers have the positional authority to influence when cont racts or
deals take effect, thus affecting the timing of revenue or expense recognition. In addition, when
people perform a certain function repeatedly such as bank reconciliations or setting up new
vendor accounts their capability to commit fraud increase s as their knowledge of the function’s

25
processes and controls expands over time. Where the right person occupies a position of
authority, he has more influence over certain situations and could also exercise authority that
enables him manage stress effecti vely. A person in a position of authority has more influence
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 Creativ ity: Wolfe and Hermanson (2004) submitted that traits and
ability enhance fraudster attitude in committing 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 talent will make committing fraud 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 po sition or authority to
access the greatest advantage (Rudewicz, 2011).
Coercion: The ability to coerce is the fourth variable the fraudster must possess. Wolfe
and Hermanson (2004) explained that the individual must be able to coerce others into the
fraud ulent behaviour of committing fraud. 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 o r look elsewhere
(Gilmore & Johnson, 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 tha t he cannot be detected. Furthermore, 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 and unethical behaviour. But a more confident person,
estimates the cost of fraud to be lower. Rudewicz (2011) opined that the common personality

26
type involves someone who is determined to make it in life at all cost, self -absorbed, and
exhibits self -confident. 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 p ersonal capability is the ability of the individual to lie
effectively and consistently. In their submission, Wolfe and Hermanson (2011) 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
keep track with the overall story. Most persons are well equipped to defend themselves
convincingly than others are. Viewing from a mental perspectives, these indiv iduals are more
capable of committing f raud (Gilmore & Johnson, 2013).
The fraud diamond encapsulated above can b e expressed below dramatically.
FIGURE 2: FRAUD DIAMOND

Adapted from Tugas, 2012.
Pressure
Opportu nity
Rationalisation
Capabilit

27
2.4 EMPIRICAL REVIEW
Amoa -Gyarteng K. (201 4) argued that t he incentives and benefits in engaging in
inventory frau d are momentary. He conducted his study using Altman Z and Beneish model,
where he try to uncover potential bankruptcy signals and the probability of earnings
manipulation at AngloGold Ashanti respectively. In his findings 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 201 2 indicate 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 in come it generated .
Using the Beneish model on the same financial statement he discovered that D ays Sales
Receivables Index grew progressively f rom 2010 to 2013, meaning that accounts receivables
as a percentage of sales has increased aggregately . The manip ulators mean o f 1.465 was greater
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 th ree years did not crossed the manipulators
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) respe ctively will help future investors to keep away from companies that
may possibly experience inventory fraud in the foreseeable future. He stressed that the practice
of fraudulent financial statement will only stop when executives report financial statement s
ethically and choose to desist from engaging in the practice entirely.

28
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-
Manipulator s Manipulators
Days in 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, it expl icit that Enron financial statements 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 E nron’ 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 LEVI respectively. The result shows that out of the
eight indices, only three (AQI, SGI and LEVI) had values above 1.0 in 1998 thus agreeing with
the results of the M -Score.
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

29
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 application 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 in Sales in Receivables (D SRI) 1.031 1.465 0.625
Gross Margin (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 (GM I), A sset Quality Index (A QI) and 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 1.03 9 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 the B eneish Model.

30
ZZZZ BEST COMPANY Inc.
Metrics Non-
Manipulators Manipulators Enron
Days in Sales in Re ceivables (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 of fraudulent practices . 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 effe ctive 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 variables 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

31
Assets ( DTA ) were not significant in the test, in other wor ds 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 fou r 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 Schweppes 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 th e news of overstated financial statements from the Board of the Company
conducted an investigation on the issue in which it was discoverd that the financial statements
were actually overstated by an estimated amount which was up to the tone of N13 billion.
Consequently, the SEC an Administrative 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 m isconduct
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. Eventua lly, the APC found all
the parties 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 .

32
Unfortunately, the third parties who suffer ed the losses resulting from the falsified financial
statements in this case were not attended to (Ogiedu & James Odia 2013). Finally, apart from
the case of Cadbury, t here have been many other cases of falsified financial statement in
Nigeria but for th e 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 .

33
CHAPTER THREE
METHODOLOGY
3.1 Introduction
This chapter discusses the methodology to be emp loyed 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 sampling technique. The study w ill adopt the use of quantitative data, however, the
ordinary least square regression and descriptive statistics will be used to test and validate the
hypotheses.
3.3 Population and sample
The ent ire population of the study include 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 sha ll
adopt a survey approach through 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 emp loyed as a means of data gathering. More so,
data collection will be based on the annual financial statements for the period of five (5) years
covering 2000 to 2004 .

34
3.5 Data analyses techniques
The analyses of data in this research will be perform with the means of the Beneish
Model while data extracted from the copies of th e annual financial statements to suit the OLS.
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 Sc ore) to establish whether the company
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)

35
3. Asset Quality Index (AQI)
1-(Current Assets (cy) + PPE (cy)) / Total Assets (cy)

1-(Current Assets (p y) + PPE (py)) / Total Assets (py)
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 and General and Administrative Expenses 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 Asse ts (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)) – Depre ciation. & 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 ).

36
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 nu mber. 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 categoris ed
into Non -Manipulators and manipulators.
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 Administrative (SGAI) 1.054 1.041
Total Accruals to Total Assets (TATA) 0.018 0.031
Leverage (LVGI) 1.037 1.111

37
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