Messod Beneish, a professor at Indiana University’s Kelley School of Business, outlined a quantitative approach to detecting financial statement manipulation in his 1999 paper The Detection of Earnings Manipulation. (pdf) He based his model on forensic accounting principles, calling it the “probability of manipulation,” or PROBM model.
The model correctly identified, ahead of time, 12 of the 17 highest-profile fraud cases in the period 1998 to 2002. The PROBM model also consistently predicted stock returns over 1993 to 2007. Students from Cornell University, using the PROBM, correctly identified Enron as an earnings manipulator, while experienced financial analysts failed to do so.
Looking through balance sheets from 2010-2013, the companies with the least probability of manipulation are:
LGBFORGE [stockquote]LGBFORGE[/stockquote]
DISHTV [stockquote]DISHTV[/stockquote]
EROSMEDIA [stockquote]EROSMEDIA[/stockquote]
TATACOMM [stockquote]TATACOMM[/stockquote]
HERITGFOOD [stockquote]HERITGFOOD[/stockquote]
SUPERSPIN [stockquote]SUPERSPIN[/stockquote]
ASAL [stockquote]ASAL[/stockquote]
VIMTALABS [stockquote]VIMTALABS[/stockquote]
PIRGLASS [stockquote]PIRGLASS[/stockquote]
RIIL [stockquote]RIIL[/stockquote]
Since the PROBM score is more of a gatekeeper, here’s a slightly longer list of stocks with high PROBM score:
ASHIANA [stockquote]ASHIANA[/stockquote]
IDFC [stockquote]IDFC[/stockquote]
TUBEINVEST [stockquote]TUBEINVEST[/stockquote]
BAJAJFINSV [stockquote]BAJAJFINSV[/stockquote]
PTC [stockquote]PTC[/stockquote]
SHRIRAMCIT [stockquote]SHRIRAMCIT[/stockquote]
MAGMA [stockquote]MAGMA[/stockquote]
GODREJPROP [stockquote]GODREJPROP[/stockquote]
BAJAJCORP [stockquote]BAJAJCORP[/stockquote]
SRTRANSFIN [stockquote]SRTRANSFIN[/stockquote]
SGJHL [stockquote]SGJHL[/stockquote]
THANGAMAYL [stockquote]THANGAMAYL[/stockquote]
MANAPPURAM [stockquote]MANAPPURAM[/stockquote]
SREINFRA [stockquote]SREINFRA[/stockquote]
CHOLAFIN [stockquote]CHOLAFIN[/stockquote]
M&MFIN [stockquote]M&MFIN[/stockquote]
LICHSGFIN [stockquote]LICHSGFIN[/stockquote]
BAJFINANCE [stockquote]BAJFINANCE[/stockquote]
L&TFH [stockquote]L&TFH[/stockquote]
PFS [stockquote]PFS[/stockquote]
Note: we ignored stocks that don’t had 5 years worth of statements.
The PROBM score, along with SNOA and STA, allows us to screen for stocks with strong balance sheets. We’ll put these three together in the next post…
