Question

Use Beneish’s earnings manipulation model to compute the probability that Enronengaged in earnings manipulation for 1998, 1999, and 2000.b. Identify the major reasons for the changes in the probability of earnings manipulationduring the three-year period.

Answer 1

1998, 1999, 2000:

Index value : -4.840, -4.840, -4.840

Days Receivable Index : 0.7243, 1.0546, 1.2562

Gross Margin Index : 0.5640, 0.4513, 0.2463

Asset Quality Index : 0.4293, 0.4300, 0.3116

Sales Growth Index : 1.3594, 1.1446, 2.2413

Depreciation Index : 0.1160, 0.1151, 0.0908

Selling & Admin Expense Index : 0.1962, 0.1650, -0.0716

Leverage Index : -0.2720, -0.2453, -0.3656

Total Accruals to Total Assets: -0.1491, -0.0285, -0.2709

Probability using norms-dist: 1.8% , 1.86%, 8.05%

Step-by-step explanation:

Beneish's earning manipulation model is used to ascertain the probability of manipulation in the financial data. In this model ratio are calculated and then their index is identified to know an indication of possibility of fraud. In the given scenario the probability of manipulation is too high. The data is assessed through applying beneish model to understand actual financial position of the company.