Detecting the Risk of Manipulation of Financial Statements for Companies on the Bucharest Stock Exchange Applying the Beneish Model

Abstract

In order to protect the interests of the stakeholders regarding the economic performance of the company, econometric models have been developed in the specialized literature that can determine the possibility of manipulating financial statements. The Beneish model developed by Professor Messod Beneish calculates a score based on eight financial rates. In Romania, based on the average score calculated for 1998-2017, 55% of companies listed on the regulated market of Bucharest Stock Exchange are likely to be manipulators. The result is worrying compared to that obtained in Italy for 2009-2010 and Greece for 2011-2012 (33%), or for Vietnamese companies during 2013-2014 (48.4%), but less dramatic than in Albania (68%). By analyzing the M-scores for each company, we conclude that 67% of the analyzed companies manipulated at least half of the annual financial statements, and of these 19% companies manipulated over 75% of the annual financial statements. The result is meant to sound an alarm for the government, even if there is also an optimistic evolution of the manipulators in the second part of the analyzed period and, in general, a linear, decreasing trend. Financial performance looks better in the manipulated financial statements (average profits, ROA, liquidity and solvency rates are higher, and the degree of indebtedness is lower), but it is a distorted performance, not a real one. The individual results, for each company separately, are of real interest to investors, auditors and other stakeholders of the real performance of the company.