As every accountant knows, it's possible to paint a rosy picture without doing anything illegal. Here's how to quickly detect possible discrepancies
01-May-2020 •Research Desk
When their operational parameters worsen, and the stress starts showing in the financial numbers, a lot of businesses get a tad creative with their accounts so that investors don't take to their heels.
Can this creativity be detected through analysing the financial results that are released? Not with certainty, but as a probability, yes. What we have here is a probabilistic score that measures a company's resemblance to other companies where the accounting has been creative.
We have developed the Modified C-score which indicates the probability of financial manipulations based on a quantitative method. We did that by modifying James Montier's C-score using his 6 basic checks and further improving it by adding our own 3 points. You will find the score on our stock pages, under the Essential checks tab.
We give a score to a company based on these nine points by giving them zero or one for each point based on qualification. The higher a C-score, the higher the probability of financial manipulation.
James Montier's C-score
Montier's C-Score is made up of six red signals. These are scored in a simple way, with a 1 for yes and a 0 for no.
These are then totalled to give a final C-score ranging from 0 (no evidence of earnings manipulation) to 6.
The individual tests are: