Explanation

The Beneish M-score is a probabilistic model that helps detect earnings manipulation. Key points:

• M-score > -1.78: Indicates potential earnings manipulation
• M-score < -1.78: Suggests no earnings manipulation
• Higher M-scores (closer to or above -1.78) indicate higher probability of manipulation

Analysis of each company:

• Company 1: M-score = -2.00 (below cutoff), improved from -2.25
• Company 2: M-score = -1.50 (above cutoff), worsened from -1.25
• Company 3: M-score = -2.25 (below cutoff), worsened from -2.00

Company 2 has the highest probability of earnings manipulation because:

1. Its current M-score (-1.50) is above the -1.78 cutoff
2. It shows a deteriorating trend (M-score becoming more positive)
3. Among all companies, it has the highest (least negative) M-score

Correct Answer: B - Company 2