Answer-first summary for fast verification
Answer: Company 2
## 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**
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An analyst gathers the Beneish model M-scores below and uses a −1.78 M-score cutoff.
| Company | Current Year | Prior Year | Change in M-score |
|---|---|---|---|
| Company 1 | −2.00 | −2.25 | 0.25 |
| Company 2 | −1.50 | −1.25 | −0.25 |
| Company 3 | −2.25 | −2.00 | −0.25 |
Based on this information, which company has the highest probability of earnings manipulation?
A
Company 1
B
Company 2
C
Company 3
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