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A mathematical model that uses financial ratios and eight variables to identify whether a company has manipulated its earnings. The variables are constructed from the data in the company's financial statements and, once calculated, create an M-Score to describe the degree to which the earnings have been manipulated.
A Z-score measures the number of standard deviations an observation is away from the mean, or average, of all observations. A positive Z-score indicates the observed value is above the mean of all values, while a negative Z-score indicates the observed value is below the mean of all values. [1] Business.