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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 latter modification to the M-Score equation eliminated some of the less significant parameters (SGAI, DEPI and LVGI), giving this five-parameter equation. M = -6.065 + 0.823 DSRI + 0.906 GMI + 0.593 AQI + 0.717 SGI + 0.107 DEP. An M-Score greater than -2.22 indicates a high probability of earnings manipulation.