A multitude of different risk metrics are used by the group in order to investigate the accounting risks and business risks present during the class period involving Northwest Pipe Company. The indicator tests conducted throughout the accounting and business risk analysis included the Beneish Model (M-score), Dechow F-score, Dechow employment nonfinancial measure, and the Simon Business Risk Exposure Calculator.
The first model being used to test accounting risk within Northwest Pipe Company is the Beneish Model (M-Score). This model determines the probability of earnings manipulation within a firm. More specifically, the model uses a combination of predictive variables to ...view middle of the document...
22. Based solely off the results of these scores, one would not assume a high probability of earnings manipulation within Northwest Pipe Company. In hindsight, it is apparent that earnings manipulation was in fact taking place at the firm. However, in this particular case, the Beneish Model is unable to detect a high probability of earnings manipulation.
The next risk assessment model being used by the group is the Dechow F-Score. The Dechow F-Score is similar to the Beneish Model in that it analyzes the likelihood of earnings manipulation within a firm. The Dechow F-Score consists of three different models, however, one of these models generates variables based off of the financial statements and this particular model is considered to have the best predictive power. Therefore, this particular model is used by the group in conducting the risk assessment. Similar to the Beneish Model, the variables within the model are weighted and then summated to arrive at the total F-Score. The table below shows the correct way to interpret the generated F-Score. An F-Score of 0.87 is calculated for Northwest Pipe Company for the time period between 2007 and 2008. This F-Score of 0.87 indicates “Normal or Low” Risk of earnings misstatement events for Northwest Pipe Company. Northwest Pipe Company did have earnings misstatements but this model did not effectively predict the risk of earnings misstatements for Northwest Pipe Company. The main reason for this result is due to the lack of precision inherent within the model.
Year | Employee count | Employee % change | Total Assets | Asset % change |
2006 | 1185 | - | 424,451 | - |
2007 | 1260 | 6.33% | 453,563 | 6.86% |
2008 | 1217 | -3.41% | 509,434 | 12.32% |
2009 | 1100 | -9.61% |...