Detection of Financial Manipulations in Financial Statements of Listed Companies of Pakistan Using the M-Score Model

Financial manipulation is one of the most important issues related to financial statements, which has been well-documented in accounting theories as well as in practice for long periods. Therefore, the primary objective of this thesis is to identify the probability of financial manipulations in the financial statements of the textile companies, listed on Pakistan Stock Exchange (PSE), with the help of Beneish M-ScoreModel. The application of this model is new in Pakistan, which has given the motivation to use it and identify the probability of financial manipulations in Pakistani textile listed companies. The thesis has made efficient use of Earnings Management, Prudence and Matching Principles theories. The results extracted, with the use of M-score, are in line with the research objectives and reflect efficient identification of probability of financial manipulations in the textile companies, listed on Pakistan Stock Exchange (PSE). The results show a successful split between the companies having high or low probability of financial manipulation. The thesis is limited to textile listed companies only, whereas private textile companies have not been considered. Nevertheless, practical contribution of M-score can play a significant role in stock markets to boost investors’ confidence on financial information, in credit institutions for credit risk assessment, in corporate sectors for solidifying internal controls and in audit firms to strengthen financial and forensic audits. Last but not the least, it is recommended that future researchers do the in-depth analysis of listed companies of Pakistan by taking financial information of last three to five years to see pattern.