A Diagnostic Analysis Of Financial Statements Using James Modified C-Score
DOI:
https://doi.org/10.66635/d8960225Keywords:
Fraud, anomaly, investigation, c score, f scoreAbstract
Fraud within the pharmaceutical sector exists, although now fraud is emerging in new forms. Investors have begun asking increasingly severe and serious questions regarding fraud in addition to waiting until after an incident occurs and then conducting a forensic review of the situation.
The objective of this study is to determine if there is evidence that use of two financial scoring models (Piotroski F-Score and James Modified C-Score) could be used collectively to identify whether or not a publicly traded pharmaceutical company is truthfully reporting its financial results. Both of these individual models were not created for this particular type of assessment; therefore, by combining them into a single application, we will have the ability to conduct a larger assessment over all firms examined.
The C-Score analyses six binary criteria related to anomalies in accounting practices. Some of these include an increase in abnormal accruals, accounts receivable increases at a greater rate than revenue, etc. All three represent possible signs of fraudulent activity in financial reporting.
On the other hand, the Piotroski F-Score examines a firm's overall financial health through nine different measurements. The nine areas measured include net income relative to total assets, total debt (leverage), gross margin, etc. Both scores provide value through their intersection. When a firm receives a low Piotroski Score, it does not automatically mean that the firm engaged in fraudulent behavior; however, when the firm's weak financial performance correlates with anomalous accounting indicators in a high C-Score, there is sufficient reason for further investigation.
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