Corporate Governance Report

Phase III

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 assess whether or not a firm is adhering to GAAP. The variables being used within this model include days’ sales in receivables index, gross margin index, asset quality index, depreciation index, selling and administrative costs index, total accruals to total assets, leverage index, and the sales growth index. The above variables make up the eight variable M-Score and the five variable M-Score uses the same variables except it removes the selling and administrative costs index, total accruals to total assets, and the leverage index. Different weights are applied to each variable and after summating the individual variable scores, one arrives at the total M-Score for the firm. An M-Score greater than -2.22 indicates a high likelihood of earnings manipulation. The group is conducting the M-Score analysis from 2007 to 2011 and deriving an individual M-Score for each year. In the appendix, there is a graph which displays the trend of the eight and five variable M-Score throughout the time period. The M-Score analysis for Northwest Pipe Company does not produce overly robust results. The five variable M-Score is never greater than -2.22 during the period and the eight variable M-Score has three years in which it is marginally greater than -2.22. Based solely off the results of...