A model for detecting fraud developed by Messod Beneish

(1997) includes eight different factors. Listed below are some of these factors.

Explain, for each one, why the factor is likely related to a company improperly reporting overly high earnings. Your answer might involve a pressure on the company to commit fraud, or it might consider whether the ratio is actually evidence that fraud has occurred:

A. A large increase in ending accounts receivable as a percentage of sales.

B. A firm that has a lower gross margin percentage this year than in prior years. The gross margin percentage equals the (sales–cost of goods sold) divided by sales.

C. Depreciation expense as a percentage of the related fixed assets is lower than in prior years.

D. The part of net income that is due to accounting accruals, rather than cash received, is growing compared to prior years.

E. An increase in the proportion of financing from debt, relative to equity.