What Does Beneish’s M-score Say About Serba Dinamik’s Accounts?

Serba Dinamik is now embroiled in an audit dispute with KPMG, after its external auditor highlighted discrepancies involving transactions to the tune of RM4.54 billion to the company's independent directors last month. The issues raised were based on the financial accounts for the financial year ended Dec 31, 2020.

Since the audit issues were made known to the investing public, the company’s institutional investors, including the Employees Provident Fund (EPF) and Permodalan Nasional Bhd, have voiced concerns over the company’s governance.

The EPF sold 17.12 million shares between June 2 and June 15, leaving it with 351.73 million shares or 9.48%. Kumpulan Wang Persaraan Diperbadankan, which had a 5.2% stake in Serba Dinamik, ceased to be a substantial shareholder as of June 1, after disposing of 26.18 million shares or 0.7% between May 31 and June 1 (The Edge, June 22).

To assess the quality of financial report, we have conducted Beneish’s M-score analysis for Serba Dinamik. The Beneish model is a quantitative tool used in detecting financial fraud. It is a probit regression model that estimates the probability of earnings manipulation using eight dependent variables.

Beneish M-Score = -4.84 + 0.92*DSRI + 0.528*GMI + 0.404*AQI + 0.892*SGI + 0.115*DEPI – 0.172*SGAI – 0.327*LVGI + 4.679*TATA

The computation of Serba Dinamik’s M-score is shown below:

Indexes above are calculated using Cumulative Quarter Financial Results retrieved from Serba Dinamik’s Q4 2020 Quarterly Report.

Based on our analysis, the M-score for Serba Dinamik was -1.76. This is in the range of ‘likely profit manipulation’ (> -1.78) based on this method of establishing probability of manipulation.

Two variables that should be highlighted here are DSRI and SGI, where both indexes were above 1. According to Beneish M-score, a DSRI above 1 indicates that receivables as a percentage of sales has increased. This variation may be reflective of improper revenue recognition leading to revenue inflation. In Serba’s case, its DSRI was 1.12.

The company’s SGI was at 1.33, which indicates positive sales growth relative to the previous year. According to GMT Research, high sales growth does not imply manipulation, but high growth companies are more likely to commit financial fraud because their financial position and capital needs put pressure on managers to achieve earnings targets.

So, has Serba Dinamik possibly manipulated its accounts? Purely based on this methodology it merits further investigation. And a more detailed work will be required after EY’s independent review.

 

 

This research solely relies on a quantitative model to analyse Serba Dinamik’s accounts. A more detailed analysis on the company’s financial statements and further due diligence is required for a more considered judgment.

 

References:

1.     Serba Dinamik to take legal action against external auditor KMPG for alleged negligence, 22 June 2021, The Edge

2.     Beneish’s M-Score, GMT Research