Glendening: 'Accounting matters, and manipulated accounting information can negatively impact the economy'

Researchers at the University of Missouri and Indiana University believe an early warning sign of a recession in the U.S. economy could come from companies' manipulated financial statements. 

The study was published in The Accounting Review, a top-notch American Accounting Association journal, according to a press release. Accounting professors Matthew Glendening and Ken Shaw, both of the University of Missouri, and Daniel Beneish and David Farber, with Indiana University, teamed up for the project. 

"Accounting matters, and manipulated accounting information can negatively impact the economy,” Glendening said in the press release. "When financial reporting is not adequately monitored and companies manipulate financial information, it can have potentially damaging consequences. Not only do investors use this information, but other firms do so as well. In many cases, firms make employment and investment decisions based on this information, which can be way too optimistic.”

The press release stated the team's research also found high-levels of potential manipulation in financial statements can predict recessions and economic slowdowns anywhere from 5-to-8 quarters in advance, as well as downturns in gross domestic product (GDP) growth in a similar timeframe. 

Team members used a widely-known measurement method called the M-Score to figure out how much financial manipulation was taking place, according to the release. The M-Score is based on eight variables, including how fast a company’s sales are growing, compared to its money owed. The measure provides a reliable way to figure out whether or not a business manipulated its financial statements. The M-Score previously revealed early warnings for the Enron accounting scandal.

“We try to do something of value in our research and see if there’s a way that we can help people,” Shaw said in the release. Previous research used this method to examine individual firm misreporting, but this study was the first to expand the scope economy-wide, the release stated.