COMPARISON OF CREATIVE ACCOUNTING RISKS IN SMALL ENTERPRISES: THE DIFFERENT BRANCHES PERSPECTIVE
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Technická Univerzita v Liberci
Technical university of Liberec, Czech Republic
Technical university of Liberec, Czech Republic
Abstract
Small enterprises are exposed to new challenges in examining the impact of creative accounting on their financial statements, particularly when assessing ‘going concerned’ conditions and increasing the risk of fraud. The article aims to identify accounting errors and fraud risks made by accounting adjustments, thus distorting the true and fair presentation of financial statements. We aim to explore the risks of creative accounting based on the relationship between profit creation (EBT) and cash flow (CF) by applying the CFEBT risk triangle method. We analyze small enterprises operating mainly in the trade, processing, and construction industry to achieve this. The detected risks of accounting records were subsequently compared and evaluated in the selected branches of activities. Our research findings confirmed that M-score values were primarily negative for the monitored industries of small enterprises. The resulting values point to applying creative accounting methods – earning management, which pursues, in particular, tax optimization, and, on the other hand, the fulfilment of profitability criteria. A more profound analysis of selected accounting items and financial indicators confirmed more substantial differences between the trade and construction industries. Differences between the branches were found in one-half of the financial indicators and most of the 14 accounting items monitored. The accounting risks ascertained may be used as a tool for reducing the information asymmetry between authors of accounting records and users of reported accounting data and information. The detection and evaluation of risks of accounting errors and errors beyond the economic substance of reported data may considerably improve the quality of decision-making of internal and external users and is also used by persons authorized to conduct the administration and Corporate Governance for increasing the efficiency of enterprises’ internal control systems.
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creative accounting, fraud, cash flow, risk, small enterprises
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1212-3609