Detecting Creative Accounting in Businesses in Financial Distress

Abstract

This paper investigates whether the management of firms in financial distress applies creative accounting techniques in order to fine-tune the elements of their financial statements. For this purpose, the financial statements of 385 Greek bankrupt firms of the trade and manufacturing sectors for the period 2003 to 2014 were analyzed. The sample was divided into two sub periods; in the period before the financial crisis, that is from 2003 to 2008, and the period 2009 to 2014 during which the Greek economy was in crisis and recession. By applying factor analysis, five financial ratios were selected, which formed the independent variables in a Discriminant Analysis (MDA) and Logit models in order to find those firms which, while they were bankrupt they were classified in the last period of their operation as healthy (type I error).By selecting these firms (common to both models), their accounting data for the last two years before they went bankrupt have been investigated in order to determine whether they have been affected by the application of creative accounting methods. The results showed that the management of some of the selected firms applied creative accounting techniques during the last year of operation before their bankruptcy, which led to the manipulation and falsification of the published financial statements during the period before the financial crisis. However, this is not the case for the period 2009 to 2014, because the economic crisis affects the behavior of managers in applying creative accounting, which is owing to the changes in market rules.

An Empirical Analysis for the Effects of Accounting and Auditing Standards and Corporate Governance on Macroeconomic Stability

“…It has been determined that corporate governance and accounting and auditing standards have the same effect on macroeconomic stability. There are estimates in the literature that the deliberate or unintentional misapplication of accounting and auditing standards may have effects on the triggering of some financial crises (see, e.g., Arnis et al, 2019;Bischof et al, 2019;Figlioli et al, 2017 ;Menicucci & Paolucci, 2017;Kothari & Lester, 2012;Huizinga & Laeven, 2012;Arnold, 2009).…”

“…Finding that the positive effect of economic freedom and democracy on macroeconomic stability was determined. Arnis, Karamanis, and Kolias (2019) Analysing relationship between creative accounting and financial distress…”