Indicators of Fraud in Financial Reporting in the Republic of Serbia

Abstract

Companies can use various manipulative techniques when preparing general-purpose financial statements in order to present better financial position and better performance. Fraudulent financial statements can lead their users to wrong decisions and, consequently, cause big losses and distort confidence in the financial reporting system. Therefore, it is important to timely discover and prevent financial reporting frauds. Timely detection of fraud is one of the key tasks of forensic accountants, who should pay attention to fraud indicators, i.e. warning signs of fraud. Warning signs are not evidence of fraud but point to the need for a more detailed investigation. The aim of the research in this paper is to examine whether there are warning signs and to understand the degree of fraud risk in financial reporting by analyzing financial statements of companies in the Republic of Serbia. The research is conducted on a sample of 42 companies. By applying the Beneish model, we find that the general fraud risk is not insignificant. Borrowing activities of companies are identified as a significant source of this risk, while forensic accountants should pay special attention to income recognition and accrual items, i.e., items related to recognition of income and expenses before or after cash inflows or outflows, including depreciation. Higher risk of fraud is identified in manufacturing companies and financial institutions than in trade and service companies. The research results indicate the need to strengthen the mechanisms of financial reporting control in the Republic of Serbia.

Covid-19 Pandemic and Fraudulent Actions in the Financial Statements: The Case of Hotel Companies in the Republic of Serbia

“…In a situation where the value of this model is greater than -2.22, there are indications that the company committed a fraudulent act in its financial statements. Source: Beneish, 1999, p. 27 Notes: t -current year, t-1 previous year, PP&E -property, plant and equipment Dimitrijević, Obradović & Milutinović (2018) list the following three limitations of the Beneish M-score model:…”

“…How companies in the Republic of Serbia, when preparing their financial statements, adhere to regulations that differ from GAAP (apply the full version of IFRS, IFRS for small and medium entities and Ordinance of the Minister of Finance), also due to the fact that financial statements differ in its form, has the consequence that certain adjustments must be made when determining the value of the Beneish M-score model. This has the consequence that the results of this model may have the character of indications that fraud has been committed (Dimitrijević, Obradović & Milutinović, 2018). In addition to these limitations, many researchers have used this model, primarily because of its simplicity.…”

“…31% of clubs manipulate earnings in their financial statements. Conducting research on the example of 42 business entities from the Republic of Serbia of different sizes and activities, Dimitrijević, Obradović & Milutinović (2018) found a number of warning signs in the financial statements for 2013 and 2014, that is, there is a moderate general risk of fraud. According to the authors, a significant source of this risk is corporate borrowing.…”

Bankruptcy Risk Prediction in Ensuring the Sustainable Operation of Agriculture Companies

“…The quality of management is a very important factor in the efficiency and profitability of any company, regardless of the type of activity and its size [44]. The most frequent reason for corporate distress and eventual bankruptcy is management incompetence.…”

Detection of fraud in financial reporting of small and medium entities in the field of manufacturing industry

“…Amortizacija (t) Amortizacija (t ) + Nekretnine, postrojenja i oprema (t) 6 Prethodno navedenih i objašnjenih 5 varijabli se koriste u obračunu Beneish (M5) M-Score modela i to u sledećoj jednačini: Zarad dalje analize i testiranja hipoteza, potrebno je utvrditi da li je prisutna normalna distribucija serije podataka. Rezultati oba testa (Tabela 3) ukazuju na to da nije prisutna normalna distribucija (p < 0,05 u svim slučajevima).…”