THE NEXUS BETWEEN FRAUDULENT FINANCIAL REPORTING AND COMPANY FAILURE – THE CASE OF BANKRUPT COMPANIES IN SERBIA
Abstract
Under conditions of financial crisis, companies may resort to manipulative practices in order to present their financial position and earning capacity more favourably than they actually are. Following the disclosure of financial statement manipulations, a significant number of companies enter bankruptcy, and even when they survive, recovery is often prolonged and challenging. A particular challenge in less developed economies is the limited transparency regarding the perpetrators of fraud, which hampers the development of reliable indicators that could serve as early warning signals (red flags). This paper examines the applicability of the Beneish M-score model with eight variables on a sample of 48 companies for which bankruptcy proceedings were initiated in the Republic of Serbia during the 2017–2024 period. The research objective is to identify potential red flags by isolating financial statement items that exhibited unusual movements in the years preceding the initiation of bankruptcy proceedings. The results indicate that 20.83% of the companies were classified as potential manipulators during the crisis period. The observed risk of fraudulent financial reporting is particularly associated with distortions in the relationship between receivables and sales, with an indicator pointing to problematic patterns related to intangible assets, as well as with faster growth of administrative expenses relative to the growth of sales revenue. The findings further confirm the need for enhanced analysis of accrual-based items that reflect mismatches in the recognition of revenues and expenses relative to the corresponding cash inflows and outflows. The results may be useful to investors, financial institutions, regulators and agencies involved in fraud prevention and bankruptcy proceedings, as well as to academic researchers in the further development of models tailored to the specific characteristics of national economies.
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DOI: https://doi.org/10.22190/TEME260131028S
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