Financial statement manipulation in failing Small and Medium-Sized Enterprises in Bosnia and Herzegovina

Abstract

The overall objective of this research is to analyze the financial condition of failing companies prior to bankruptcy, in comparison with non-failing companies, which are matched on the industry, size, and time-period. The sample consists of 168 SMEs from the wholesale and retail industry, whose financial statements were analyzed for the 2011-2015 period. The analysis is primarily based on the ratio analysis and the models developed for bankruptcy prediction and financial statement manipulation. Mann-Whitney U test is used to compare differences between failing and non-failing SMEs for a set of twenty variables. Research findings indicate that there is a significant difference between failing and non-failing SMEs, especially in accruals, asset quality, leverage, profitability, and liquidity. For the very first time in the transition economy of CEE Bosnia and Herzegovina, the pre-bankruptcy behavior of failing SMEs is analyzed, providing insights into potentially manipulated areas, which represent the main contribution of the research.

Keywords

• financial distress
• accounting manipulations
• earnings management
• wholesale and retail industry,
• Beneish M-score
• Altman Z-score model