Creative accounting and its impact on SMEs
Creative accounting and its impact on SMEs

Summary/Abstract: Being the most credible of publicly available primary sources of information on financial position and performance of a business entity, financial statements are the primary target of creative accounting (application of a set of techniques by which the financial results of a company could be intentionally manipulated). This paper is focused both on this practice and risks related to its application in financial reporting of small and medium enterprises (SMEs). Even though at first sight this risk is lower for SMEs than for large companies, this is not quite true. Creative accounting techniques are used when all the following factors (incentives for their application, opportunity for their application and perception of the related risk as low) are present at the same time. Except for certain types of incentives (e. g. share based payments for managers) all three factors are present both in small and medium enterprises as well as in large companies. Consequently, small and medium enterprises are exposed to almost the same level of application of creative accounting techniques – but without the same level of assurance system in place (as their internal controls and auditing requirements are rarely as effective and independent as for other businesses). In order to cut down these risks, all three factors contributing to the application of creative accounting techniques should be reduced to the lowest possible level by decreasing the incentives, reducing the judgment in selection of accounting policies and imposing harsh sanctions for any non-compliance.

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