Innovations in the Company’s Earning Management: The Case for the Czech Republic and Slovakia

Abstract

Earning management is a collection of managerial decision that results in not reporting the true short-term, value-maximizing earnings as known to management. It is focused on the changes in financial reporting to mislead the stakeholders and achieve contractual benefits. Earnings management emphasizes the manipulation of accounting choices and operating cash flows, and it is known as a practice which chooses an accounting treatment that is either opportunistic (maximizing the utility of management only) or economically efficient. The paper deals with the possibilities of detection and quantification of trend, degree and scope of the earnings management of Slovak and Czech companies from 2015 to 2017. The paper aimed to create a systematic overview of the earnings management specificities considering the enterprises’ innovation policy as the phenomenon of earnings management understood ambiguously, contradictory and without consensus. The paper is to explain various opinions of earnings management understanding and to propose methodical instrumentation for the detection and quantification of earnings management. The validity of the focus in question is multiplied by the possibility of smooth implementation in the transition countries, countries that even after almost thirty years of transformation, still show a significant degree of difference from countries with a developed market economy. In total, 29 earnings management detection models were subjected to forensic analysis. 2,155 Slovak and 4,842 Czech enterprises represented the statistical sample after the removal of extreme values. The most effective model to reveal manipulation with earnings is the Kothari model. Using the Friedman non-parametric test, trend, degree and scope of earnings management were tested. The results of the analysis showed interesting results – countries tend to manipulate earnings upwards. Detection of earnings management practices in enterprises is of vital importance provided that the real and correct data have to be presented to stakeholders and third parties to prevent any forms of financial and credit risks. Keywords earnings management, earnings management detection models, discretionary accruals.