Abstract
The main objective of this study is to find out if Balkan banks use income smoothing (IS) as a creative accounting practice. The IS level is analyzed to see whether banks are focused on these practices as a tool to produce a better picture of financial views in the sight of decision makers. The data are provided from the audited financial reports presented on the banks’ web pages. Eckel’s modified equation was used to find out if banks use the technique of IS. As a result, the findings showed that banks use IS, and the factors that influence the use of this practice are analyzed. The factors studied are: age of banks, profitability, and loan provision. Of a total of seven banks in Kosovo, only three use income smoothing. In Albania, of a total of 11 banks, only one uses income smoothing. Surprisingly, the results show that none of the variables measured affect the usage of income smoothing. The study contributes to understanding the practice of IS on the one hand, and on the other hand, to opening the eyes of investors and depositors promoting vigilance when they make decisions about investing their funds in banks.
Highlights
The main goal, for banks, but for all institutions is to increase revenues and profits
The main objective of this study is to explore if banking organizations in two Balkan countries, Kosovo and Albania, use income smoothing as a creative technique to help banks better present their financial health to different audiences
This study attempted to show if banks in the two Balkan countries use income smoothing practices and examine if the factors reviewed in the literature affect application of the income smoothing technique
Summary
The main goal, for banks, but for all institutions is to increase revenues and profits. From the investor’s premise: Investors invest their capital when a company has little fluctuations in their profits and incomes Income smoothing is defined as “A shape of earnings management constructed to mitigate peaks and valleys from a normal earnings series, including steps to mitigate and “store” profits during good years for use during slower years” The scandals of the last two decades of large and world-renowned companies have turned their attention to the study of factors influencing accounting manipulations. These manipulations by different companies, which are involved in fraudulent practices, have been replaced by different names as creative accounting.
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