ACCOUNTING SHENANINGANS - CAUSES OF THEIR OCCURENCE AND METHODS OF DETECTION

Abstract

The definition and adoption of accounting rules and procedures (general theories of accounting) whose acceptability would be universal (general), resulted in the involvement of the two most important accounting associations (International Accounting Standards Board - IASB and Financial Accounting Standards Board - FASB), as well as other interested individuals and associations, in the preparation and adoption of the so-called international professional accounting regulations (standards and/or GAAP) that would achieve this. However, the long-term work on developing standards did not result in the definition of unique rules and procedures for the bookkeeping treatment of all changes in the asset-financial and return position of accounting entities and the compilation of a set of financial reports. Namely, during the development of the standard, it was concluded that in certain situations prescribing only one procedure harms the quality of the standard, and alternative procedures are allowed for certain situations, which allow accountants to make subjective decisions, but also a certain degree of arbitrariness in their choice. The (un)ethical application of the basic or alternative procedure may result in the presentation of the desired asset-financial and return position of the accounting entity, which may deviate to a greater or lesser extent from what could be called true and fair. Such accounting is called creative (aggressive, manipulative), even illegal accounting, although in most cases it does not result in a mandatory violation of legal norms and/or accounting rules and procedures. The common understanding that the methods and techniques of creative accounting are in most cases used for manipulative purposes, resulted in the finding of adequate models, developed primarily by forensic accountants, which would limit its (mis)use and reveal "accounting shenanigans" in financial reports.  The term "shenanigans" was first used by Howard Schilit, an international leader in detecting early warning signs of accounting fraud and corporate mismanagement. Beneish's M score model is one of the most commonly cited and tested models that can be used to assess with reasonable certainty whether the analyzed financial statements are true and fair, or they were compiled using basic and/or alternative procedures that aim to show the property-financial and return position that may or may not deviate from the actual one. We supported our presentations by analyzing the financial reports of several companies from the Manufacturing Industry sector in the Republic of Serbia, both those that showed a significant increase in net profit and those that showed a loss in the observed year 2023.