DETECTION OF FRAUD IN FINANCIAL REPORTING OF MANUFACTURING INDUSTRY

Abstract

The importance of forensic accounting has been
growing in recent years, especially when it comes to small and
medium enterprises (SMEs). These entities do not have
sufficiently developed accounting functions, they do not invest
enough in staff who are not consequently motivated to present
certain items of financial statements in a precise manner and in
accordance with accounting standards. This results in reporting errors. The other side of the coin are the manipulations that
happen with the intention and goal of presenting better business
than the real situation to banks and other stakeholders. In this
research paper, Beneish's M-Score model with five variables
(M5) was applied as a method of forensic accounting, in order
to detect manipulations in SMEs from sector C – Manufacturing
in Serbia. The sample includes 73 companies, and only for 3 of
them the M(5) Score exceeded the reference value and indicated
a high risk of manipulation. The situation is different when
looking at model variables individually; however, the results of
the Mann-Whitney test indicate that there is no statistically
significant difference in the level of liquidity and profitability of
a firm depending on whether an entity manipulated from the
individual model variables point of view or not.