|Abstract:||Earnings management is a phenomenon that occurs more often in a period of economic crisis. Companies, their managers and owners are using the techniques which regulate their profit or loss, to prove a higher value of the company, cut the tax base for the calculation of the tax, etc. Although the law tolerates alteration of income statement within certain limitations, the limit between admissible and fraudulent balancing is, nevertheless, very thin. The boundary is the intention of the act; thus, the change for gaining certain benefits at the cost of harming others is a fraud in accounting. All this relates to the level of ethics of the manager or owner of the company.
Accounting experts are professionally well-trained as they have to harmonize legal regulations and the ethical aspect of the functioning of experts. This is sometimes quite difficult, as the contradictions between professional and business ethics can be immense. Differences are best handled by co-operation and compromise.
This master’s thesis will present the concept of earnings management: the reasons, goals and motives for altering; the most common types of alterations; and the most common earnings management techniques. Due to differences in determining the income statement between companies and sole proprietorships, thesis separately sets out the reasons, goals and motives for altering, the most common types of alteration, and the most common earnings management techniques of sole proprietorships.
The analysis included micro and small companies and sole proprietorships who were previously involved in the Horvat’s survey (2012).
For the purposes of establishing the relationship between accounting ethics and earnings management, the thesis researches methods for determining earnings management and then selected the most right for present research (Garrod and co-authors’ test (2006) or GRPV-statistics). In the case of sole proprietorships, this test was not proper; therefore, at Horvat’s proposal, we used a lever with which we calculated the ratio between the percentual change in the total profit or loss of sole proprietorships and the percentual change of their incomes.
In the practical part of the master's thesis we carried out a test of Garrod and co-authors (2006) for micro and small companies for five consecutive business years. The test showed an anomaly of clear income statement around zero in the cases of less and more sensitive business managers. We could not attribute the results to continuity, because the number of purely positive income statements, calibrated both with operating revenues and total revenues, was too high to add it as a coincidence. In sole proprietorships, leverage calculations were carried out. Even here, as with companies, we bring to an end that there is no difference between less and more vulnerable independent entrepreneurs for accounting ethics, since we found out a greater likelihood of altering income statements in majority of them.|