INDICATORS OF FRAUD IN FINANCIAL REPORTING IN THE REPUBLIC OF SERBIA

Abstract

Companies can use various manipulative techniques when preparing general-purpose financial statements in order to present better financial position and better performance. Fraudulent financial statements can lead their users to wrong decisions and, consequently, cause big losses and distort confidence in the financial reporting system. Therefore, it is important to timely discover and prevent financial reporting frauds. Timely detection of fraud is one of the key tasks of forensic accountants, who should pay attention to fraud indicators, i.e. warning signs of fraud. Warning signs are not evidence of fraud but point to the need for a more detailed investigation. The aim of the research in this paper is to examine whether there are warning signs and to understand the degree of fraud risk in financial reporting by analyzing financial statements of companies in the Republic of Serbia. The research is conducted on a sample of 42 companies. By applying the Beneish model, we find that the general fraud risk is not insignificant. Borrowing activities of companies are identified as a significant source of this risk, while forensic accountants should pay special attention to income recognition and accrual items, i.e., items related to recognition of income and expenses before or after cash inflows or outflows, including depreciation. Higher risk of fraud is identified in manufacturing companies and financial institutions than in trade and service companies. The research results indicate the need to strengthen the mechanisms of financial reporting control in the Republic of Serbia.