Creative accounting in small advancing countries

Abstract

The great majority of the studies conducted on the problem of creative accounting concerns large countries with developed capital markets. Their results are not necessarily applicable to small countries that have a different setting. Thus, this opinion study investigates why, how, to what extent, and in what direction earnings management is practised in Greece. The results obtained indicate that, despite the detailed accounting regulation, creative accounting is practised in Greece frequently, especially the legitimate one, and to a considerable extent (i.e. around 25 per cent of pre‐managed earnings). The schemes employed and several of the motives for earnings management are pertinent to the Greek setting. As for the direction of earnings management, the large companies overstate profit, the overriding motive being the demand for external financing, while the small companies understate profit in order to reduce income taxes. These findings have important implications for the users of Greek accounts, especially for investors, auditors and regulators.

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