Investor Skepticism and Creative Accounting: The Case of a French SME Listed on Alternext

By Demerens, Frederic; Pare, Jean-Louis et al. | International Journal of Business, Winter 2013 | Go to article overview

Investor Skepticism and Creative Accounting: The Case of a French SME Listed on Alternext


Demerens, Frederic, Pare, Jean-Louis, Redis, Jean, International Journal of Business


I. INTRODUCTION

At a time when the accountancy environment has become much more complex because of the introduction of International Financial and Reporting Standards (IFRS) and accountancy rules are becoming increasingly flexible, financial manipulations designed to concoct more positive financial statements are frequently observed among listed companies. According to the 2005 "Global Economic Survey" produced by Price Waterhouse Coopers, the number of firms reporting fraud is increasing rapidly, and the number of restatements of financial statements increased to 1,195 cases in 2005 (8.5% of U.S. publicly traded companies). Thus, investors must be vigilant of potential accounting manipulations that could threaten their investments. Similar to any other watchdog, investors must be skeptical. In this paper, we will apply a revised definition of a skeptical investor by using the financial statements of a public firm. The skeptical investor, unlike the auditor, will not be able to demand confirmations. The investor arrives at his or her judgment only by analyzing the public information that is disclosed by the firm. Our research question investigates whether skepticism can lead an investor to have presumptive doubts about a firm's financial statements and to make drastic financial restatements.

We adapt the concept of auditors' professional skepticism, as defined by regulators and academics, to the investor. Using the determinants presented by Nelson (2009), we focus on knowledge. We apply a skeptical approach regarding financial statements to a real company that has not yet been charged for financial statement fraud. This "live case" addresses a French services company that is listed on Alternext and has financial statements that seem, from a skeptical point of view, to have been manipulated. Using the available knowledge of financial shenanigans and accounting manipulations, accounting and auditing standards, the company's business model and its financial impact, we conduct a deeper analysis of the economic, legal and financial information that has been disclosed by the company over several years.

We find that skepticism based mainly on knowledge determinants leads to presumptive doubts and drastic financial restatements. Erroneous recognition of income, transfers of current expenses to future periods, overvalued assets and undervalued liabilities are the main "potential" accounting manipulations identified for the company. These operations considerably modify corporate financial indicators.

The contributions of the paper are twofold. First, our paper presents an original application of investor skepticism to a real "live case", which reveals ex-ante presumptive doubt about potential accounting manipulations. Our original methodology allows us to explain how the financial statements of this firm do not comply with its real economic situation. We demonstrate that our methodology contributes to the economic analysis of this firm and that our restatements approach reality. Second, our research questions the ability of legal "watchdogs" to detect manipulations and to bark. No watchdog has suspected any fraud for this company or documented any of our doubts.

The article is divided into four sections. In the first section, we review the literature on creative accounting and investor skepticism. In the second section, we provide our investor skepticism-based methodology. In section III, we present the case of a French company and our restatements of its key financial indicators. Lastly, we discuss our results and highlight the lack of skepticism among the investors of this company.

II. LITERATURE REVIEW ON CREATIVE ACCOUNTING AND INVESTOR SKEPTICISM

A. Creative Accounting: Definitions and Motivations

1. How to define accounting manipulations

The literature frequently makes a distinction between manipulations that conform to legal rules and standards and manipulations that do not. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Investor Skepticism and Creative Accounting: The Case of a French SME Listed on Alternext
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.