An Analysis of Financial Fraud Detection and the likelihood of Bankruptcy of Scandinavian Banks

Abstract

The relationship between accounting manipulations and bankruptcy likelihood is a challenging topic in the financial field. Earnings quality and financial stability are one of the key drivers for any company. The goal was to examine the degree of influence of fraudulent accounting on bankruptcy likelihood and the performance measures. Beneish M-score model and Jones model were chosen to evaluate earnings quality, Altman Z-score model was used to analyze the level of distress. The secondary data were gathered from 33 Scandinavian banks’ annual financial reports and stock market for the period 2011-2018, the analysis was done in timeline of 7 years. SPSS software was applied to conduct descriptive statistics, correlation analysis and multiple linear regressions. The overview of the data was showed in descriptive statistics, and the correlation analysis presented the degree of association between variables. Multiple linear regression showed the main result, providing the findings related to the effect of accounting manipulations on bankruptcy likelihood and the performance measures. The opted methods allow to test the hypothesis. The findings showed that some of the Scandinavian banks could apply earnings management. Z-score was at a satisfactory level, representing that most of the sampled banks are financially healthy. The result presented that discretionary accruals affect negatively on Z-score, i.e. earnings manipulations increase the bankruptcy likelihood. This correlation is more applicable for larger banks from the selection. The positive relationship between earnings manipulations and the performance measures was detected. The findings showed that fraudulent accounting increase performance ratio values, but in broad perspective earnings manipulations can become a trigger of bankruptcy likelihood.