Creative Cash Flow Reporting – the Motivation and Opportunities

Stevanović, Slavica and Belopavlović, Grozdana and Lazarević-Moravčević, Marija (2013) Creative Cash Flow Reporting – the Motivation and Opportunities. Economic analysis, 46 (1-2). pp. 28-39. ISSN 1821-2573

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Abstract

Company's stakeholders make business decisions based on information presented by management. The quality of decisions, among other things, depends on the quality and reliability of information in the financial reports. Business practice demonstrates that managers tend to present a false picture of the financial position and profitability of the company, often in cooperation with the owners of the capital. Procedures that management and investors take, in order to create a false impression about the performances of the enterprise, the contemporary literature defines as creative financial reporting. Presentation of better financial performance than realistic one provides misleading signals about the company, while the users of information are misinformed. The goal of this paper is the analysis of opportunities to implement creative cash flow reporting and the factors that encourage the company’s management and the owners of the capital to wrong and misleading interpretation of performance items. After the presentation of the main motive of creative financial reporting, we shall focus on examples of erroneous classification of cash flows. Earnings management and the shaping of cash flows may be realised within and beyond the boundaries of accounting regulations on several ways, but a special review in the paper is dedicate to creative reporting procedures of cash inflow and outflow related to receivables, investments, liabilities, and expenses. Consequences of creative reporting on cash flow and other performances could be serious both for stakeholders and for survival of the company, which is discussed in the last part of the paper.

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