A Qualitative Study of Danish Private Firms' Potential Advantages from Using Accounting Flexibility and Earnings Management to Manipulate Accounting Estimates to Influence Credit Ratings

Abstract

Accounting fraud poses an immense risk to firms of all types and sizes. Accounting flexibility includes a risk of being subject to earnings management. When private firms are applying for credit, they could be tempted to take advantage of earnings management to strengthen their credit rating. This thesis contributes to the literature of earnings management by analyzing and discussing the potential advantages a Danish private firm can obtain from using accounting flexibility and earnings management on items with accounting estimates, to manipulate their financial statements in connection to the credit rating in Denmark. Our study includes an investigation of the auditor’s impact on the opportunity of using earnings management to obtain an advantage in the credit rating in Denmark. Furthermore, the study provides an exploration of what the Danish banks emphasize in their credit rating and the extent to which they focus on earnings management and accounting flexibility. The study has a qualitative approach and is based on data from 13 interviews with auditors, banks, and Danish private firms. The finding of our study highlights that the Danish private firms can improve their credit rating by using earnings management, however this might only be a short-term solution and can have limited advantages. Our outcome has been drawn from an analysis and discussion of accounting flexibility in Årsregnskabsloven (ÅRL), the auditor’s role in relation to earnings management as well as credit ratings in Denmark. The analysis of accounting flexibility in ÅRL includes following items associated with accounting estimates; (i) development projects, (ii) goodwill, (iii) investment properties, (iv) depreciations and (v) revaluations and devaluations.