Creative accounting-undesirable phenomenon in the Slovak Republic

The most common definition, which appears in the literature indicates creative accounting as a process of manipulation of accounting data to transform financial statements from the form they should form, into the form their creator would like to have. Most frequent creative accounting practices can be illustrated by the following scheme:

Procedures of creative accounting

2. Creative accounting practices

Based on a long-term examination of the use of creative accounting practices, there are most frequently used practices in Slovakia: A) Targeted selection of several legal procedures

a) Depreciation of property.

Tax and accounting depreciation are governed by two separate laws. When tax depreciation is definitively determined, accounting depreciation is managed by itself by entity according to the actual depreciation of assets. Creative accounting is a significant, when applying depreciation. Tax depreciation may be in - terupted by the entity, therefore it is not applicable in costs, when under the legislation, the only tax deductable expences are tax depreciations.

b) The choice of the amortization of intangible assets.

Intangible assets are depreciated according to a depreciation plan. Accounting Act sets the maximum amortization period only for intangible assets, setting the development costs for five years. Entities are obliged to write off intangible assets given, no later than five years after its inclusion, while accounting amortization of intangible assets is tax deductible costs. Creative accounting is reflected in the fact, that the entity itself determines the period of amortization of intangible assets, and thus, tends to increase legal costs.

c) Technical evaluations of fixed assets

Refers to expenditure on completed extensions, additional buildings and construction works, reconstruction and modernization, when exceeding individual tangible and intangible assets of 1,700 Euro in total for the tax period. The form of creative accounting is reflected in the decisions of an entity, to apply these expences directly to the the costs /501 Account/, or increases the value of assets and reflects the costs in depreciation /Account 551/.

d) Application of expenditure in the cost of tangible fixed assets

If an entity procures fixed assets on credit, it is required to pay even the interenst. Creativity of an entity, manifests itself in alternative decisions, whether interest on the loan is included in the cost, or shall be charged directly to expenses. When the entity charges interest cost, so it can increase costs legally.

If he decides to include the interenst in the cost of fixed assets and the amount of interest it will be applied in the cost of an entity, gradually - in the form of depreciation.

e) Deduction of the tax losses

It is also an alternative tool of creative accounting - it is the tool to reduce the tax base from the income tax of the legal entity. An entity may deduct the tax loss immediately, equally, during the four consecutive tax periods, if the entity displays tax base.

Within the framework of creative accounting, entities use this method of base tax relief, if they are interested in reducing of the tax.

B) Failure to follow the legal procedures

a) Depreciation of fixed assets - entities, in order to avoid to the increase the income tax base, interrupt the accounting and tax depreciation of assets, which is in conflict with the law and, thereby they reduce their own income tax, which should be paid to the State. Thus, this is illegal use of creative accounting practices.

b) Adjusting entry - the entity has an obligation to create, in accordance with the precautionary principle adjusting entries if it is essential to assume, that there was impairment of assets compared to of their book values. If this is an adjusting entry resulting from the Law on Income Tax, then creation is a tax deductible expense if it comes to other provisions, then an entity has an obligation to raise the income tax base. We see signs of creative accounting that the entity does not generate any adjustments, but distorts the real value of assets, which is calculated on the balance sheet.

c) Reserves form entities on the basis of the precautionary principle for risks and charges. Reserves can be: legals arising from the Law on Income Tax (then they represent tax deductible expense), and other reserves (which represent unrecognized tax expenses). Creative accounting will take effect, if the entity does not constitute a reserve, which belongs to the category of other reserves and the entity wrongly quantifies it lower.

All above mentioned, but also other creative accounting practices form tax evasion. Tax evasion is a result of the overall economic behavior of taxpayers, oriented to reduce the tax liability of the taxpayer to the state, on legal, or illegal basis. In its core, tax evasion is a legal and illegal tax avoidance, both within the country and internationally.

By legal tax avoidance, we understand, in line with current legislation, those methods, that are characterized by tax avoidance, by the clever use of the possibilities offered by the law. [1, p. 25] From the practical application of creative accounting it is a targeted selection from a number of legal procedures. Thus, the entity has not committed any breach of applicable law, but selecting the most appropriate alternative offered by laws

- Illegal tax evasion, is the one which is breaking the law, or is performed outside the legislation. From the practical applying of the creative accounting, there is a lack of compliance with legal procedures. The most frequent illegal tax evasions are:

- Companies established solely for the purpose of billing (white horses based on so-called virtual address)

- Invoicing, which subsequently is not entered into the accounts and is not granted in the tax return, on the other hand, a customer of the invoice deducts

VAT,

- Altering accounting,

- Exchange of invoices in accounting,

- Not exposed invoice for the sale of goods or services, or not using of the electronic cash registers,

- Taxpayer applies VAT deduction 2 times

- Expenses and deduction of the VAT applied from «bought blocks» of an electronic cash register.

3. The procedure of detecting tax evasion

Within the auditing profession at the unveiling of the creative accounting practices, there is set out the procedure of international auditing standards IAS 240. This standard is called the auditor's responsibility for judging fraud in audits of financial statements. The standard clearly defines the term «fraud» as the deliberate action of one or more persons of management, managing persons, employees or the third parties, which include the use of lies to gain unauthorized or illegal advantage. For the auditors, there is essential to consider two types of intentional misstatement and inaccuracy resulting from fraudulent financial reporting and inaccuracy resulting from stolen assets.

The introduction of measures against tax evasion is not only the current issues in EU Member States, but also in the Slovak Republic. The Ministry of Finance prepared, in accordance with International Accounting Standard IAS a document entitled Action Plan Against Tax Evasion. It was approved in 2015 and it includes the following measures:

- Introducing an obligation of electronic archivation of accounting records, including value added tax,

- Establishment of a system for monitoring cross-border transport of goods, the so-called. computerized transit control system ETCS,

- Establishment of a system of sending automatic notifications via SMS to the tax debtor,

The publication of tax debtors on the website of the Financial Report of the Slovak Republic with the aim of reducing tax arrears,

- Introducing the possibility of cancellation of trade license when violation of the provisions of Law no. 431/2002 Coll. on Accounting, as amended,

- Introduction of criminal liability of legal persons,

- Analyzing the possibility of exchanging information, including the introduction of electronic cooperation between the Financial Directorate and all banks,

- Introduction of online access of Financial Directorate of the SR into the toll system (interconnec - tively), to CEMVO registration (central registry of motor vehicles) and the Register of natural persons.

The auditor in the performance of his work has the responsibility to detect material misstatements. The company uses the following resources for detecting of tax evasion:

- Professional skepticism when the auditor expects the tax evasion even if, it is not.

- Obtaining information from management, from internal auditors and other appropriate individuals within the entity to determine, whether they have knowledge of the actual or alleged fraud, or suspected fraud (such as a written opinion from a lawyer of an entity, information from managers, obtaining information directly from banks and subsequently request for account numbers and closing balances to the 31st December of the audited accounting period)

- Analysis of accounting entries of an entity,

- A written declaration of management, which includes, among other facts, the statement that provided accounting books and financial statements do not contain misstatements or omission.

The Slovak Chamber of Auditors has the competence to supervise the work of auditors and also the procedure for detecting the tax evasion. If during the controls, there were serious violations of international auditing standards and legislation violation, Slovak Chamber of Auditors has the right to suspend the license of the auditor.

Conlusion and open questions

Creative accounting causes reducing tax entity, thus reducing revenues to the state budget. For this reason, creative accounting is closely related to tax evasion. Tax evasion introduces issues, that occurs not only in Slovakia, but also in the European Union. In 2011, in Slovak Republic, the tax evasion reached the amount of 2,773 billion. Euro. According to the statistics of the European Union, the biggest tax evasions were at the value added tax in 2012, in the amount of 177 billion Euro.

The Slovak Republic is fighting against tax evasion by means of specific measures to reduce tax evasion. The fight against tax evasion is performed by a Financial Report and also by individual auditors.

At the Bureau of the Financial Report, there are improvements of the tax controling system annualy. The means of improvements are modern approaches to controling activities, as well as, the organizational management of the control. The obligation to report to the bodies acting in criminal proceedings was introduced to the auditors, when finding the tax evasions that have the character of the crime.

The fight against tax evasion is a continuous process, since tax evasion is a permanent scourge that exists in the market society and therefore in order to increase the state budget revenues there should be paid great attention to this issue.

Bibliography

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2/BABCAK, a kol: Financne pravo na Slovensku a v Europskej unii, 1. vydanie, EUROKODEX, s.r.o. 2012, ISBN 978-80-89447-86-2

3/ MEDVED, J. a kol.: Verejne financie. Bratislava, Sprint dva.2011 ISBN 978-80-89393-46-6

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EDITION. 2008. ISBN 978-80-8078-228-3

5/ zakon c. 431/2002 Z.z. o uctovnictve v zneni neskorsich predpisov

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