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Military Industry in the Czech Republic and Publishing of Financial Statements.

JEL M00*M13

In today's global economic environment, there is a growing demand for true, reliable and comparable financial statement information. For this reason, emphasis is placed on the harmonization of financial reporting, an area that has seen significant progress. One of the main legal obligations of a European Union-based company, per Directive 2013/34/EU, is the presentation of financial statements. Financial statements are presented to protect the owners, potential investors, and business partners from risks associated with business ventures. Therefore, every organization should take these potential risks into account in the financial statements, for example, in the depreciation of assets and use of hedging instruments. (1) The paper emphasizes the importance of this directive from the viewpoint of external users' needs, and is in line with published works (Hirshleifer and Teoh, Journal of Accounting and Economics, 2003; Leuz and Wysocki, Journal of Accounting Research, 2016; Li and Yang, The Accounting Review, 2015).

Our methodology is based on an analysis of financial statements of companies operating within the military industry in the Czech Republic during 2016. The research sample consisted of 237 accounting entities, 100% of licensed companies. This small research sample limited our analysis, but no other business entities were legally allowed to produce or trade arms in the Czech Republic. Within the sample, 75% of business entities were limited companies (Ltd.), 22% were joint-stock companies, and the remaining 3% were represented by state enterprises or other types of businesses. The research was predominantly an analysis of the statistical information related to companies that did not publish or disclose their financial statements in the collection of documents in the Business Register (online available: http://or.justice.cz) by the beginning of 2017. Up to 22% of companies included in the research sample did not fulfill this legally-binding obligation. Nevertheless, when compared with the country's average (including all segments of the economy), the situation in the military industry was still relatively positive. The Czech Credit Bureau conducted a study in 2013 and found that 52% of all companies operating in the Czech Republic did not publish financial statements as required by law. Due to the severity of this situation, the government is currently considering several measures, such as court-ordered closure of companies, or a significant increase in fines, which would hopefully force more companies to disclose their financial statements.

The final sample size, after limiting our research to companies that published financial statements, was 184 companies. All reports adhered to the Czech accounting legislation. None of the aforementioned companies reported financial statements in accordance with the International Financial Reporting Standards (IFRS). Furthermore, only 39% (71) of the financial statements were audited. The remaining companies were not obligated to have their financial statements inspected by the external audit. Subsequently, the research examined whether the financial statements complied with the prudence principle. Only 61 companies (33.15%) involved in the research sample reported impairments (asset value corrections), provisions (liabilities of uncertain amount or timing), or both. We found that only 48 companies, with the obligatory external audit (67% of all audited companies in the research sample), complied with this principle.

Our results suggest that the situation is not ideal in regard to the publishing of financial statements in the Business Register in the Czech Republic. The information provided in financial statements can protect external users of accounting information and enable them to analyse whether a company is financially sound or not. The situation is considerably more serious when dealing with companies producing arms or other potentially lethal products that could also be used for illegal activities. Accounting specialists can analyse the financial statements and possibly discover mistakes (unintentional or otherwise) even if the company underwent an external audit. However, having financial statements published, as required by the law, is the key prerequisite.

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(1) Such risks include the depreciation of assets, future cash outflow caused by current debts, or the use of hedging instruments resulting from a decrease in the risks connected with asset outflows.

[??] El Josef Horak

josef.horak@ savs.cz

Josef Horak (1*)[iD] Jifina Boksova (1*) Jiri Strouhal (1)

(1) Skoda Auto University, Na Karmeli 1457, 293 01 Mlada Boleslav, Czech Republic

https://doi.org/10.1007/s11294-019-09727-6
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Title Annotation:RESEARCH NOTE
Comment:Military Industry in the Czech Republic and Publishing of Financial Statements.(RESEARCH NOTE)
Author:Horak, Josef; Boksova, Jifina; Strouhal, Jiri
Publication:International Advances in Economic Research
Article Type:Report
Geographic Code:4EXCZ
Date:May 1, 2019
Words:716
Previous Article:Debtor Path to Bankruptcy: Dependence on the Annual Percentage Rate Charge.
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