Business Prohibition—How Company’s Financial Statements Reflect the Positions of Convicted Persons?

This study deals with the companies where persons who are convicted of a business prohibition for aggravated financial crimes, have acted in various positions. The main question is how the key figures in the financial statements of these contact companies reflect the activities of these convicted people. The study mainly concentrates on companies where the convicted person has acted as a CEO or deputy CEO. Five research hypotheses are derived and four of them are supported by evidence. The hypotheses were tested with empirical data, which mainly consisted of very small micro, limited, private companies with only 3 - 4 employees. There were originally 22 financial variables in the data, of which 10 were selected for continuation. Finally, stepwise logistic regression (LR) analysis was used to develop a model to detect companies with convicted persons. This model included variables measuring company growth, liquidity, and solidity, but not profitability. Moreover, a variable reflecting inconsistency in behavior of financial ratios was incorporated into the model. In years 1 - 5 before the sentence, the model correctly classified 63.4% of contact companies and 64.2% of non-contact companies. The classification accuracy of the model decreased systematically when the positions of the convicted persons decreased.