Abstract:

Over time medium-sized companies can grow into an operative crisis for various reasons. If the company does not overcome the crisis, it will have to register insolvency. Regular in these cases the stakeholders also suffer a financial disadvantage and the insolvency of the company can in-fluence the national economies of the particular countries in a negative way too(Creditreform 2012).

Whena company receives losses over a longer time period, the danger grows that banks do not grant new loans to the company, distributors stop their deliveries and costumers lose their faith in the company. The corporation is anxious to avoid this happening by using the economic possibil-ities it has. The German accounting system permits the companies legal accounting options as well as judgments. By using these prospects the company can keep down losses or change small losses into small profits to signal an apparently better performance of the company.The German insolvency law codifies the insolvency of the matters of fact inability to pay the claims or balance sheet overindebtedness. In both situations the company can avoid insolvency:(I) By using real earnings managementactivities to acquire, for example, cash for avoiding illiquidity. (II)Or,by using accrual-based earnings management to avoid an overindebtednessof the statement of financial position. In some cases the company exceeds the legal limitations and uses illegal accounting measures to conceal the necessity for declaring insolvency. As a result of the delayed application, the company commitschargeable delayed insolvency petition, which leads in many cases to a reduced chance for successfully redeveloping the company.